PEM Convention and challenges in origin management - Simeon L. Probst, Oliver Hulliger, Pascal von Ah April 2021

PEM Convention and challenges
in origin management
Simeon L. Probst, Oliver Hulliger, Pascal von Ah
April 2021

PEM Convention and challenges
in origin management
The elimination of trade barriers and restrictions in international trade is a key element for a flourishing
economy. As a result, numerous countries have concluded free trade agreements (FTA) with other countries
and regions around the world to stimulate the economy by creating the conditions for a single market. An
example of such an agreement is that between the EU and the EFTA member states, the western Balkans
and the Mediterranean countries, formally known as the Pan-Euro Mediterranean (PEM) Convention.

The basics of an FTA
The purpose of an FTA is not to remove all trade barriers, but to facilitate the movement of goods by reducing
customs duties and other obstacles to trade between member states. FTAs achieve this by making use of the
concept of ‘rules of origin’ to differentiate products that will benefit from the reduced duties (preferential duties)
and barriers from those still subject to customs duties. By means of the protocols of the respective FTAs,
members agree on set criteria, known as rules of origin, for determining the origin of products. ’Preferential
origin’ refers to the category for products that meet the requirements for reductions or even exemptions from
customs duties. These criteria vary depending on each FTA, since they are the result of individual
negotiations between the contracting states. It is important not to confuse ‘preferential origin’ with ‘non-
preferential origin’ or any indication of origin (such as ‘made in‘), as the various types of origin have different
legal bases.

Should a product qualify as an ‘originating good’, it can be imported into the contracting state subject to
preferential tariffs or even duty free. Thus, preferential origins have a crucial influence on competitiveness in
international and cross-border trade for exporting companies. A study conducted by the Trade Economist
Network of the EU showed that companies exporting from the EU saved up to EUR 11 billion per year
worldwide by using the preference system based on the EU’s FTAs (report published in June 2018 with data
mainly from 2016). The report also showed that the duty savings rate, i.e. the rate of actual savings compared
to potential savings, was only 77.5%. There are various reasons why the preferential trade system has not
been fully utilised. The complexity of the rules of origin is one of them.

Until the end of 2011, most protocols of FTAs differed only in small details. With the entry into force of the
regional PEM Convention’s preferential rules of origin on 1 January 2012, the rules of origin of the respective
agreements were unified in a single convention on origin. The respective agreements have been adapted
gradually, thus allowing preferential circulation of industrial goods among those countries that have adopted
and apply the rules of the origin within this Euro-Med cumulation zone.

The revision
The Joint Committee of the PEM Convention met in November 2019 to draft a revision of the existing
preferential rules. Numerous simplifications are intended to facilitate origin management for affected
companies as part of the revision. The following changes are worth noting:

   Administrative simplifications regarding certificates of origin;
   Broader value criteria for the maximum percentage of non-originating materials allowed;
   Increase of value tolerance of non-originating materials;
   Application of average prices for input materials in the original cost calculation;
   Replacement of the direct transport rule with the non-alteration rule.

Nevertheless, due to the diverse interests of the respective contracting states, it has been challenging to
reach a consensus. In particular, the North African states have not yet agreed to the revised content of the
PEM Convention. Therefore, 1 January 2021 as the overall date of entry into force was no longer feasible.

However, the current signatory states, such as the EU, the EFTA partners, the western Balkan states, the
Faroe Islands, Turkey and most of the Mediterranean partner countries (MED) still want to apply the revised

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rules bilaterally and provisionally. The adoption of those new rules is currently under review by the states and
is expected to be concluded during the second half of 2021.

Challenges in practice
Rules of origin are complex and extremely challenging to put into practice. Origin management within a
company requires in-depth knowledge of the following key elements (see Fig. 1):
1. What products does the company produce and under which customs code are they classified (‘what’)?
2. Where are the goods exported to, where does the manufacturing take place and which PEM countries are
   involved (‘where to’)?
3. Which raw materials are used to produce the products in the respective PEM country and where are these
   materials imported from (‘where from’)?
4. Are the materials/products that are exported correctly classified and which criteria have to be applied
   (application of FTA)?
5. Is the appropriate proof of origin documentation (such as supplier declarations, invoice statements, etc.)
   available (proof of origin)?

     Country of destination/                                                       4-digit HS Code
     FTA

                                            List criteria of the
                                            respective FTA

                                            Specific rules

                                            Origin yes/no?
                        Yes                                                           No

     Proof of preferential                                                         No proof of
     origin                                                                        preferential origin

Figure 1: Overview of issuing proof of preferential origin

Efficient origin management therefore requires that each company interprets the rules of origin for its products
(origin calculation). This requires in-depth knowledge of one’s own manufacturing and/or trading activities,
accurate document management and automation. Should these aspects be assigned to different areas of a
company (e.g. purchasing, production, sales, legal department, IT, etc.), cross-departmental cooperation and
communication becomes essential.

The PEM Convention’s vision to simplify and harmonise rules of origins is therefore a very welcome
development. However, the fact that not all contracting states are willing to recognise the conditions of the
revised PEM Convention leads to additional practical challenges and questions. At present, the policy is to
recognise both the previous and the new rules during a transitional period. However, companies must decide
in advance whether they want to continue operating as they did before or switch to the new PEM rules.
Cumulation is only possible under either the previous or the new rules due to the different cumulation zones.

This situation gives rise to various practical questions. Any potential exporter should therefore consider the
following aspects, among others:
 A previously established origin management system is confronted with simplified rules of origin. Given the
   uncertainty concerning the duration of the transition period and remaining negotiations, would the effort to
   implement the more liberal origin convention be justified in relation to the benefits at the present time?

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 Where does a company stand in the supply chain, and what happens if suppliers and/or buyers already
  want to apply the new rules? Each company must decide which rules it wants to apply since it is not
  possible for a company to apply the previous rules and the revised rules simultaneously.
 Although the revised rules of origin are easier to comply with, they also require an adjustment of the system
  for calculating origin. The data stored in the system not only have to be set up again, but also document
  management must be adapted because the revised regulations require proof of origin, such as supplier
  declarations, to be made available.

Conclusion
Of course, the situation will differ for each company and certain factors are beyond a company’s influence.
We recommend therefore that affected companies examine their individual situation as soon as possible and
analyse whether switching over to the revised rules is worthwhile even before the PEM convention comes into
force or whether patience is the better alternative. Whatever they decide, companies must still be vigilant and
take proactive action to reconsider their approach to rules of origin.

Contacts

                        Simeon L. Probst
                        Partner Customs & International Trade
                        M: +41 58 792 53 51
                        simeon.probst@pwc.ch

                        Oliver Hulliger
                        Customs & International Trade
                        M: +41 58 792 56 96
                        oliver.hulliger@pwc.ch

                        Pascal von Ah
                        Customs & International Trade
                        M: +41 58 792 23 19
                        pascal.vonah@pwc.ch

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