Circular Economy and Trade

Unsustainable production, consumption and disposal of the world’s resources are primary causes of the triple threat of pollution, climate change and biodiversity loss. This linear model is also a significant cause of social injustice, with most resource consumption and wealth accumulation occurring in the Global North, and the worst environmental impacts and threats to human health in the Global South. Increasing geopolitical tension around the world, and the likelihood of further global supply-chain shocks and disruptions, exacerbate these issues.

The transition to an inclusive circular economy is essential to help address these challenges. An inclusive circular economy seeks to achieve absolute decoupling of resource use and environmental impact from equitable economic prosperity and human development. It does this by slowing, narrowing and looping the flow of materials through the economic system while regenerating natural systems. By focusing equally on environmental issues, human needs, sustainable livelihoods, social justice, an inclusive circular economy can make important contributions to human development, poverty reduction and improved well-being around the world.

But no country can achieve a circular economy in isolation. Rather, all are dependent on international trade to secure affordable and reliable access to a wide range of different goods and services with which to perform circular economy activities (such as resource sharing, repair, remanufacturing etc).

Equally, some countries lack the ability to reuse, remanufacture or recycle used goods and waste materials. If these goods and materials cannot be redistributed to other regions which can achieve the economies of scale or hold the industrial capacity to do so, it can result in local pollution and risk to human health. In this way, international trade has a key role to play in delivering an inclusive circular economy.

Circular trade encompasses any international trade transaction that contributes to realizing a circular economy at the local, national and global levels. This includes trade in:

• Circular economy-enabling goods, services and intellectual property (IP). e.g. remanufacturing equipment, supply chain traceability sensors and digital systems, remote condition monitoring technologies
• Second-hand goods for reuse, repair, remanufacturing or recycling. e.g. electronics, garments, furniture
• Refurbished and remanufactured goods. e.g medical, automotive and industrial equipment and parts
• Secondary raw materials. e.g. metals
• Non-hazardous waste, scrap and residues that can be safely recovered or valorized. e.g soya-bean cake

Click on purple boxes in Figure below to learn more about each circular trade flow.

Circular trade has grown strongly in value over the past two decades. For example, the value of trade in second-hand goods, secondary raw materials and waste for recovery rose by more than 230 per cent, from $94 billion to $313 billion, between 2000 and 2019, with the global export value of trade in goods rising by around 195 per cent over the same period. Similarly, the value of trade in maintenance and repair services increased from $74 billion to $108 billion between 2015 and 2019.

However, the numbers presented above should be considered with caution. This is because the ability to monitor and track circular trade flows with sufficient granularity around the world is severely limited. There are several reasons for this including the lack of shared definitions and classifications on circular trade flows and poor data traceability and transparency protocols and systems resulting in no or very little data collection.

Circular trade offers many economic, environmental and social benefits. Trade in circular economy-enabling goods, services and IP allows countries and companies to access the necessary skills and equipment to implement new circular business models such as leasing and renting or to conduct reuse, repair, remanufacturing and recycling activities.

Trade in used goods for reuse, repair or remanufacturing enables affordable access to essential goods and services for those in secondary markets and generates local demand for industry and employment.

Trade in secondary raw materials and waste destined for recovery enables the aggregation of materials in areas of highest demand to maximize economies of scale thereby making it economically attractive to transform waste into resources for new production.

However, poorly regulated circular trade can have negative impacts. Many grey areas and loopholes currently exist in the global trading system, enabling high levels of illicit waste shipments, causing pollution and increasing human exposure to toxic chemicals.

Meanwhile, high volumes of used goods can also flood secondary markets thereby threatening local fledgling industries and overwhelming local waste management systems.

Under certain circumstances, overdependence on circular trade flows may also increase exposure to supply-chain risks and shocks. Supply of circular trade flows (for example, in used goods, secondary raw materials and waste or scrap) can be extremely volatile (both interms of price and availabiltiy) as it is difficult to predict when such items will reach their end-of-life and become available. The market for circular trade flows is also affected by the availability, demand for and relative price of raw materials and finished goods. For example, if the price of oil drops below a certain point, it becomes cheaper to produce new plastic than to use recycled plastic. Finally, ciruclar economy policy changes by trading partners can signficantly disrupt supply or demand for circular trade flows. For example, China recently announced the intention to reuse 320 million tonnes of scrap steel by 2025, thereby expanding its domestic scrap steel market by 40 per cent from 2021. This will likely reduce Chinese exports of scrap metal and impact trading partners reliant on such a supply, like Japan, which imported $790 million of scrap metal from China in 2020.

The distribution of value captured from circular trade flows is currently highly uneven with most of the value remaining in the Global North. Growing geopolitical trends – such as economic nationalism and deglobalization – will likely lead to countries pursuing resource security in their circular strategies rather than collective sustainability objectives. The resulting actions will inevitably create ripple effects along global value chains which could potentially have a negative impact on other countries and exacerbate existing inequities.

Any solution to overcoming circular trade barriers will therefore require a collaborative global response to ensure that all countries benefit equally from the transition. A research paper by Chatham House presents an alternative pathway for the circular transition towards a global trade regime that enables fair, inclusive and circular societies worldwide.

Although circular trade is a key enabler of a global circular economy, a range of regulatory, procedural and technical challenges are inhibiting its advancement. These include a lack of mutually recognized definitions, classifications, interoperable standards, regulations and conformity procedures concerning circular economic activities or goods.

Furthermore, as an emerging area of activity, the circular economy has itself only been embedded to a limited degree in bilateral, regional and plurilateral trade and economic cooperation agreements. This restricts the scope and potential for collaboration around transboundary issues such as illegal waste, supply-chain transparency and traceability, investment or the issues pertaining to mutual recognition, technical barriers to trade and trade facilitation.

The link between trade and the circular economy is increasingly being recognized as an important issue for action within national and international policy forums such as the recently established circular economy and trade informal working group within the WTO’s Trade and Environmental Sustainability Structured Discussions (TESSD), the Dialogue on Plastics Pollution and Environmentally Sustainable Plastics Trade and the Global Plastics Treaty negotiations. Nonetheless, understanding of the complex links between trade and the circular economy, and of the associated opportunities and risks, remains limited.

Rather than the current fragmented and largely unilateral approach to transitioning to the circular economy, overcoming the barriers to circular trade requires a coordinated global response to ensure that all countries, in particular developing economies, benefit equally from the transition.

Chatham House, in collaboration with an alliance of organizations spanning Africa, Southeast Asia, Latin America and the Caribbean and Europe, have co-published a framework for inclusive circular trade which outlines five areas for collective action which can help develop an inclusive pathway for the circular economy transition.

The five key areas for collective action are:

1. Agreeing on definitions and classifications of circular goods
   
2. Reducing technical barriers to circular trade (e.g mutual recognition or harmonisation on standards and conformity assessment procedures)
3. Enhancing circular trade facilitation measures (e.g. piloting cross-border
   transparency and traceability approaches for circular economy trade flows).
4. Scaling up circular trade capacity-building (particularly in low- and middle- income countries through the likes of the WTO Aid for Trade initiative)
   
5. Embedding circularity within trade and economic cooperation agreements (e.g. mutual recognition of standards and CAPs, financial assistance, commitments to reduced trade barriers...)

Realizing a circular economy is essential to averting environmental crises and an opportunity to stimulate inclusive economic development. However, unless deeply entrenched economic, financial, industrial and political inequities between the Global North and Global South are addressed, and while countries continue to focus their circular economy efforts on building national competitiveness and resilience, the further scaling of circular trade flows risks contributing to, and reinforcing, these inequities.

A concerted global effort is therefore required to ensure the circular trade regime evolves in a way that fosters equity, inclusivity and mutual cooperation and, in times of increasing geopolitical tension, this endeavour is more important than ever.