EU circular economy and trade: Improving policy coherence for sustainable development

While the circular economy has gained a lot of attention domestically, the impacts of the EU’s shift on the rest of the world through international trade have remained largely unexplored.

The adoption of the EU Circular Economy Action Plan in 2015 set the European Union firmly on the path towards the circular economy with a view to reduce the EU’s dependency on primary raw materials and to demonstrate global leadership in – and gain competitive advantages through – such transition.

Furthermore, shifting from a linear to a circular economy has also been identified as one of the foundations for future sustainability in the EU, including a means to curtail the negative impacts of EU consumption (e.g. carbon footprint).

While the circular economy has gained a lot of attention domestically, the impacts of the EU’s shift to a circular economy on the rest of the world through international trade have remained largely unexplored.

The IEEP report on circular economy and trade explores the complexity of the spillover effects caused by the EU's shift to a circular economy. See Chapter 5 for specific recommendations

However, awareness of the need to look beyond the EU’s borders is increasing rapidly, brought forward particularly by the aftermath of China’s ban on waste imports for recycling in 2017.

Following in China’s footsteps, India banned the imports of solid plastic waste in March 2019. Similarly, Thailand has announced a halt to all imports of plastic waste by 2021, and Vietnam and Malaysia also have plans in place to reduce permits for imports of plastic waste.

The story behind these bans unfolds as follows: as a result of increasing waste imports, several developing countries have had to deal with large amounts of waste while lacking the proper infrastructure for processing and recycling.

While processing waste into secondary raw material can be important to developing countries' economies, weaker environmental regulations in the waste importing and processing countries mean that workers – as well as the environment – are exposed to risks and suffer from negative impacts. This is particularly the case with electronic waste (e-waste) exports to the developing countries.

In addition, waste importing countries are also suffering impacts from the low quality of recyclable waste, which often leads to higher costs of recycling and can also result in undesirable activities in importing countries such as landfilling or incineration. Such practices feed the vicious cycle of downcycling, giving secondary raw materials a bad reputation and lowering the potential for the development of a circular economy in general.

The Chinese ban – and those that followed – have rapidly brought into question the strategy that many EU Member States had implicitly chosen to deliver their waste recycling targets, namely exporting waste to be recycled outside the EU.

The transition to a more circular economy in the EU will inevitably have implications on a global scale

They also highlighted the way the EU’s internal policies aimed at promoting circularity and increasing more sustainable resource use can, depending on their implementation and in the absence of additional control mechanisms, lead to adverse impacts outside the EU, including negative environmental and social impacts on developing countries.

The above trends suggest that the transition to a more circular economy in the EU will inevitably have implications on a global scale.

In addition to the global movements of recyclable waste, a shift to circular systems results in changes to primary and secondary resource flows, including the demand for and trade in these resources. Further down the line, all these changes can translate into opportunities – or obstacles – for sustainable development in third countries.

How do the EU’s internal policies for circular economy impact the world?

Changes in the demand for primary resources

The EU and its Member States depend heavily on low-income countries for imports of raw materials. Shifting to a circular economy means both keeping the value of products in the economy for longer and increasing the use of secondary raw materials. Consequently, it influences trade flows on primary raw materials, including possibly also the extraction of such materials in third countries. This may have impacts on developing countries’ ability and pathways to reach sustainable development goals (SDGs).

From an environmental point of view, a reduction of the demand for resources could reduce the pressure on the environment in third countries with positive implications on environmental sustainability.

Shifting to a circular economy means both keeping the value of products in the economy for longer and increasing the use of secondary raw materials

On the other hand, the export of raw materials still plays a central role in the development pathways of several trade partner countries. Consequently, these countries are likely to be impacted by a decline in exports, with possible implications for their (economic) development.

At the same time, lessening the export of raw materials may generate opportunities to grow domestic markets in the developing economies, as the development of higher-value downstream processing is encouraged.

Recyclable waste becoming a traded good

The EU’s transition to a circular economy promotes the reuse and repair of products and, finally, the reintroduction of high-quality recycled materials into the economy. By incentivising reuse, repurposing and recycling of materials, the EU circular economy framework can in principle encourage the development of regional recycling and reprocessing hubs, promoting intra-EU markets for secondary raw material.

In practice, as highlighted above, up until recently several EU Member States have chosen to manage their recyclable waste streams by exporting them outside the EU, with documented negative environmental and social impacts on third countries.

In principle, however, secondary raw materials recovered from waste have the potential to become a valuable resource for the third country economies, but only when supplied by waste streams of an appropriate quality and supported by capacity to process the recyclable material.

Waste importing countries are often also manufacturing hubs, which means that it can be economically efficient to reuse recycled materials in proximity. However, as long as there are issues with the quality of EU’s waste exports and uncertainty on whether the exported waste is really recycled, and if so, in what conditions, focusing on improving waste recycling within the EU should remain a priority for the EU.

If EPR raises the costs for EU firms relative to non-EU firms, they may be at a disadvantage in world markets

Domestic policies with global implications

The EU circular economy policy also foresees a better harmonisation of end-of-life rules applied to products within the EU, including standards to promote their durability, reusability and recyclability in an efficient – and safe – manner. While such standards promote circularity benefits in the geographic context in which they are adopted, those benefits are likely to be significantly reduced once products or waste material are imported and/or exported, creating barriers to effective recycling of waste or uptake of secondary raw materials.

The EU policy framework also promotes the uptake of extended producer responsibility (EPR) schemes, i.e. schemes aimed at ensuring that producers and manufacturers take responsibility for the end-of-life of their products and the associated packaging, with possible global consequences. If EPR raises the costs for EU firms relative to non-EU firms, they may be at a disadvantage in world markets. In other words, this might result in EU’s circular economy measures providing an unintended and counterproductive advantage to third-country producers with a lower level of circular responsibility.

In general, evidence shows that the cost of processing together with level of stringency of environmental standards in different countries determines the direction of recyclable waste as a traded good, with streams being directed towards countries with less stringent environmental standards and regulations (e.g. developing countries).

On the other hand, EU progress on developing environmental standards can have a positive international impact, as other economies adopt similar standards in order to facilitate exports to the EU market.

However, all the above external effects of the EU’s internal policy objectives and instruments are currently largely overlooked, both in the context of the implementation of EU’s circular economy measures and monitoring of their impacts.

While the EU monitoring framework for the circular economy provides a useful and evolving tool to keep track of the EU’s developments on the circular economy, the existing indicators fail to capture the wider implications of the EU’s circular shift.

What can EU trade policy do?

The EU currently has around 80 free trade agreements (FTAs) fully or partly in place, and around 40 pending or being negotiated. This makes the EU the world’s most productive trade negotiating authority, with significant influence over global trade. Consequently, the EU’s FTAs with third countries can play a role in supporting – or hindering – the circular economy worldwide.

Improving the scope and implementation of EU trade agreements

The trade arena still represents a largely underused venue for the EU to advance the circular economy agenda, both internally and externally.

The review of EU FTAs reveals that to date only two agreements explicitly mention circular economy. In both cases, however, no concrete incentives are presented to promote the circular economy and nothing is said on the possible means to promote circularity as a part of trade in practice. Furthermore, circularity is integrated in the agreements as pertaining to the environmental safeguards to trade only, indicating that the circular economy is not yet considered as an underlying feature of the economy and therefore of trade.

Sustainability Impact Assessments (SIAs) underpin all EU FTA negotiations. The Commission guidelines from 2016 highlight the need to assess possible contributions of the agreement to greening the economy, to resource efficiency objectives, and to promoting sustainable consumption and production.

The review of all published SIAs since 2016 shows that possible impacts on resource use and efficiency as well as waste management are indeed common indicators in all these SIAs. However, the circular economy is only referred to explicitly in three reports; in the final SIA report for the Trans-Atlantic Trade and Investment Partnership (TTIP) (2017) and, more significantly so, in the draft, interim SIA reports for the Philippines and Malaysia (2018).

Building on the above, several future opportunities can be identified for improving the integration of the circular economy into EU FTAs.

Several future opportunities can be identified for improving the integration of the circular economy into EU FTAs

For example, some agreements explicitly cover trade related to specific economic sectors. For such agreements it would be possible to integrate circularity aspects to sector-specific principles and regulatory actions, thus mainstreaming the circular economy also at a sectoral level and beyond the environmental considerations of FTAs.

Furthermore, promoting trade in certain products and services within a sector (e.g. environmental goods and services - EGS) or strengthening the EU regulatory frameworks linked to sector-specific trade (i.e. so-called trade ‘flanking measures’) should also be considered. A comprehensive consideration of circular economy-related aspects in the SIAs underpins such a sector-specific integration.

While the progressive integration of circular economy considerations into EU FTAs and SIAs improves the likelihood of their uptake, the implementation that follows the agreements remains the key to any effective progress. To date information is scarce as to the impacts of EU FTAs on the circular economy in practice. Enforcing the role of FTAs’ Trade and Sustainable Development Committees in implementing the sustainability provisions of the agreements, including ones on the circular economy, would be a step in the right direction.

Addressing the lack of international standards and definitions

The lack of international definitions and standards linked to waste recycling, and circularity more broadly, significantly hinder promoting the benefits of circular economy as part of trade.

Firstly, the lack of international standards for waste quality is creating a barrier to recycling efforts. Consequently, supporting the harmonisation of waste standards and treatment practices not only within the EU but also at the international level should become a core part of the EU’s circular economy policy. For instance, at the moment information on the presence of hazardous substances is not readily available to those who handle the waste in importing countries. Additionally, waste may contain substances that are no longer allowed in new products, or that are not allowed in other countries.

The lack of international consensus on the definition of waste hinders circularity in the global context

Adoption of global recyclability standards, as well as global eco-labelling schemes preventing the incorporation of hazardous materials, could remedy these issues and allow for relevant products to be recycled or re-used anywhere in the world, thereby facilitating circularity through trade.

Secondly, the lack of international consensus on the definition of waste hinders circularity in the global context. Rules on end-of-waste are not harmonised, either in the EU or at the international level, meaning that there is no clarity as to when and following what processes waste becomes a secondary raw material.

The adoption of standards and definitions seems even more timely in the light of the recent Basel Convention ban on plastic waste exports from OECD to non-OECD countries, with the exception for material that is ‘non-hazardous, clean, unmixed and uncontaminated’ and strictly purposed for recycling and not energy recovery. This piece of international legislation could be an important trigger for speeding up international negotiations on waste standards and definitions.

Finally, most EU FTAs include a call for parties to promote liberalisation of environmental goods and services. This can, in principle, be used to incentivise the trade in goods that are produced using sustainable circular economy practices and/or comply with circular economy criteria. However, no existing cases of promoting such practice could be yet identified. The scope for future opportunities depends partly on settling on a more concrete definition of what is considered as an ‘environmental good’. Unfortunately, the discussions on this matter have stalled, making future advances uncertain.

Calling for better policy coherence between circular economy, trade and development cooperation

The IEEP report on circular economy and trade clearly highlights that the shift to a circular economy in the EU will not be sustainable by default; it will only be so if it reflects the implications both within and outside the EU. From the availability of raw materials to the exports of waste for recycling and repair, the shift to a circular economy in the EU is both affecting and affected by various global factors. Domestic policy frameworks and targets for circularity in the EU can – through international trade – impact different aspects of sustainable development in third countries, including several developing countries.

Domestic policy frameworks and targets for circularity in the EU can impact different aspects of sustainable development in third countries

Consequently, identifying and addressing the external implications of its circular economy policy needs to play an integral role in EU’s plans to deliver the 2030 sustainable development agenda, including a shift to sustainable production and consumption of resources at a global scale. This includes improving the integration of circular economy considerations into EU trade policy, both to prevent any negative external impacts but also with a view to supporting the uptake of circular economy-related opportunities in the trade partner countries.

EU development cooperation – and its Aid for Trade strategy in particular – can help to support the shift to a sustainable circular economy at a global scale. The strategy explicitly refers to environmental sustainability as being at the heart of aid for trade, highlighting the green and circular economy as a ‘leapfrogging opportunity in trade, growth and employment’.

The EU’s Aid for Trade schemes can support the uptake of sustainable and equitable circular economy-related trade opportunities within the context of EU FTAs. They can play a catalysing and supporting role in third countries’ shift to a more circular economic model, this way also supporting circularity at the global scale and vis-à-vis the EU. However, more consolidated efforts are needed to ensure that the schemes are coordinated with the needs arising from the further shift to circularity within the EU and the trade-related opportunities and risks associated with that.

Being mindful of the bigger picture

Finally, when assessing the global impacts of pursuing a circular economy within the EU one should keep in mind that the shift to a circular, resource-efficient economy – in the EU and also globally – is associated with a number of related trends, such as growing digitalisation and clean energy transitions.

Without addressing the broader picture, the EU will fail to deliver the foreseen benefits of circular economy

Coupled with population growth and increased wealth, these trends foresee an increasing need for raw materials, including in the developing economies, which are projected to account for more than half of all global consumption by 2030.

In addition, research shows that material footprint (i.e. the quantity of materials to be mobilised in order to meet the consumption of a country) has increased globally. The EU has a considerable contribution to this trend, with the estimated per capital material footprint from high-income countries – such as the EU Member States – being considerably higher than any of the other income groups.

Consequently, for the foreseen sustainability benefits of circular economy to materialise – at the EU or global level – the related policy efforts need to be nested in the broader implementation of the 2030 sustainability agenda, including measures aimed at addressing demand and consumption. Without addressing this broader picture, the EU will fail to deliver the foreseen benefits of circular economy, both internally and externally.