The implementation of the Pan-Euro-Mediterranean Regional Convention (PEMC) is a strategic tool for Ukraine’s integration into global value chains, but its potential is currently only partially exploited. This was stated by Veronika Movchan, Director of Research at the Institute for Economic Research and Policy Consulting (IER), during the presentation of the study “Pan-Euro-Mediterranean Regional Convention: Current Impact and Potential”
About the PEMC
The PEMC is a multilateral agreement created to harmonize rules of origin in a network of preferential trade agreements between countries in Europe, South Africa, and the Middle East. Preferential rules of origin determine in which country a product is considered to be produced, which determines the use of trade preferences.
At the same time, cumulation of origin allows materials and operations from several countries to be taken into account as part of a single production process in order to grant preferential status to goods.
The CETA provides for bilateral, diagonal, and full cumulation*. The conditions for application are valid foreign trade agreements between all countries involved, identical rules of origin, and compliance with the rules on sufficient processing.
The greatest potential for using the cumulation rules lies in the Ukraine-EU-Turkey triangle.
Ukraine’s main trade in intermediate goods (raw materials, parts) is with the European Union (60% of exports and 47% of imports of intermediate goods, with a market overlap of commodity structures for exports and imports of over 65%). Therefore, Ukraine has high potential for using cumulation rules in its relations with the EU.
Ukraine also has high potential with Turkey, with which our country signed a FTA agreement in 2022 but has not yet ratified. Turkey’s share in Ukraine’s trade in intermediate goods is 7% in exports and 9% in imports, with a market match of commodity structures of 66% for Ukraine’s exports and 44% for imports.
On the other hand, the potential for cumulation with Moldova and Georgia is low due to the small size of their markets and the low degree of overlap in the commodity structures for imports and exports to Ukraine. Israel has moderate potential.
An analysis using an applied general equilibrium model shows that the use of diagonal cumulation in trade between Ukraine, the EU, and Turkey will have a positive impact on Ukraine’s real GDP. To realize these opportunities, it is necessary to complete the ratification process of the free trade agreement with Turkey.
“An analysis of the structure of trade with ENP countries and the results of an analysis using a general equilibrium model for Ukraine show that Ukraine has not yet fully exploited the opportunities offered by the Convention. Our priority should be to complete all formalities with major trading partners, such as Turkey, and to encourage businesses to build multilateral production chains,” Veronika Movchan emphasized.
The new version of the Convention introduces full cumulation, which should provide even more advantages to manufacturers compared to the current diagonal model.
Recommendations:
- Complete ratification of the free trade agreement with Turkey, which will unlock the possibilities of cumulation.
- Ensure the use of PEMA in relations with Israel.
- Inform businesses about the benefits of the new version of the Convention, in particular the transition to full cumulation.
* Bilateral cumulation allows two countries that have a free trade agreement (e.g., Ukraine and the EU) to consider materials originating from one party as “their own” by the other party to the agreement, which opens up the possibility of using preferential import duty rates in mutual trade.
For example, Ukraine can use goods originating in the EU in production and then, when determining the country of origin of goods when exporting to the EU, materials originating in the EU will be considered as “originating in Ukraine.”
Diagonal cumulation creates broader opportunities for cooperation. Compared to bilateral cumulation, the list of “own” in terms of origin can also be expanded to include
Diagonal cumulation creates broader opportunities for cooperation. Compared to bilateral cumulation, the list of “own” in terms of origin can also include the cost of materials originating in third countries (e.g., Turkey) if these countries have free trade agreements with the rest of the partners and all agreements contain identical rules of origin.
In our example, Ukraine can use goods originating in Turkey in its production, and, provided that the free trade agreement between Ukraine and Turkey comes into force, and since the agreements between Ukraine and the EU and between Turkey and the EU are already in force, Turkish components of goods produced in Ukraine will be considered “produced in Ukraine” for the purposes of determining the rules of origin when exporting to the EU. This improves the chances of obtaining preferential (mostly zero) customs duties in the EU.
Full cumulation is similar to diagonal cumulation, but in this case, when calculating origin, it is possible to include not only the cost of materials that have proof of origin in partner countries, but also the cost of work, even if this work is carried out with materials that do not meet the criteria of origin, as well as the cost of materials that do not meet the criteria of origin, but which have undergone sufficient processing in partner countries.
If we consider our previous example, in the case of diagonal cumulation, Ukraine can import products from Turkey made from materials that were produced in China and further processed in Turkey, use them further in its production process and, depending on the level of processing, either include the entire cost of the products or the cost of the work in Turkey as “its own” for the purposes of determining origin when exporting to the EU.
The study was conducted as part of the project “Assessment of the economic impact of adapting EU law to specific sectors of the Ukrainian economy” with the support of the International Renaissance Foundation and the European Union.
Source: IER
