Any preferential free trade agreement needs rules of origin defining which products shall benefit from the preferences.
Cumulation allows products that have obtained originating status in one partner country to be further processed or added to products originating in another participating country as if they had originated in that latter country.

The existing Free Trade Agreements with the Western Balkans (Stabilisation and Association Agreements with Croatia and the former Yugoslav Republic of Macedonia) are based on a system of bilateral cumulation. This means Croatia and the former Yugoslav Republic of Macedonia can cumulate with the Community but not amongst each other. Under the system of diagonal cumulation they will also be able to cumulate amongst each other. For a system of diagonal cumulation to work, it requires that all partners have Free Trade Agreements with the same rules of origin amongst each other.

The benefits can best be illustrated by using simple example:
A product receives 30% value added in Croatia and 30% value added in the former Yugoslav Republic of Macedonia. Let’s assume the EU requirement for the import of a good as “originating in Croatia” is 50% value added in that country. Under bilateral cumulation, this product will not be exportable to the EU under preferential conditions, while with diagonal cumulation these percentages can be cumulated and the product qualifies with 60% as originating in Croatia or the former Yugoslav Republic of Macedonia.

The example shows that diagonal cumulation is an instrument to enhance trade amongst participating countries. Obviously, for countries to become part of the international division of labour, diagonal cumulation represents a significant advantage. The more countries participate and the deeper trade integration amongst them, the higher the likely benefits are. When applied to the Western Balkans, the system should increase economic opportunities for operators to intensify their exchanges and to draw benefit from further regional trade integration. This also means that the Western Balkan countries will become more attractive to foreign investors.

As a first step, the Commission is preparing a zone of diagonal cumulation involving the EU and all countries of the Western Balkans fulfilling the necessary conditions. At this stage, this comprises Croatia and the former Yugoslav Republic of Macedonia as the only two countries having the necessary Free Trade Agreement with the EU (the Stabilisation and Association Agreement) in place. Once SAAs are signed with the other countries of the Western Balkans they shall also be integrated into the system.

In a second step, the Commission will work toward the integration of the Western Balkans into the Pan-Euro-Med zone of diagonal cumulation. This zone includes the EU, Romania, Bulgaria, Turkey, EFTA countries and the Mediterranean countries participating in the EU’s Barcelona process. This second step cannot be done immediately because the Pan-Euro-Med cumulation is only about to be put in place with the necessary changes of the rules of origin under ratification. Adding new members at this moment in time would mean restarting the process and thereby delaying the establishment of the Pan-Euro-Med zone itself. Also the necessary contacts with the non-EU partners in the system will have to be taken before.