The US-China Trade Dispute: What Impact on the Circular Economy?

With no end in sight for the trade tensions between the US and China, efforts to advance the circular economy in both economies are seemingly under threat, writes Patrick Schröder.

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Paper is processed at a recycling plant in the US. Recycled paper has been a major export from the US to China but China has recently tightened its restrictions on how much paper can be imported due to ongoing trade tensions between the two countries. Photo: Getty Images.

Paper is processed at a recycling plant in the US. Recycled paper has been a major export from the US to China but China has recently tightened its restrictions on how much paper can be imported due to ongoing trade tensions between the two countries. Photo: Getty Images.

In the latest development in the trade dispute between the US and China, the Trump administration has announced a delay to the newly planned 10 per cent tariffs on another $300 billion of Chinese goods until the end of 2019. Since a recent round of negotiations did not bring about any resolution to the dispute between both countries, there is now increasing evidence that the trade war between the two countries is hurting both economies. Furthermore, the trade dispute is yielding negative spill-over effects for different areas of global concern, including the climate, environmental protections and waste management, while also dampening trade in circular goods and services between the two countries.

The circular economy – an economic model in which waste is eliminated by design, goods are reused, repaired and recycled, and asset-sharing is prioritized over individual ownership – is a crucial strategy for reducing the resource footprint of industrial development and for tackling the global waste crisis. China and the US, both key players in this space, are vital for the success of the global circular economy, and the two countries have enjoyed a healthy symbiotic relationship through the trading of goods until now, particularly the trade in secondary raw materials and waste products for re-processing and recycling.

However this relationship is now under threat. China’s retaliatory tariffs cover multiple categories of scrap metals, copper waste and other secondary materials including recovered fibre and paper pulp from recycled paper and cardboard in the US – all relevant resources for the circular economy. Consequently, the impact of these tariffs has been significant. China has been the top importer of US recycled paper for decades: before the tariffs in the first half of 2018, it imported 2.73 million tons of US cardboard and 1.4 million tons of other US-sourced recovered fibres. By July 2019, China’s imports of paper and cardboard reduced by more than one third.

Initially, the loss of China as the principal export market for American recycled paper has left many municipal recycling programmes in crisis, facing increasing costs and reduced revenues. More recently, the US recycling industry has been experiencing a revival partly through Chinese investments. For example, the Hong Kong-based company Nine Dragons, one of the world’s largest producers of cardboard boxes, invested $500 million to buy and expand production at US paper mills to avoid trade tariffs. While another Chinese company, Global Win Wickliffe, is reopening a shuttered paper mill in Kentucky, thereby creating US jobs and revitalizing the community.

In China, recycling operators and urban mining pilot projects, which were already facing a shortfall of secondary raw materials after China placed restrictions on foreign plastic waste imports at the start of 2018, are now suffering from the new import tariffs. Urban mining operations and industrial parks are short of feedstock, with some having had to stop their operations, as there are not enough secondary resources from domestic Chinese sources. As such, the fall-out with the US risks undermining China’s efforts to support the growth of a domestic circular economy: urban mining and recycling operations, developed through the support of policy over the last decade under the Circular Economy Promotion Law, now face an uncertain future. To maintain and expand these operations, it is necessary to provide more domestic supplies of high-quality recyclables, a goal the government aims to achieve with ambitious pilot projects introduced only in July 2019 in Shanghai for the mandatory sorting and recycling of household waste.

These recent developments point out certain challenges that governments and businesses will need to address as the global circular economy evolves. Most countries and businesses are not able to make use of all the waste and secondary materials that they generate as by-products. International cross-border trade is therefore essential to generate markets for circular goods and services. But, in a highly interconnected network of global circular value chains, businesses and governments are exposed to sudden market disruptions. Governments will need to take a twin-track approach to managing the risk of such disruption.

To do this, they firstly will need to support the development of their reuse, repair and recycling capacity at home and support the development of domestic markets for circular goods and services. Current uncertainty about future trade relations risks dampening innovation in the circular economy and discouraging the development and trial of new business models and products. Domestic markets matter for the circular economy to generate value and create new employment locally. This can be achieved through supportive policies that encourage local repair businesses and start-ups with digital solutions for optimizing resource use and facilitating asset-sharing.

Secondly, they will need to engage to enable closer cooperation within the framework of a rules-based international system to govern trade in a way that works for the circular economy – not against it. This requires taking into account the perspective of global value chains and the full life cycle of goods and services. Despite this, the role of global and regional trade in the circular economy remains little understood. As more countries are developing national circular economy strategies, it is important to understand how these will relate to the trade rules of the global economy.

What is needed is a clearer analysis and understanding of the physical trade flows of waste products and secondary resources in a wide range of sectors and across borders. A new Chatham House circular economy project will look more closely into these complex trade issues to inform the design of effective national and international trade policies in support of the circular economy.