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Recently, there have been a series of reports in the media focussing on the challenges that electric vehicle (EV) manufacturers are likely to face, from the end of this year, in exporting electric vehicles tariff-free to the EU.
The issue was outlined in more detail in our recent blog on the 19th of May (see https://blogs.sussex.ac.uk/uktpo/2023/05/19/rules-of-origin-do-matter-after-all/#more-7817). There we suggested that the UK should seek an extension of the current rules, which would give EV manufacturers more time to adjust, and battery manufacturers more time to build capacity. An alternative solution was recently mooted by some EU officials – that the UK could apply to join the Pan-European Mediterranean (PEM) Convention on Rules of Origin.
The PEM is an agreement on common ROOs between the EU and a wide range of partner countries, including the Southern Mediterranean, the European Free Trade Area (EFTA) countries and the Western Balkan States, as well as Georgia, Moldova and Ukraine. The agreement covers all products and not just cars and car batteries.
Being part of the PEM may be beneficial to the UK, as we have previously suggested in response to government inquiries and consultations. A major factor behind this recommendation is that being part of the PEM enables countries to be freer to use inputs from any of the PEM countries, which then count as ‘originating’. This meets the required rules of origin to then export to any of these countries. The technical term for this is diagonal cumulation. Note that the UK has already agreed the PEM rules of origin with all the PEM convention countries, other than the EU, with whom it signed a continuity agreement[1].
This advantage should not be overstated. The share of the PEM countries in total UK imports of intermediate goods in 2019 (i.e. before the introduction of the TCA and COVID) was just under 10%. Over half of these imports came from Switzerland where the main intermediate was gold. In 2021 the share of intermediates from the PEM countries had fallen to just over 6% – arguably some of this could well be because of the lack of diagonal cumulation.
Another advantage of being part of the PEM could be if the product-specific rules of origin were less restrictive than those in the TCA. We have applied our Rules of Origin restrictiveness index (ROO-RI) developed by the UKTPO to both the TCA and the PEM. The index ranges from 1 (very low restrictiveness) to 10 (very high restrictiveness). The average ROO-RI across all the rules of origin in the PEM and the TCA is 4.49 and 4.26 respectively, so quite similar overall. The chart below compares the ROO-RI across 96 industries, using the HS 2-digit classification. The way to read this chart is that the rules of origin become more restrictive the further out along any given spoke. What we see is that the PEM rules of origin are more restrictive in some sectors (notably from HS 30 to HS 40 (except HS35), that they align closely for other sectors (such as HS 50 to HS 66) while for other sectors the TCA becomes more restrictive. In 22 cases the PEM is less restrictive, and in 28 cases it is the TCA that is less restrictive...
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Michael Gasiorek is Director of the UK Trade Policy Observatory and Co-Director of the Centre for Inclusive Trade Policy. He is Professor of Economics at the University of Sussex Business School. Peter Holmes is a Fellow of the UK Trade Policy Observatory and Emeritus Reader in Economics at the University of Sussex Business School. Manuel Tong Koecklin is a Research Fellow in the Economics of Trade at the UK Trade Policy Observatory and University of Sussex Business School.