PEM convention takes the next hurdle

Could you explain what the Pan-Euro-Mediterranean Convention is all about?
The PEM Convention is a regional agreement between the EU and various partner states concerning preferential rules of origin. That sounds somewhat complicated. Most free trade agreements are concluded on a bilateral basis, which means they are applicable between two countries. The aim of the PEM Convention, however, is to combine free trade agreements. In other words, the objective is to establish a comprehensive free trade zone encompassing the European Union, the EFTA countries, Turkey, the Western Balkan countries (e.g. Serbia) and Mediterranean countries such as Jordan, Morocco and Tunisia. The countries concerned have agreed on common rules under which goods can circulate tariff-free. These are referred to as “PEM preferential rules of origin” and they have recently been revised.

Why is the decision by Switzerland’s parliament important?
The existing PEM rules of origin are half a century behind the technological processes and supply chains. With our most important trade partner – the EU – we have the most restrictive rules of origin. This constitutes a major competitive disadvantage for Swiss companies in the textiles and clothing industry, especially on the EU market. And the situation has been aggravated still further by Brexit and COVID-19. After many years of tough negotiations, the involved countries have at last agreed on new rules that now have to be approved by each country’s parliament. Switzerland has just fulfilled this requirement.

Could you explain what the term “restrictive rules of origin” means in practice?
According to the old rules, it is almost exclusively the origin of the yarns that is of relevance. If the yarn originates from the Far East, the tariff exemption no longer applies. To give you an example: a finishing facility in Switzerland dyes material for a weaving company in the EU, which uses cotton yarns from Greece as well as polyester yarn from China. If the Chinese yarn accounts for more than 10 percent of the total weight of the fabric, the weaving company is no longer able to comply with the rules of origin in accordance with the free trade agreement between Switzerland and the EU and is thus required to pay customs duty of 7 percent on its import of the dyed fabric from Switzerland. In view of this, next time the weaving company will probably prefer to have its fabrics dyed in the EU instead of in Switzerland.

So why do European weaving companies not simply use European yarns?
They do, to the extent that this is possible. The problem is that, in the past twenty years or so, there has been a major shift in the production of textile precursor materials to Asia, which now accounts for around two-thirds of the worldwide production of cotton and chemical fibres. Companies are simply no longer able to obtain certain qualities of materials in the PEM zone. Furthermore, a major European supplier of yarn is domiciled in the UK. As a consequence of Brexit, all products that contain this company’s yarns are no longer eligible for tariff-free delivery to the EU market if Switzerland is involved in the supply chain.

What benefits will the new PEM rules of origin bring?
The new PEM Convention offers more combination options and will make it easier for the participating countries to comply with the rules of origin. For example, it now confers preferential origin on twisting in combination with weaving. There is also an urgent need to introduce “bilateral full cumulation”. Currently, when cooperating with partners in the EU, the rules of origin treat the parties separately rather than jointly. Under the new PEM Convention, however, in our bilateral cross-border trade we will be able to add together those manufacturing steps that confer origin. This will improve the way in which Swiss and EU companies can work together.

Does this mean that the temporary suspension of tariffs on textiles will no longer be required?
No, on the contrary. In combination with bilateral full cumulation, the beneficial effect of the suspension of tariffs on textile precursor and intermediate materials can now really unfold. Take the example I cited earlier: the weaving company in the EU weaves yarns from the Far East for its fabrics. The fabric is dyed in Switzerland and re-exported to the EU. When the fabric is imported into Switzerland for dyeing, the product does not benefit from a preferential status because weaving on its own is insufficient to qualify. It is only after the fabric has been dyed in Switzerland that the rules of origin are complied with. This means that customs duty would be applicable upon its import into Switzerland if the temporary suspension of tariffs were not in force. So, the temporary suspension of tariffs is an ideal complement to bilateral full cumulation.

You mentioned that the negotiations had been lengthy and tough: what were the main hurdles?
Unfortunately, the textiles and clothing industry was the focus of the lengthiest negotiations. Whereas the countries outside the EU, including Switzerland, called for very liberal rules of origin, such as regulation on the basis of added value, this was opposed by a small majority of EU member states. One reason for the opposition lay in the fact that entirely different conditions apply to the EU member states: once a product has entered the EU it can freely circulate among 27 countries. Some EU member states feared that, with more liberal rules, Asian suppliers could benefit from tariff exemption by using a back-door to bring their exports into the EU. They overlooked the fact that the textile supply chain has shifted to Asia even under the stringent PEM rules of origin. And, of course, it was also an opportunity to show Switzerland what it is missing out on as a non-member of the EU.

To what extent is Swiss Textiles supporting its members in the implementation of the new PEM Convention?
First of all we are calling for clarification of the issues still outstanding. And we are also pushing for the most liberal interpretation of the PEM rules of origin within the Swiss federal administration. We also plan to offer our members concrete support, both in the form of a free webinar on this specific topic, as well as by offering our members company-specific courses free of charge. We possess specialised know-how in the field of rules of origin, and we will also be clarifying various issues on behalf of our members so that they will not have to become directly involved themselves.

Thank you very much for the interview.