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Mediterranean countries, which include Morocco, Tunisia, Algeria, Egypt, Jordan,
Syria, Israel, the Palestinian Authority, Lebanon, Cyprus and Malta.
Diagonal cumulation therefore encourages the use of materials and processing within
the preferential area(s) while maintaining a common standard for treating third
country non-preferential inputs. Note that in order for diagonal cumulation to be
operational it is essential that all participating countries have signed identical free
trade agreements, and that all of these trade agreements have identical rules of origin.
If these conditions are not met, than once again trade deflection can result.
Earlier we identified that constraining ROOs are likely to lead to some combination of
trade suppression and trade diversion. In a similar fashion we can identify the possible
impact of diagonal cumulation on the EU (the hub) and its partner countries (the
spokes):
• Spoke-spoke trade: As diagonal cumulation makes it easier to source
intermediates from other EU partner countries (ie from other spokes), than was
previously the case, the introduction of the PECS should positively impact on
spoke-spoke trade. This is likely to be a combination of trade creation and trade
reorientation. Trade creation occurs as the spokes source more intermediates from
each other instead of supplying the good itself domestically, and reverses the trade
suppression caused by the original ROO. Trade reorientation occurs as the spokes
switches sources of supply away from the EU and towards other spokes. This
reverses some of the trade diversion arising from the original ROO.
• Hub-Spoke trade: Here it is important to distinguish between flows from the hub
to the spoke, and from the spoke to the hub. With regard to hub-spoke trade, to the
extent that the spoke reorients its’ sourcing of intermediates away from the EU to
other spokes, than there may be a negative impact. With regard to spoke-hub
trade, it is possible that the EU could now choose to sourcing more intermediates
from the spokes, hence there could be some increase of spoke-hub trade flows.
• Spoke-ROW trade: Here there are two possible effects. First, there may be trade
diversion as the spokes source more from each other at the expense of the rest of
the world. This would result in a lowering of spoke-row trade. Secondly, as the
spokes increases the proportion of originating materials by sourcing from each
other, this also enables them to import more intermediates from the ROW while
still being granted originating status on export to the EU. This would result in an
increase in spoke-row trade. The net effect will therefore be ambiguous.
• Hub-ROW trade: This case is analogous to the case of spoke-row trade. There
could be some trade diversion away from EU imports from the ROW if the EU
switches to spoke suppliers. However, there could also be some trade creation or
trade reorientation.
Our empirical strategy in the next section of this paper is to take the PECS and it’s
introduction in 1997 as a natural experiment for identifying the possible impact of
rules of origin. If the rules of origin were constraining, than the introduction of
diagonal cumulation should have impacted on patterns of trade.