How to use global trade for a just circular transition

Outlining and analysing the necessary actions to mitigate the threats and amplify the opportunities brought about by an increasingly circular trading system.

Jack Barrie and Patrick Schröder, 25 August 2021

As countries move towards increased circularity – whereby the demand for primary natural resources reduces while demand for the reuse, repair, remanufacturing, and recycling of valuable materials increases – there will be significant effects on the structure of global value chains and the dynamics of material trade around the world.

This will impact the economies of developing countries – particularly low-income countries (LICs) which are resource-export dependent – and predicting these impacts is a complex challenge because the intersection between the circular economy (CE) and global trade spans a multitude of topics such as domestic policy, international trade governance, geopolitics, technological innovation, global finance, waste crime, multilateral environmental agreements, free trade agreements, international labour rights, and global resource flows.

A particular area of growing interest is how global trade could be harnessed to deliver a just circular transition. A just circular transition aims to ‘reduce waste and stimulate product innovation, while at the same time contributing positively to sustainable human development’. Applying just transition approaches to the CE identifies which countries, sectors, communities, and workforces may be adversely affected, as well as helping develop policies and programmes to support those at risk of being left behind.

How do the circular economy (CE) and trade overlap?

The CE and international trade overlap in four main ways.

  1. Global value chains, whereby new product circularity regulations, such as the European Union (EU) Sustainable Products Policy, or the circular economy ISO-232 standard currently under development, require all suppliers across the value chain irrespective of geography to align.
  2. Increased shipment in end-of-life or second-hand goods, secondary materials, scrap, and waste to countries which can most economically deal with it.
  3. Trade in technologies which enable circular activities such as repair, remanufacturing, and recycling.
  4. Trade in services such as circular design, research and development, and other professional services such as IT services.

As countries compete to become more resource-independent and build value chain resilience, a new geopolitical landscape surrounding the trade in resources will emerge.

Examples can already be seen in trade protectionism for certain critical materials such as metals, semi-conductors, or lithium, non-tariff barriers, onshoring mining, and stockpiling as critical raw materials become scarcer. As the price of landfilling waste increases domestically, low-income countries (LICs) could increasingly become a dumping ground.

In an increasingly unequal world exacerbated by COVID-19, complex interlinkages between the circular transition and global trade present both opportunities and threats to achieving a just circular transition, with three particular areas requiring immediate attention by policymakers.

Benefits for some, adverse impacts for others

The predicted benefits experienced by one country or demographic through increased circularity will, in many cases, result in adverse impacts on others.

It could be argued the CE will reduce overall carbon emissions as global trade, regulated and facilitated through agreements, helps ensure maximum efficiency and best use of economies of scale. But if secondary materials are increasingly shipped to LICs for sorting the material streams and dealing with the residual waste, this may increase the territorial emissions of the LICs.

In recognition of this, there are calls for exporting countries to account for consumption emissions associated with exported secondary goods, materials, and waste.

In addition, although the total number of new circular jobs created is likely to increase globally, the geographical distribution of these jobs is likely to be highly uneven with developed countries winning high-value jobs in repair, remanufacturing, and recycling to the detriment of these jobs in LICs which may only gain in low-value jobs dealing with waste and scrap.

Increased eco-design standards, especially in Europe, should reduce the exposure to hazardous materials for waste workers but only if illegal shipments in hazardous waste are curtailed – no easy task when considering waste crime is currently the third biggest global crime behind drugs and people trafficking. More than 15 million people globally depend on work in this ‘informal’ waste sector.

Many contradictions and knowledge gaps

There is a prevalence of contradictory claims around the perceived opportunities and impacts on LICs. The import of goods which are easier to repair and recycle in LICs could boost the profitability of businesses and increase jobs, as well as offering LICs opportunities for economic diversification. But importing second-hand goods such as textiles, electronics, vehicles, or machinery could undermine local manufacturing and the industrial base.

LICs may also experience a loss in their competitive advantage over developed countries in dealing with valuable secondary material streams as the products will increasingly be designed to be much easier to repair, dissemble, and recycle, making it more economically and technologically viable for developed countries to do so domestically – particularly when combined with increased digitization and automation.

When developed countries increase circularity, they should import fewer raw materials from LICs which could have significant economic ramifications for LICs dependent upon raw material extraction and export.

But there is an argument that economic growth in developed countries will likely to continue to increase demand for raw materials particularly in sectors such as renewable energy, and demand for raw materials from LICs may shift from developed to BRICS economies.

These contradictions are indicative of the significant knowledge gaps in terms of mapping and understanding the complex trade flow dynamics associated with the CE transition.

A chronic lack of data

Current literature contains several contradicting predictions with the vast majority qualitative and speculative, so it is hard to accurately model likely changes in trade dynamics due to increased circularity, or make accurate predictions on potential benefits and adverse impacts.

A combination of these three issues – failure to fully consider win-lose scenarios, the prevalence of competing claims, and the lack of available data – risks the design of inadequate trade policies and rules, and a failure to deliver a just circular transition.

CE will reduce overall carbon emissions as global trade, regulated and facilitated through agreements, helps ensure CE activities are performed at maximum efficiency and make best use of economies of scale.

CE and plastics waste trade regulations will reduce amount of mismanaged plastic waste, leakage and marine plastic pollution.

Secondary materials and waste are shipped to LICs for sorting, increasing their territorial emissions and impact on local environments.
Eco-design standards in developed countries, particularly Europe, results in increased LIC access to higher quality secondary products which are longer lasting, easier to repair, and less toxic.Easier to repair and recycle products risks high-quality secondary products being retained within the developed market, and only products in which value cannot be easily extracted or are obsolete are shipped to LIC markets.
Growing demand for resource-intensive CE technologies such as renewable energy systems and repair, remanufacturing, and recycling technologies increases demand for certain raw materials produced in LICs.Risk of reduced export earnings in LICs from reduced demand for certain raw materials due to increased circularity in buyer markets. Reduced demand in virgin bulk raw materials increases the cost of extracting from the same mine, reducing exports from LICs.
Importing second-hand easy to repair and recycle goods into LICs boosts profitability of businesses and enables economic diversification.Second-hand goods undermine the local industrial base producing similar goods, along with a loss in competitive advantage for dealing with secondary material streams as products are easier to repair, dissemble, and recycle.
The total number of global new jobs created increases.The geographical distribution of new jobs is highly uneven with developed countries winning high-value jobs in repair, remanufacturing, and recycling to the detriment of these jobs in LICs.

What needs to happen?

To ensure global trade is harnessed for a just circular transition, there are two groups of actions – rewriting global trade rules and agreements to accelerate the global CE transition, and investing in targeted capacity-building programmes in LICs.

Re-writing global trade rules and agreements:

  • Develop and harmonize CE standards, classifications, and definitions, integrating them into free trade agreements (FTAs).
  • Upgrade the harmonized system (HS) codes and customs processes to enable a transparent trade in CE goods and services, while preventing illegal waste shipments.
  • Finance a rollout of technologies and systems to enable automated product identification, tracking, and providence, along with automated customs procedures in LICs, such as blockchain, product passports, and RFID tags.
  • Embed CE into FTAs to ensure mutually beneficial gains.
  • Embed CE within the Aid for Trade programme.

Low-income country capacity-building:

  • Invest in repair, remanufacturing, and recycling infrastructure, as well as relevant skills training to support the growth of a domestic CE industrial base and boost local jobs.
  • Invest in ports and rail trade infrastructure, and digitize customs and ports systems to increase the global competitiveness of LICs.
  • Provide support to help LICs develop national CE roadmaps and strengthen ability to negotiate FTAs.
  • Enhance the multilateral dialogue to understand and plan for the distributional impact of the global CE transition.
  • Explore alternative ways to ensure fair CE trade is conducted with, such as raw material leasing which could be enabled through blockchain applications used in supply chain management.

The impact of the CE transition on the dynamics of international trade is now receiving increasing attention in global policy forums, especially within the context of how global trade can be harnessed to deliver a just circular transition, as highlighted in our recent research.

In this 2021 ‘Super Year’ of the environment, there is high-level recognition on a multilateral level of the interlinkages between trade and environment, and the 12th WTO Ministerial meeting in November will see critical discussions on how to accelerate the ‘greening’ of world trade. It is the perfect opportunity to start aligning the global trade system and sustainability.