3.1 Circular economy-enabling goods, services and intellectual property
The transition to a circular economy requires a profound restructuring of local, regional, national and global value chains and production systems. Such a transformation is dependent upon the development and scaling of new technologies, infrastructure, business models, approaches to financing and specialist services. The trade in finished goods, services and intellectual property (IP) that are essential to performing these activities may be considered as part of this flow.
Trade in circular economy-enabling goods
To conduct circular economy activities, governments and organizations need access to a wide range of essential goods. However, many of these goods currently face high customs duties, making them more – sometimes prohibitively more – expensive than new equivalent goods. Reducing or removing such duties would greatly accelerate their adoption and therefore the transition to a circular economy. High customs duties are not particular to circular economy goods, but also to a wider range of environmental goods. It is for this reason that 46 WTO members have engaged in discussions on the need to establish an environmental goods agreement (EGA).
Despite the discussions, little priority has been given to identifying, defining and including circular economy-enabling goods as a subset of overall environmental goods. As a result, circular economy-related goods included within the EGA have largely been limited to those applicable to recovery of waste or end-of-pipe pollution control, recycling equipment, spare parts for industrial equipment and a narrow range of resource-efficiency equipment. Despite several rounds of discussions, participating members have failed to reach a consensus, and the negotiations have been inactive since December 2016. The formation of TESSD and the Informal Dialogue on Plastics Pollution (IDP) at the WTO has since brought renewed momentum to the topic, with increasing calls to find ways to facilitate trade in environmental goods and services.
Although there is no official agreement by WTO members on what constitutes a ‘circular economy-enabling good’, at the highest level, the following could be considered under such a category:
- Equipment, machinery, spare parts and tools for conducting circular activities (such as reuse, repair, remanufacturing, recycling and waste management), or sustainable agricultural activities;
- Monitoring and tracking equipment and sensors to map the flow of materials along the entire value chain;
- Digital hardware necessary to store and retrieve supply-chain data, as well as conduct product-service system business models;
- Specialist equipment for producing circular materials (such as industrial biotechnologies and materials science);
- Goods related to achieving energy efficiency and the provision of renewable energy (such as energy efficiency technologies, renewable energy generation and storage technologies); and
- Finished goods designed to be circular over their life cycle (i.e. durable, easy to recycle, non-toxic, repairable and reusable), produced via circular production methods, and complying with strict product standards such as ‘cradle-to-cradle’ certification, national eco-design standards or the planned EU Sustainable Products Initiative (SPI) requirements.
Should there be renewed momentum in the development of an EGA, there will be value in considering how the circular economy can be better embedded within the discussions.
Trade in circular economy-enabling services
The trade in circular economy-enabling services receives less attention than trade in goods, yet is no less vital. This is due to the expected increase in movement towards services over sales of goods, as companies increasingly adopt business models based on product-service systems such as leasing and renting, which replace product ownership and the demand for lifetime extension services like repair and refurbishment.
The 1995 General Agreement on Trade in Services (GATS) outlines four modes of supplying services. These are cross-border trade (mode 1); consumption abroad (mode 2); commercial presence abroad (mode 3); and temporary presence of natural persons abroad (mode 4).
Circular services cut across all four modes – for example, online services such as remote monitoring of equipment, provision of online sharing applications and platforms or circular design expertise (mode 1); conducting repair, refurbishment, remanufacturing, recycling or waste management services (modes 2 and 3); or assembly, installation, maintenance, repair and testing of circular equipment and infrastructure (mode 4).
Growing digital interconnectivity and recent technological advancements (such as remote monitoring and real-time communications via 5G networks) have meant that even those services traditionally considered to be geographically constrained are being traded globally. Therefore, trade in circular services will play a critical role in enabling companies to conduct circular activities along the value chain, as well as in allowing multinational companies to efficiently transfer skills and technologies to overseas subsidiaries. However, trade in circular-enabling services currently faces several challenges, such as divergent regulations across jurisdictions on secondary material and waste trade, and limitations on international data transfer. This significantly increases the cost of compliance, particularly for micro-, small and medium-sized enterprises (MSMEs) and firms in developing countries.
No estimate has been produced for the global traded value of CE goods and services, owing to a lack of recognized definition for such a category of trade and of collected data. However, global trade in maintenance and repair services increased in value from a total of $73.8 billion in 2015 to $108.1 billion in 2019, before falling to $87 billion in 2020 (likely due to COVID-19-related restrictions). In addition, the global market value for recycling equipment and machinery in 2019 was $852 million and is expected to rise to $917.5 million by 2027. When the trade in reuse, repair, remanufacturing and CE-enabling digital equipment is combined with that in remanufactured goods and software, the value of CE-enabling goods and services is likely to be in the range of hundreds of billions of dollars per year.
Trade in circular economy-enabling intellectual property
A global circular economy requires innovation and collaboration (particularly in the form of technology- and knowledge-transfer) along entire value chains spanning multiple jurisdictions. The rules governing the transfer and sharing of circular economy-enabling IP – otherwise referred to as intellectual property rights (IPR) – play an important role in enabling or restricting such collaboration.
IPR relate to works that are the result of human intellectual creativity, such as copyright over creative works, patents for new inventions, registered designs and trademarks distinguishing goods and services. The enforcement of IPR is considered a key safety measure to incentivize investment in, and the diffusion of, innovation. Harmonization of IPR at the global level provides a baseline set of rules concerning registration, certain levels of protection and a level playing field with respect to foreign IP holders vs national equivalents. This is particularly important for ensuring the development and diffusion of sustainability-related IP.
The rules governing the transfer and sharing of circular economy-enabling IP play an important role in enabling or restricting collaboration.
The WTO agreement on trade-related aspects of intellectual property rights (TRIPS), established in 1995, provides this important baseline to support international knowledge and technology transfer. The TRIPS agreement remains the most comprehensive multilateral agreement on IP and continues to play a central role in facilitating global trade in knowledge and creativity. Nonetheless, some opponents have argued that strict control of IPR has, in some cases, slowed down the rate and diffusion of the innovation that underpins a functioning circular economy.
For example, the protection of trade secrets and the minimal licensing of patents – particularly by original equipment manufacturers (OEMs) – on the functional design of products, their material composition and associated manufacturing technologies can restrict third-party organizations from undertaking circular activities on the goods that would otherwise end up as waste (such as condition-monitoring and fault inspection, disassembly, repair, remanufacturing and recycling). Restricted sharing of IP becomes a particular problem globally when the holders, such as OEMs, trade goods into markets where they have limited presence or capacity to collect such goods at the end of their life, and therefore limited ability to extract additional value from them. By overly restricting IP access (such as availability of repair manuals), local third parties are disincentivized from performing the necessary circular activities and therefore increasing the likelihood that the goods end up as waste. This is not only inefficient, but it also risks contributing to environmental pollution and human exposure to hazardous chemicals if it occurs in countries with poor waste management systems. It also curtails the potential for job creation in emerging markets.
An example of a circular economy-related IPR challenge is BMW’s choice to restrict access to its patented tools for recycling used cars, including a technology for draining oil from end-of-life shock absorbers and a process for recycling printed circuit boards. These restrictions limit the recovery of valuable materials from the global fleet of BMW vehicles, as BMW is capable of recycling only a small proportion itself. The same is the case for many manufacturers of electronic goods, which are required to provide neither instructions on how to repair or remanufacture those goods nor the necessary tools and spare parts to do so.
For the circular economy to grow at the rate necessary to meet global environmental and human development goals, it is important that third-party operators specializing in circular activities can access the relevant IPR.
Another challenge related to IP is that circular economy policies to date have tended to neglect the challenges associated with IPR, an example being the EU’s eco-design regulations. In addition, a more ambitious set of circularity policy and regulatory measures is now under development, to which efficient IP transfer is essential for delivery. An example is the EU’s SPI (an evolution of the Ecodesign directive), which will require companies to provide minimum information requirements on the life cycle, durability, repairability and recyclability of their products. This will be underpinned by the rollout of digital product passports (DPP). The products themselves will also need to meet technical criteria for durability, repairability and recyclability.
The EU’s ‘right to repair’ resolution, planned for the end of 2022, will also seek to empower customers and third parties to be able to repair products. It will do this by requiring manufacturers to disclose proprietary information that would otherwise have remained inaccessible to consumers.
However, in some cases, the right to repair and disclosure of relevant IP has faced resistance from companies concerned that enabling consumers to repair their products could result in the loss of trade secrets or lead to malfunction, reputational risk and exposure to litigation as a result of poor-quality repair work. Furthermore, producers may be able to ensure minimal compliance with legislation by providing instructions on how to repair a product without the relevant IP on the specialist equipment and machinery required to undertake the repair. It remains unclear as to whether the challenges associated with IPR have been adequately considered and – importantly, in terms of inclusivity – how the right to access relevant IP extends to third parties outside the EU.
Despite the importance of trade-related aspects of IPR on the restructuring of global value chains towards circularity, hardly any circular economy research addresses IPR-associated issues either from a corporate or policy perspective. As such, many questions are still to be addressed. For example, whether anyone selling a remanufactured product (such as a computer or mobile phone) is required to pay an additional licensing fee to the original IP owners. A similar issue relates to the leasing of goods to multiple owners. More broadly, questions exist around how the TRIPS agreement could be better utilized to enable and accelerate circular economy-related IP transfers, particularly to less-developed countries. Further research and discussion on this topic by the international trade community is necessary.
3.2 Used goods for reuse, repair, remanufacturing or recycling
The trade in used goods can occur in three main ways. They can be traded with the intention of being sold into a secondary market: (i) directly for reuse; (ii) to be repaired, refurbished or remanufactured (otherwise referred to as ‘cores’); or (iii) to be recycled to recover secondary raw materials. Any used good that cannot be reused, repaired, remanufactured or recycled should be classed as waste.
Trade in used goods in accordance with the above criteria offers numerous economic, environmental and social benefits. First, it provides an export opportunity to the primary consumer country – for example, the total value of the global used furniture market is expected to reach $47 billion by 2025. Second, trade can provide affordable access for citizens in secondary markets to high-quality goods that would have been unaffordable as new.
An example is the export of used railcars from Japan. Due to strict domestic environmental regulations and high costs relating to the recycling and scrapping of trains, Japan has become one of the largest exporters of used rolling stock in Asia. One of the biggest recipients is the Indonesian city of Jakarta, which by 2018 had received over 1,500 used Japanese railcars. This supply has helped the city meet growing demand for public transport brought about by rapid urbanization and has been well-received by the local populace, which prefers the better-quality, air-conditioned Japanese railcars to those previously used. Furthermore, the cost is estimated to be around one-tenth of that for procuring new railcars. However, Jakarta faced some challenges in terms of obtaining spare parts for maintenance. In some instances, entirely new parts had to be fabricated locally, which is costly and time-consuming.
The combination of recent advancements in ICT, widespread internet access, increased globalization and reduced tariffs has dramatically reduced transaction costs for conducting trade in second-hand goods.
Finally, the need to repair, refurbish, remanufacture or recycle imported second-hand goods generates demand for local industry and jobs in the importing country, as well as providing a source of valuable secondary raw materials to meet domestic production demand. For example, the trade of second-hand tractors from Japan to Vietnam created a local industry of alteration and repair shops to make the tractors suitable for the Vietnamese climate and terrain.
The combination of recent advancements in information communication technology (ICT), widespread internet access (enabling the growth of second-hand online markets like eBay), increased globalization and reduced tariffs has dramatically reduced transaction costs for conducting trade in second-hand goods (see Box 2). This is particularly the case for developing countries, which have received continued pressure to reduce trade barriers as a condition of international free trade agreements.
