Exploring the modernized PEM rules

The Pan-Euro-Mediterranean (PEM) Preferential Rules of Origin, a cornerstone of trade facilitation within the PEM zone, are undergoing significant updates. This revision aims to modernize and simplify the existing rules to better align with contemporary trade practices and economic realities. As these changes prepare to take effect, it is essential for businesses and stakeholders to understand the implications and opportunities that come with the revised framework.

Established in 2012, PEM plays a vital role in fostering trade by harmonizing rules of origin among its 25 contracting parties, including the EU and several countries in the Mediterranean region of the EU, EFTA, participants in the Barcelona Process, the EU's Stabilization and Association Process, and others like Moldova, Georgia, and Ukraine. The PEM Convention is a regional agreement that facilitates diagonal cumulation, allowing materials originating in one contracting party to be used in another without losing their originating status when traded within the zone. This cumulation is supported by a network of Free Trade Agreements (FTAs) that incorporate identical origin protocols.

The revised rules aim to modernize the existing framework by:

Increasing flexibility:
Product-specific rules are easier to meet, with increased thresholds for non-originating materials and the lifting of duty-drawback prohibitions for most products.
Enhancing regional cumulation:
The introduction of "full" cumulation for most products facilitates supply chain integration.
Raising tolerance rule:
Thresholds of non-originating materials is increased, from 10% to 15%, with exceptions in some Chapters.
Improving logistics:
The replacement of the "direct transport" rule with a "non-manipulation" rule reflects advancements in logistics practices.
Simplifying documentation:
A single type of proof of origin (EUR.1 or origin declaration) replaces the previous dual system, reducing complexity.

In most cases, a product that is compliant with the PEM Convention rules is also compliant with the transitional rules, as the latter are more flexible. However, there are a few cases where the transitional rules are stricter than the PEM Convention rules (in particular for products containing sugar).

Under the revised rules, businesses must adapt their documentation practices. From January 1, 2025, "revised rules" should be indicated in box 7 on the EUR.1 certificate. The EUR-MED certificate is no longer applicable under the new framework. This change reduces administrative burdens and aligns with the modernized, streamlined approach of the revised rules.

While it was initially intended for the revised rules to become effective on January 1, 2025, across the board, many free trade agreements in the PEM zone do not yet include a dynamic reference to the PEM Convention. Due to lengthy legislative procedures among the contracting parties, it is clear that not all FTAs within the PEM zone can be updated by the end of 2024. This means that even after January 1, 2025, two sets of rules—the current or ‘old’ PEM Convention rules and the revised rules—will still coexist in the PEM zone. Since diagonal cumulation in the PEM zone relies on identical rules of origin, this situation could negatively impact existing cumulation options and supply chains.

To address this, there was a meeting on December 12, 2024, where the contracting parties agreed on a procedure for how the two sets of rules can be used together starting on the first of January, 2025. As each country member adopts the transitional provisions, companies will have the option to either continue using the old rules or adopt the revised ones. This choice, called permeability, is available for all FTAs with a dynamic reference to the PEM Convention and still allows exporters the option of cumulation, but only between the like sets of rules or from the old to the revised – cumulation from revised to old rules is not allowed.

ONESOURCE Global Trade is dedicated to supporting clients through this transition. Our team is actively monitoring the implementation of the modernized PEM Convention. We have initiated a strategic plan to integrate the PEM rules update into our system, ensuring that businesses receive timely updates.

We will be communicating to our clients how these changes affect the updated rules applicable to their finished goods and have already begun the implementation stage of these updates within our system, aiming to complete the process before the end of the year.

So far, we have found that the majority of exception rules that have been specifically configured for clients will convert to the revised rules without any additional information/coordination necessary. However, we will work directly with clients for the handful of rules where their feedback will be required.

The modernization of the Pan-Euro-Mediterranean Preferential Rules of Origin represents a significant step forward in facilitating trade across the PEM zone. By introducing more flexible, simplified, and cost-effective protocols, the revised rules pursue to enhance trade flows and economic integration among the contracting parties.

For more information on how ONESOURCE Global Trade can assist you in managing the revised PEM convention, as well as many other free trade agreements, please reach out to your Account Manager or Client Services Manager.