Russia’s invasion of Ukraine and Western circular economy strategies
Russia’s invasion of Ukraine, as well as China’s response to Russia’s actions, will likely result in a change of strategy on circular trade from the EU and the US. For instance, the Biden administration has banned the import of Russian oil, liquefied natural gas and coal to the US. Meanwhile, the EU plans to reduce linear trade in non-renewable energy sources with Russia, vowing to reduce gas imports by two-thirds before the end of 2022. This will likely lead to an increase in demand for circular economy-enabling goods and services, especially for energy efficiency measures and renewables. As a next step, the EU may accelerate and strengthen its statutory circularity standards and fiscal incentives to promote the domestic capture and reuse of critical raw materials. This could help reduce reliance on primary materials and resource trade imports from Russia in the first instance, but likely also from China.
Although sanctions on circular trade flows have previously been rare, increasing geopolitical tensions may well encourage the use of sanctions (and/or export restrictions and tariffs) by the EU and US on scrap metals, secondary critical materials (that are important in the production of military equipment) and used goods. Russia, for example, imported $1.2 billion and exported $2 billion of scrap metal in 2020, accounting for approximately 1 per cent and 1.6 per cent of the global scrap metal trade, respectively. Trade restrictions on advanced digital technologies have already been introduced regarding Russia, and trade liberalization measures on technology equipment for renewable energy technologies necessary for conducting key circular activities could be adapted by the EU and others that seek to reduce their reliance on Russian energy.
Proprietary protection (and IP-licensing) on CE goods and services could also be strengthened by the EU, the US and allies. Controlling the diffusion of certain strategic CE-enabling technologies (particularly digital ones) – via, for example, IP-licensing – enables tighter control on their use. Yet it may constrain the extent to which the IP holders of the technology gain market share. Tighter control of IP between the EU and the US on one side and China and Russia on the other will not only impact the efficiency gains provided by opening up to circular trade, but will also likely have negative impacts on developing countries and regions that are particularly dependent upon the import of such goods and services.
Energy resource security in a net zero world
A major global trend with geopolitical implications that impacts circular trade is the race towards net zero. The low carbon transition is materially intensive, and so increases demand for certain technologies and materials. This leads to an intensification in the mining of critical raw materials such as cobalt, lithium and nickel for batteries, and copper, silicon and silver for solar PV. According to the International Energy Agency (IEA), achieving net zero will lead to a six-fold increase in mineral demand by 2040. The IEA has warned that there is a risk this demand will not be met, as the mining and processing of these minerals is currently highly concentrated geographically. For cobalt, the Democratic Republic of the Congo hosts 70 per cent of the world’s production, while, for rare earth metals, China hosts roughly 60 per cent. Processing of these materials is even more concentrated, with China processing around 70 per cent of the world’s rare earth metals and 50–70 per cent of the world’s cobalt and lithium. Such high concentration creates supply-chain vulnerabilities – for example, those linked to geopolitical risks or natural disasters.
Both the mineral and metals supply chains for technologies and the concentration of manufacturing capacity in a small number of countries are becoming a geopolitical issue. China has the world’s largest production capacity for solar PV: eight of the top 10 solar companies in the world are Chinese, supplying almost 100 per cent of solar ingots and solar wafers. Meanwhile, China’s global share of solar-cell manufacturing is about 80 per cent. In the context of Russia’s war on Ukraine, the EU and the UK are aiming to reduce their dependence on oil and gas, but the transition to a renewable energy system at the same time significantly increases dependence on China’s solar power industry. Current trends towards increased economic nationalism and geopolitical conflict work against both energy security objectives and net zero transitions.
To build more resilient and sustainable supply chains for low-carbon technologies and to ensure access to required materials, national governments have a range of different tools. While resilient and sustainable supply chains are ultimately built at company-level, governments can, among other things, build national stockpiles for strategic products (such as rare earth elements) and encourage firms to diversify sources of supply. A multi-pronged government strategy should also prioritize demand-side reduction measures (thereby reducing overall demand for resources), as well as measures to scale up circular processes and technologies to tackle the hard-to-reduce emissions in sectors such as agriculture, aviation and construction (thereby increasing the likelihood of trade in circular economy-enabling goods and services). Such a multi-pronged approach will also need to include demand-side measures that reduce end-use energy consumption and primary resource use.
Policy measures put in place to accelerate the net zero transition may either foster or inhibit circular trade flows. For example, carbon border adjustment mechanisms under consideration by the EU and the US, which seek to impose costs on imported goods comparable to the costs faced by domestic producers. These mechanisms may encourage investment not only for decarbonization of the energy sector, but also low-carbon materials such as ‘green’ steel and concrete. However, critics argue that they could create trade barriers or even lead to trade wars between countries. The compatibility of carbon border adjustments with WTO rules will likely also be contested. To reduce trade frictions, it would be ideal – though currently unlikely – to align domestic carbon measures with any border tax measures.
Increasing plurality of geopolitical alliances and trade deals
Due to the challenges in achieving multilateral consensus on trade rules, countries are increasingly moving towards bilateral and plurilateral trade agreements. Such trade initiatives among groups of like-minded countries offer the chance to accelerate towards environmental (and circular) ambitions without requiring complex and often lengthy multilateral negotiations based on the principle of consensus. Plurilateral agreements could be a step towards an eventual (and ultimately preferable) multilateral solution.
Yet plurilateral negotiations still require compromise and are not always successful, as shown by the failed EGA. Some countries – notably India and South Africa – oppose the plurilateral approach. Moreover, such initiatives may discourage countries from making the multilateral concessions essential to realizing a global circular economy later on. The proliferation of bilateral and plurilateral agreements also leads to a risk of fragmentation in rules and standards, which could present obstacles to building circular economies and sustainable global supply chains.
Important initiatives related to trade, the environment and climate include the launch of negotiations in 2019 for an Agreement on Climate Change, Trade and Sustainability (ACCTS) between Costa Rica, Fiji, Iceland, New Zealand, Norway and Switzerland. In 2021, groups of WTO members announced three joint statements on TESSD, IDP and Fossil Fuel Subsidy Reform. But significant work remains, as these statements merely establish the priority areas for further discussion – including the circular economy.
South–South economic integration
The Global South plays an important and dynamic role in the global economy. South–South trade has increased over the past two decades, reaching approximately 40 per cent of global trade in 2017, compared to about 24 per cent in 2001.
South–South foreign direct investment (FDI) has also become increasingly relevant. Total FDI outflows from developing economies grew from $110 billion in 2005 to $381 billion in 2017, and now accounts for almost 30 per cent of total FDI outflows. The establishment of major South–South economic integration initiatives such as the African Continental Free Trade Agreement (AfCFTA), the Asian Infrastructure Investment Bank, China’s Belt and Road Initiative and the South–South Cooperation Fund suggest that the growth in South–South trade will continue in the future.
The Global South is also playing an increasing role in global consumption and production patterns. Rapid growth in South–South trade suggests global supply chains are becoming more diverse. Rather than being concentrated in a few major emerging economies such as China and India, early production stages of many industries have relocated to lower-wage economies (though the wage differential is narrowing and becoming less of a driver for relocating production). This could impact the economies of scale required for material-recycling and -reprocessing and increase the fragility of some supply chains. But it also offers opportunities for South–South trade in both secondary goods and materials, as well as circular economy-enabling goods and services – thereby increasing the resilience of participating regions.
South–South regional trade cooperation can help individual countries with high trade-dependency rates to become more circular.
South–South regional trade cooperation can also help individual countries with high trade-dependency rates to become more circular. High trade-dependency rates can create challenges because recycling supply chains often do not reside within the country. In the case of ASEAN, the dependency rates of Brunei Darussalam, Cambodia, Malaysia, Singapore, Thailand and Vietnam exceeded 100 per cent in 2018. A regional circular economy approach among ASEAN countries and in other parts of East Asia through coordinated trade agreements could overcome these challenges. In the case of the South Asian Association for Regional Cooperation (SAARC), India’s economic development and regional trade have created spillover effects, contributing to the economic growth in neighbouring countries of Bangladesh, Bhutan, Nepal and Sri Lanka. Advancing the circular economy through SAARC trade agreements or the likes of the Pacific Alliance agreement for sustainable management of plastics could create similar spillover effects for circularity.
Looking to the future
Geopolitical risks and heightened tensions threaten the achievement of sustainable development objectives. In the case of the circular economy, the geopolitical ramifications of Russia’s invasion of Ukraine will likely have a negative impact on circular economy trade. Furthermore, it will likely lead to countries prioritizing resource security over collective sustainability objectives when pursuing circular strategies. Trends such as economic nationalism and deglobalization could limit the benefits offered by international trade of goods and services, including those that enable the circular transition.
Given increasingly low levels of trust between countries, it will be difficult to achieve the collaboration necessary to agree, implement and enforce trade rules that incorporate CE at the bilateral, multilateral and regional levels. Plurilateral initiatives among groups of like-minded countries are far from perfect but offer a valuable step towards more global approaches and higher levels of ambition.
4.3 Balancing the benefits and risks of circular trade
Given the current inequity in value-capture of circular trade, combined with growing geopolitical volatility, circular economy and trade policymakers face the difficult task of maximizing the benefits offered by international circular trade flows while mitigating the risks (see Figure 8).
