A N A LY S I S ECONOMY AND FINANCE GOING CIRCULAR How the Harmonized System Codes Can/Not Support a Circular Economy and What Else Could Be Done Jack Barrie and Gael Grooby August 2023 Are you interested in the circular economy? Did you always want to deepen your understanding about the HS codes? And are you open for experiments? Then please read this paper. It evaluates the extent to which the World Customs Organization Harmonized System of Codes (HS), a standardised method of clas­sifying and tracking traded goods, could play a role in facili­ tating a circular economy. The HS will be a critical tool for a global CE transition, ena­ bling governments to monitor, regulate and facilitate circular trade flows more effectively. How­ever, maximising the po­ tential use for this would re­quire some significant changes to the way the HS works.

ECONOMY AND FINANCE GOING CIRCULAR How the Harmonized System Codes Can/Not Support a Circular Economy and What Else Could Be Done With support of Circular STEP – Stakeholder Engagement Platform to accelerate Circular Economy transition in the UNECE region

 Content KEY INSIGHTS  2  3  HARMONIZED SYSTEM: AN OVERVIEW  5 2.1 What is the 5 2.2 Who uses the 5 2.3 How is the HS 5 3 FACILITATING CIRCULAR TRADE: STRENGTHS AND LIMITATIONS OF THE HS  8 3.1 Strengths of HS in facilitating circular 8 3.2 Limitations of HS in facilitating circular 9 4 REFORMING THE HS TO SUPPORT A CIRCULAR ECONOMY  13 4.1 Creating new or revising existing classifications 13 4.2 Strengthening institutional capacity to implement effective 17 4.3 Improving coordination with multilateral environmental 18 4.4 Extending to an eight-digit international 20 5 EXPERIMENTAL CIRCULAR TRADE FACILITATION APPROACHES  21 5.1 Trusted circular traders and resource recovery 22 5.2 Electronic data 23 5.3 Special Economic Zones 24 SUMMARY  26 Appendix – 27 Glossary 28  29

FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR KEY INSIGHTS A global transition to an inclusive circular economy is a vital strategy for addressing the triple crises of climate change, biodiversity loss and pollution, as well as boosting economic resilience. An inclusive circular economy seeks to slow, narrow and loop the flow of mate­ rials through the economic system, while regenerating nat­ ural systems and designing out toxicity. By focusing equally on environmental issues, human needs, sustainable liveli­ hoods, decent work and social justice, an inclusive circular economy can make important contributions to human de­ velopment, to poverty reduction and to improved well-be­ ing around the world. International trade will play a critical role in realising an inclusive circular economy. It can improve affordable access to necessary goods, services and intellectual proper­ ty to implement new circular business models such as prod­ uct leasing, or to conduct reuse, repair, remanufacturing and recycling activities. Equally, trade in used goods for di­ rect reuse, repair, refurbishment or remanufacturing can provide affordable access to essential goods and services for those in secondary markets and generate local demand for industry and employment. Finally, trade in secondary raw materials and waste destined for recovery and reuse enables the aggregation of materials in areas of highest demand to maximise economies of scale, making it economically attrac­ tive to transform waste into resources for new production. The report highlights potential reforms to the HS to better facilitate circular trade. These include:(i) the crea­ tion of new or revision of existing classifications for circular enabling goods;(ii) strengthening institutional capacity of the WCO and customs administrations to develop and regu­ late effective systems for circular trade;(iii) improving coor­ dination with multilateral environmental agreements; and (iv) extending to an 8-digit international system. Recognising the inherent structural and procedural limitations of the HS, the report also calls for experimentation with additional trade facilitation measures which promise to streamline circular trade flows while reducing the burden on customs administrations. Ex­ amples include:(i) trusted circular trader and resource recov­ ery lane initiatives;(ii) integrating circular product data with Single Windows and electronic data systems; and(iii) the potential use of Special Economic Zones for certain circular trade activities. Circularity-enabling trade flows remain poorly facilitated or regulated. This has often resulted in negative en­ vironmental, social and economic impacts(particularly on low-income countries) and jeopardises the goals of an inclu­ sive circular economy. Meanwhile those participating legiti­ mately in these types of trade face many procedural and le­ gal hurdles and barriers which act as a commercial and eco­ nomic disincentive to scale up such beneficial trade flows. The topic of facilitating circularity-enabling trade in a way that is mutually beneficial for all is therefore politically sensi­ tive and future solutions must navigate it carefully. This report explores how trade flows that promise to contribute to an inclusive circular economy can be better facilitated. It evaluates the extent to which the World Customs Organization Harmonized System of Codes (HS), a standardised method of classifying and tracking trad­ ed goods, could play a facilitative role. 2

Introduction 1 INTRODUCTION Unsustainable production, consumption and disposal of the world’s resources are primary causes of the triple threat of pollution, climate change and biodiversity loss. 1 This linear model is also a significant cause of social injus­ tice, with most resource consumption and wealth accu­ mulation occurring in the Global North and the worst en­ vironmental impacts and threats to human health being felt in the Global South. Increasing geopolitical tensions and the likelihood of further global supply-chain shocks and disruptions exacerbate these issues. A transition to an inclusive circular economy is essential to help address these challenges. An inclusive circular economy seeks to achieve absolute de­ coupling 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 regenerat­ ing natural systems and designing out toxic chemicals which pose a risk to human harm and prevent the circular use of materials. By focusing equally on environmental is­ sues, sustainable livelihoods, decent work and social jus­ tice, an inclusive circular economy can make important contributions to human development, to poverty reduction and to improved well-being around the world. International trade will play a key role in delivering or inhib­ iting the transition to an inclusive circular economy. Chatham House introduced the concept of“circular trade”, which encompasses any international trade transaction that contributes to realising an inclusive circular economy at the local, national and global levels. 2 Circular trade is therefore an umbrella term that encompasses many differ­ ent types of trade flows: – Circular economy-enabling goods, services and IP: Enabling organisations to access the necessary skills and equipment to implement new circular business models (such as leasing and renting), or to conduct reuse, re­ pair, remanufacturing and recycling activities. – Used goods for reuse, repair or remanufacturing or goods that have been remanufactured: Enabling affordable access to essential goods and services for those in secondary markets and generates local de­ mand for industry and employment. – Secondary raw materials and waste destined for recovery: Enabling the aggregation of materials in are­ as of highest demand to maximise economies of scale, making it economically attractive to transform waste into resources for new production. It is important to highlight that the transition to an inclusive circular economy will also be hindered by ongoing trade in goods and services which serve to promote or lock-in a lin­ ear wasteful economic model – examples include products containing hazardous or harmful chemical substances, dam­ aged or poor-quality used goods or hazardous waste. How the trade in such harmful or wasteful goods may be restrict­ ed and regulated and what role the HS can play in that en­ deavour is an equally important question. Insofar as this pa­ per aims to discuss how the HS and other trade facilitation measures can support the circular economy- enabling trade flows listed, it will touch upon the need to regulate such cir­ cular economy- hindering trade flows. Nonetheless, further consideration is required on this topic. Circular trade flows have grown strongly in value over the past two decades. For example, the value of trade in sec­ ond-hand goods, secondary raw materials and waste for re­ covery rose by more than 230 per cent(from$94 billion to $313 billion) between 2000 and 2019, with the global ex­ port value of trade in goods rising by around 195 per cent over the same period. The value of trade in maintenance and repair services increased from$74 billion to$108 billion between 2015 and 2019. 3 However, the numbers presented above should be consid­ ered with caution. This is because the ability to monitor and track with sufficient granularity the types of circular trade flows around the world listed above is severely limited. There are several reasons for this, including the lack of 1 https://www.resourcepanel.org/reports/global-resources-outlook 2 https://www.chathamhouse.org/2022/10/role-international-trade-re­ alizing-inclusive-circular-economy 3 https://www.chathamhouse.org/2022/10/role-international-trade-re­ alizing-inclusive-circular-economy 3

FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR shared definitions and classifications of circular trade flows and poor supply chain data traceability and transparency. Lack of circular trade transparency and regulation has been observed to result in negative economic, environmental and social impacts. One example is the high levels of illicit ship­ ments of hazardous waste, causing pollution and increasing human exposure to toxic chemicals. Illegal e-waste trade and dumping, for example, amounted to around$10–12 bil­ lion in 2016. Equally, lack of regulation of circular trade flows can lead to high volumes of poor-quality used goods flooding second­ ary markets(particularly in the Global South), threatening local industries and overwhelming local waste manage­ ment systems. 4 For example, the sheer volume of post-con­ sumer textiles, combined with cheap, low-quality textiles from East Asia, 5 has also been observed to undercut do­ mestic production and create significant amounts of waste. As such, it has been subject to particularly strong pushback from countries in sub-Saharan Africa – which received ap­ proximately$1.4 billion of imported textile waste in 2020 – through the introduction of import bans, quotas and other restrictions. Another aspect is the potential for materials to be recycled that either are unsustainable in terms of resource usage for recycling or present hazards when used in the manufacture of other goods(for example, plastics containing hazardous chemicals) simply to meet mandated requirements for recy­ cled content or to provide a marketing benefit. Poorly regulated circular trade flows also disincentivise the private sector from pursuing circular reverse logistics busi­ ness approaches because of the added procedural costs and time delays, as well as import and export trade restrictive measures. For example, it is 31 per cent more costly to trade used electronics or 190 per cent more costly in some cases if the products include hazardous components. Some com­ panies need to wait 14–42 months for prior informed con­ sent(PIC) before they can ship goods. 6 It is therefore evident that although the scaling up of circu­ lar trade offers many potential benefits there are also nu­ merous risks, many of which have materialised to date and have raised valid concerns from governments that bear the brunt of these impacts. If the full benefits of circular trade are to be realised while mitigating the risks, these circular trade governance challenges should be addressed, many of which are characterised by an inability to accurately classify and monitor circular trade flows. 4 https://www.chathamhouse.org/2022/06/trade-inclusive-circu­ lar-economy 5 Brady, S. and Lu, S.(2018): Here’s why the used clothing trade deser­ ves more attention, AGOA.Info, 11 December 2018; available at: https://agoa.info/news/article/15539-here-s-why-the-used-clothingtrade-deservesmore-attention.html. 6 https://www.weforum.org/whitepapers/facilitating-trade-along-­ circular-electronics-value-chains/ The collection of global trade data is underpinned by the classification of products provided by the World Customs Organization’s(WCO) Harmonized Commodity Description and Coding System, generally referred to as the Harmonized System(HS). This international nomenclature is an important starting point for governments and stakeholders wishing to obtain a more granular picture of trade flows. Looking beyond the HS to the role of customs more gener­ ally, it is evident that there is a growing and strong body of support among customs administrations to develop the role of customs in environmental policy and related policies such as circular economy policies. Green Customs is cur­ rently one of the three official focus area for the WCO, meaning that member administrations have designated it a strategic area in which actions and improvement are urgent and essential to properly address future challenges and po­ sition customs as modern and agile actors at borders. This includes the circular economy as highlighted in the WCO strategic plan.  As highlighted by the Environmental Scan 2021, the world’s mindset regarding sustainable development and the protection of the environment has changed significantly in recent years.(…) The Strategic Plan will ensure that sufficient attention is paid to this and that concrete initiatives are explored to point the WCO in the right direction in this area. In particular, trade-related aspects will be further studied, such as the circular economy and waste management. A global reflection will also be launched to assess how WCO instruments might be amended and reviewed to further integrate the environmental aspect and contribute to the global green economy. 7 With that context, this report aims to raise awareness among the circular economy policy and trade policy com­ munities on the opportunities that the HS can provide in fa­ cilitating a global circular economy and where its limitations require consideration of other methods to achieve identifi­ cation of circular economy trade. Note that this report does not discuss the trade in circular services, which is a critical and growing element of circular trade. Facilitating the trade in circular services warrants further investigation. The report is therefore structured as follows: Chapter 2 pro­ vides an overview of the HS system, its purpose, its archi­ tecture and how it is governed. Chapter 3 discusses the strengths and limitations of the HS in terms of circular trade facilitation. Chapter 4 explores four options for HR reform to help overcome these limitations. Finally, acknowledging that there are some unavoidable limitations of the HS when it comes to addressing certain circular trade facilitation challenges, Chapter 5 identifies future areas for collabora­ tive experimentation which may serve to complement the HS. 7 WCO Strategic Plan 2022-2025. 4

The Harmonized System: an overview 2 THE HARMONIZED SYSTEM: AN OVERVIEW The World Customs Organization(WCO) Harmonized Sys­ tem(HS) codes are an important tool that can aid in the transition to an inclusive circular economy by providing a standardised method of classifying and tracking goods throughout their lifecycles for international trade. This chap­ ter provides an overview of the HS, including its intended purpose, structure, users and governance model. 2.1  IS THE HS? The HS is a system that allows all physically tradable goods to be categorised into a set of globally used classifications. It covers tangible goods 8 and does not include the trade in services, which is covered under the Central Product Classi­ fication for Services. The HS is administrated by the World Customs Organization (WCO) and is set up in accordance with the International Convention on“The Harmonized Commodity Description and Coding System”(HS Convention) to ensure a common basis for custom tariff and statistical nomenclatures used for the treatment and recording of goods being cleared by cus­ toms at international borders. Only eligible states or cus­ toms or economic unions can be contracting parties to the Convention. Customs administrations: Customs administrations use HS codes to:(i) ensure compliance with trade agreements and to monitor the flow of goods in and out of their country; and (ii) to determine the duties, taxes, and tariffs that need to be applied to imported or exported goods. Customs do not in­ spect all goods. For many countries, inspections are in single digits or less as a proportion of all goods in transit: inspecting all goods would require a massive workforce and slow trade dramatically. Importers and exporters: Importers and exporters use HS codes to accurately classify their goods for customs purposes and to ensure that the correct duties and taxes are applied, and to avoid delays at the border. When a tangible(physical) good is traded across a national border(or regional border for customs unions), declarations are normally required for export and import. In both, customs officials must be provided with the classification of the goods, under the relevant national ex­ port tariff to customs in the exporting country and under the relevant import tariff to customs in the importing country. 9 Freight forwarders and logistics companies: Freight forwarders and logistics companies use HS codes to proper­ ly classify and ship goods. This helps them to avoid potential problems with customs and to ensure that their shipments are properly documented and accounted for. The HS is amended every five years to ensure it remains rel­ evant and up to date with developments in international trade. The latest round of amendments came into force on 1 January 2022, with the work on the negotiations for the next edition, which will come into force on 1 January 2027, concluding in March 2024. Changes to the HS are negotiat­ ed though the Harmonized System Committee and its Sub-Committee by delegates from the Contracting Parties to the HS Convention, which currently number 160 parties. 2.2  USES THE HS? The HS is used by those involved in the transboundary trade of tangible goods, its regulation or the compiling or use of statistics. The main users include: 8 The only intangible good included is electricity. Governments and trade or statistical organisations: Governments, trade organisations and statistical organisa­ tions use HS codes to track and monitor trade, implement trade policies, conduct trade negotiations, and collect trade data. HS help regulate cross-border trade requirements set out in multilateral environmental agreements, such as the Basel, Stockholm, and Rotterdam Conventions. 2.3  OW IS THE HS STRUCTURED? The HS has a nested hierarchical structure(see Figure 1). At the highest level, there are 21 Sections, each represent­ ing a different sector of the economy, such as textiles, ma­ 9 Sometimes there are national or regional exceptions to the require­ ment to classify goods. For example, many countries exempt lowvalue consignments from classification. This has a significant impact on the global knowledge of what is being traded. 5

FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR Figure 1 Hierarchical structure of the HS with maximum number of headings and sub-headings available Chapter Two-digit 99x Heading Four-digit 9x Sub-Heading Five-digit 9x Sub-Heading Six-digit chinery, or chemicals. Each section is further divided into 96 chapters(the first pair of digits in an HS code), num­ bered 1 to 97(Chapter 77 is reserved for future use), which divide each section into different classes. For exam­ ple, I“Live animals; animal products” is divided into five Chapters: Chapter 1“Live animals”; Chapter 2“Meat and edible meat offal”; Chapter 3“Fish and crustaceans, mol­ luscs and other aquatic invertebrates”; Chapter 4“Dairy produce; birds' eggs; natural honey; edible products of an­ imal origin, not elsewhere specified or included”; and Chapter 5“Products of animal origin, not elsewhere spec­ ified or included”. Each chapter is further divided into headings, so the first heading of the first Chapter is 01.01“Live horses, asses, mules and hinnies”. These four-digit headings form the basic classifications and all the worlds’ goods fit into the 1,222 headings of the current edition of the HS. As there are mil­ lions of different goods and only a few can be individually named within such a limited number of headings, this is achieved using“other” headings, for example heading 01.06 “Other live animals”. Where greater specificity is needed, a heading may be sub­ divided into five-digit subheadings. These can be further subdivided into six-digit subheadings(ending in a number between 1 and 9). Where a heading or subheading is not subdivided, zeros are added to make the six digits of the fi­ nal HS classification code. The current edition has 5,387 classifications. Individual codes vary in their ability to accurately describe the good under the code. For example, 081010 is fresh strawberries(easy) whereas 081090 is for“fresh fruit” not elsewhere covered in Chapter 8 and hence can encompass a large range of different fruits. HS provisions that are specific­– that is, they are for a named type of good – pro­ vide global trade statistics and allow for targeted treat­ ment at the border. Classification must be done in accordance with the rules of the HS, entitled“The General Rules for the Interpretation of the Harmonized System”, which are legally binding. The purpose of these rules is to ensure that a product can be classified in only one place and to enhance uniformity of classification globally. The HS can use legally binding Notes to provide definitions, include or exclude certain goods regarding headings or sub­ headings and to direct classification. For example, any phys­ ical good can be classified under only one classification. Therefore, the HS uses Notes to ensure this. This hierarchical system allows for a high level of granularity and specificity in classifying goods(see Figure 2). An exam­ ple in terms of circular trade is the HS code for“retreaded pneumatic tyres of rubber of a kind used for buses or lor­ ries”(401212). It sits in Chapter 40(Rubber and articles thereof), under Heading 40.12(Retreaded or used pneumat­ ic tyres of rubber; solid or cushion tyres, tyre treads and tyre flaps, of rubber), then under Sub-heading 4012.1(Retread­ ed tyres), and, finally, at six-digit level, 4012.12(Of a kind used on buses or lorries).” The text from the heading and five-digit subheading also forms part of the scope. Countries use the HS as the first six digits of their tariffs and can choose to further divide the HS classification codes to as many digits as they need, otherwise referred to as“ex-out­ s”. 10 Countries frequently subdivide to 8, 10 or even 12-digit tariff classification numbers to provide a more detailed de­ 10 https://www.iisd.org/system/files/publications/code-shift-2022-har­ monized-system.pdf 6

Figure 2 HS provision for retreaded light truck tyres 4012 Retreaded or used pneumatic tyres of rubber; solid or, tyre treads and tyre flaps, of rubber The Harmonized System: an overview Two-digit 4012.1 Retreaded tyres 4012.20 Used pneumatic types 4012.90 Other 4012.11 Of a kind used in motor cars(including station wagons and racing cars) 4012.12 Of a kind used on buses or lorries 4012.12.40 Radial 4012.12.40.15 Light truck (on-the-highway) 4012.13 Of a kind used on aircraft 4012.19 Other 6 digit international classification 8 digit country classification(resp. 8 digit country classification with an added 2 digit statistical code) scription of goods that they consider to be of national inter­ est to monitor and regulate or to reflect differential duties more closely. The introduction of 8- to 12-digit classification numbers at the national level cannot change the scope or structure of the HS, rather they need to be designed to be added on to exist­ ing headings. The EU, China, and USA have all developed specific 8- to 12-digit codes relevant to circular trade flows. 11 11 For a detailed breakdown of EU, US and Chinese 8–10-digit codes, see: https://repositorio.cepal.org/bitstream/handle/11362/47536/ S2100997_en.pdf?sequence=4&isAllowed=y In the case of the example given above in Figure 2, the Unit­ ed States has introduced a 10-digit code for“retreaded pneu­ matic tyres, of rubber, of a kind used on buses or lorries” (4012128019). The use of national classification codes can assist greatly in implementing national policies; however, they cannot be used to provide global statistical information. Potentially even more concerning, it can make it more difficult for trade in cir­ cular economy goods when multiple countries develop provi­ sions for the same class of goods, but with different criteria for the goods to be recognised as meeting the classification requirements. 7

FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR 3 FACILITATING CIRCULAR TRADE: STRENGTHS AND LIMITATIONS OF THE HS As outlined in the introduction, circular economies enabling trade flows face both a trade facilitation and a regulatory gap. These barriers hinder governments’ ability to ade­ quately regulate these flows, as well as businesses’ ability to efficiently conduct cross-border circular activities. This Chapter outlines the strengths and limitations of the HS in terms of helping to overcome these challenges. 3.1 OF HS IN FACILITATING CIRCULAR TRADE HS codes provide a common classification for tracking and understanding the dynamics of international trade flows. As explained above, the international HS codes form the first six-digits of these tariff classifications and make it possible to apply global controls and monitoring consistently, pro­ duce comparable statistics on trade, and simplify the classi­ fication of goods traded across multiple countries. For example, with the data collected from the HS, Chatham House was able to develop an interactive tool that allows users to map, from the year 2000 onwards, the global trade (by weight and value) of a wide range of different used goods, secondary raw materials, wastes, scraps, and resi­ dues(Figure 3). 12 Datasets and tracking tools such as this benefit businesses seeking to optimise and participate in circular trade as it helps them identify where inefficiencies and waste are oc­ curring in supply chains, and to target interventions to en­ courage the adoption of circular economy activities. National circular economy or trade policymakers benefit from these datasets as they help them to understand their own country’s circular trade dynamics(in terms of imports 12 See Circular Economy.Earth – data derived from UN COMTRADE. Figure 3 Chatham House circular trade flows mapping tool Source: Circular Economy.Earth) 8

Facilitating circular trade: strengths and limitations of the HS versus exports and key trading partners). It also allows them to target trade restrictions to products seen to be inhibiting domestic circular economy efforts or, vice versa, loosening restrictions on goods that facilitate the circular transition. The HS also creates a shared nomenclature with which to foster greater collaboration between nations through provi­ sions in trade agreements – for example through mutual rec­ ognition or harmonisation of CE relevant standards, reducing tariffs, or putting in place certain trade facilitation measures on certain categories of circular enabling goods and services, such as remanufactured goods, within bilateral or regional trade agreements(see Box 1). In the same vein, the HS also supports the development and monitoring of multilateral en­ vironmental agreements related to the CE, including the Ba­ sel Convention and the future Global Plastics Treaty. Box 1 Examples of remanufacturing provisions in trade agreements Comprehensive and Progressive Agreement for Trans-Pacific Partnership(CPTPP): Includes a provision promot­ ing trade in remanufactured goods by requiring that remanufactured goods not be subjected to any import prohibitions or restrictions that are applied to used goods. In CPTPP, remanufactured goods are distinct from used goods in that they undergo significant processing beyond cleaning, repair and maintenance, and are thus restored to a much higher level of functionality than a repaired or used good. The CPTPP also includes provisions that promote the trade of environmental goods and services, including recycling equipment. The North American Free Trade Agreement(NAFTA): includes provisions that allow remanufactured goods to be treated as if they were new products. EU-Singapore Free Trade Agreement: Includes provisions on remanufactured goods that encourage cooperation be­ tween the two parties in the development of standards and regulations for remanufactured products. The agreement al­ so provides for the mutual recognition of standards and conformity assessment procedures for remanufactured products. Australia-United States Free Trade Agreement: Includes provisions that require both parties to eliminate tariffs on re­ manufactured goods. EU-Japan Economic Partnership Agreement(EPA): Includes provisions for remanufactured goods that recognize the environmental benefits of remanufactured goods and promote the development of standards and regulations for these products and require both parties to eliminate tariffs on remanufactured goods. APEC Pathfinder on Facilitating Trade in Remanufactured Goods: An initiative in which 11 economies agreed to share information on best practices and encourage capacity-building efforts to help economies identify remanufactured goods at the border and distinguish them from used goods. Recent Pathfinder efforts have focussed on remanufactured medical equipment in lieu of increased demand generated by Covid-19. 3.2 OF HS IN FACILITATING CIRCULAR TRADE a minimum of 12 years(to avoid issues with statistics and countries using outdated editions). Despite the apparent benefits of the HS in terms of facilitat­ ing circular trade, there are also many limitations. These lim­ itations can be grouped primarily into three categories:(i) the HS structure;(ii) the approach to classification; and(iii) coordination between policy areas. As such, requests to further subdivide provisions that are nearing these limits must be particularly persuasive, as Con­ tracting Parties(CPs) to the HS Convention will wish to keep some provisions available for possible future critical needs. In addition, most CPs prefer a smaller HS, considering it sim­ pler to administer and use. STRUCTURAL RESTRICTIONS Accurate tracking of circular trade flows will require new provisions and the creation of new provisions is often diffi­ cult for several reasons. Firstly, there are limits on the level of granularity that can be accommodated within the hierarchi­ cal and nested structure of the HS. To put it simply, only a limited number of codes are available for new provisions, and for some chapters, headings, or subheadings none may be available until a previously used one has been deleted for To achieve a new provision there must be clearly articulated reasons for its use and value. Normally acceptable reasons for considering new provisions include: i.	 H igh trade value- the normal value thresholds for seeking a new provision are comparatively low(for the creation of a new subheading of 50 million USD in trade and 100 million USD for a new heading), although es­ tablishing the trade value without an existing separate provision can be difficult. 9

FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR ii.	 R egulatory requirements(for instance multilateral agreements). iii.	 H igh economic importance to developing countries. ing or even worse than the parent substance or product may be produced. This is a particular challenge for agreements on dangerous chemicals, but it can also be an issue for oth­ er goods. iv.	 S ocial or environmental importance. v.	 T echnological or trade pattern changes. To help streamline and process, the WCO have published a guide 13 on how to make a change proposal. vi.	 T echnical changes(changes to resolve an issue with the legal texts). CLASSIFICATION BY PHYSICAL CHARACTERISTICS However, simply meeting one of these conditions does not automatically mean the request will be accepted. It is still subject to consideration by the CPs who must accept it with a two-thirds majority at the Committee level and by full con­ sensus at the WCO Council(the governing body made up of heads of administrations). The argument for a new provision on social or environmen­ tal values for certain circular trade goods also needs to com­ pete with other goods which may also be important. The importance of tracking circular trade flows compared with other classes of goods that might need that space in the fol­ lowing 17+ years therefore needs to be clearly articulated. This is often difficult for circular trade flows because of their currently small volumes relative to other products in the same classification which are contenders for separation into new provisions. For instance, the trade in remanufactured products of a particular heading may be quite small com­ pared with, say, products of that heading using a renewable energy source. Secondly, the process for revision or addition of codes itself is lengthy and complicated, and as outlined above, HS revi­ sions only occur every five years. This is for good reason as careful thought is needed concerning the wisdom of the re­ quested change and potential unintended consequences. This is important whether the new provisions are intended to promote facilitation or restrictions. Goods may be better with regard to certain criteria, but not great, or they may be good in one aspect, but not others. For example, something might have higher recyclability than ex­ isting alternatives but use far higher levels of non-sustainable materials. Creating an HS provision, which is slow and diffi­ cult to update, may increase the facilitation and promotion of the“better” alternative, but it can also reduce the incen­ tive to find better solutions. Comparable examples are the energy and water efficiency ratings used in many countries. If they are not periodically updated to require higher stand­ ards for the top rating, to both encourage and reward inno­ vation, then there is a tendency for the market to produce only the minimum required to reach a“five-star” rating rath­ er than investing in newer and more efficient technologies. Conversely, providing a provision intended to support coun­ tries regulating a damaging substance or products that is very specific can mean that products with minor differenc­ es, just enough to avoid the classification but just as damag­ In addition to evidencing a demonstrated need for a global provision, the second most important element is whether the goods can be objectively identified at the border. Classification of goods at the border is under the legislation of the importing country and is, for imports at least, con­ nected to duty payments. Therefore, it must be possible for customs and importers to be able to prove that the goods comply with the declared classification before a court of law. Identifiability is an essential question Contracting Par­ ties(CP) to the HS Convention will ask before any agree­ ment to draft new provisions in the HS. The constrained ca­ pacity(of skills, technologies and/or time) of customs offi­ cials to ensure identifiability, particularly in low-income countries, further reinforces the problem. The need to identify products by their physical attributes creates a particularly thorny issue when it comes to creating new provisions for circular trade flows. This is because in nearly all cases it is not possible to identify the circularity of a goods by physical attributes – rather circularity is defined by its: i.	 n on-physical attributes, such as its durability, repair­ ability, recyclability, non-toxicity; and use of circular production methods; ii.	 c ondition, for example is it new, used but useable, un­ usable but can be repaired, refurbished, remanufac­ tured, or recycled, or has it been repaired or remanufac­ tured? iii.	 I ntended use, how will it be used in the importing country for example will be it be reused or recycled, or will it be landfilled or lead to environmental pollution? This challenge is compounded by the fact that there remains an absence of, or divergence in the interpretation of, inter­ governmental definitions and classification of goods in terms of circularity, as well as a lack of harmonised product standards. Examples include inconsistency in how govern­ ments classify hazardous versus non-hazardous waste, sec­ ondary raw materials versus waste, used or repaired goods versus remanufactured goods(see Box 2). 13 https://www.wcoomd.org/-/media/wco/public/global/pdf/topics/no­ menclature/activities-and-programmes/amending/creating-hs-chan­ ge-proposals--how-to_english-17-may-2023.pdf?la=en&la=en 10

Facilitating circular trade: strengths and limitations of the HS Box 2 Challenges for customs in identifying different circular trade flows Hazardous or non-hazardous waste? Different countries define what constitutes hazardous and non-hazardous waste differently. In some countries, end-of-life products and materials destined for recovery operations may not be considered waste and are instead referred to as recyclable materials or scrap materials, while other countries often consider them as a subset of waste. Secondary raw materials or waste? There is no universally accepted definition of secondary raw material(SRM) thus it is difficult to track global trade in this area. For example, one country may recognise certain SRMs destined for production as waste, resulting in far greater administrative costs and time per trade transaction, whereas another may recognise it as an SRM. Used goods for reuse or recovery or used goods for disposal? There is no differentiation at the border between end-of-first life goods which are intended for reuse or resource recovery versus those destined for landfill. This is due to the inability of customs officials to verify what happens to the good once it crosses the border. The definition of“used” is also unclear. For example, when does a car become used? If it is in relation to a change of ownership, then what will hap­ pen if it is sold through a chain of sales between the manufacturer and the final importer? If it is on distance, then how far does a car need to be driven(noting that new cars have been driven on import, even if only to go onto and off the ship) to qualify as“used”? For goods in general, if a machine or vehicle is in“as new” or“excellent” condition, then what will identify them as used? These are the types of questions asked when new provisions of this type are requested, so clear definitions and criteria are needed. Remanufactured goods and cores or used goods? Remanufactured goods(and cores) tend to be viewed by some governments as“inferior” to new“like” goods and as such are subject to higher import tariffs, or to non-tariff trade re­ strictions such as import prohibitions, core export prohibitions and/or complicated bureaucratic processes. Despite the di­ vergence in interpretations, established definitions for remanufacturing processes do exist. These definitions have helped establish remanufacturing mutual recognition provisions within trade and economic cooperation agreements(see Box 1), Circular goods or linear goods? To conduct circular economy activities, governments and organizations need access to a wide range of essential goods. Examples of circular enabling goods range from equipment, machinery, spare parts and tools for conducting circular activities(such as reuse, repair, remanufacturing, recycling and waste management), or sus­ tainable agricultural activities; or monitoring and tracking hardware and software to map the flow of materials along the entire value chain; to specialist equipment for producing circular materials(such as industrial biotechnologies and materi­ als science). Many of these goods currently face high customs duties, making them more – sometimes prohibitively more – expensive than new equivalent goods. For the trade in plastics, for example, there is no distinction between recycled and virgin plastics in primary forms. The Contracting Parties have given this matter some considera­ tion, but no reliable way has yet been found to objectively verify at the border whether primary plastics are virgin or secondary materials. As the HS provisions become legisla­ tive requirements upon becoming part of tariffs, not having a means of determining shipments’ compliance with a new classification for primary plastics from recycled plastics is a strong barrier to creating such a provision. Any advantage given to recycled plastics creates an incentive to misclassify virgin plastics, so enforceability needs to be considered carefully. With textiles and garments there are a handful of codes re­ lated to waste, recycled content and post-consumption, however the codes are of limited scope and concern only certain fibres. Examples of codes for waste or used fibres include: – 52.02 – Cotton waste(including yarn waste and garnet­ ed stock) – 55.05 – Waste(including noils, yarn waste and garnet­ ted stock) of manmade fibres – 63.10 – Used or new rags, scrap twine, cordage, rope and cables and worn-out articles of twine, cordage, rope, or cables, of textile materials – 63.09 – Worn clothing and other worn articles However, 63.09 is more limited than it appears at first sight. Its coverage is limited by a legally binding Note(Note 3 to Chapter 63), which not only establishes wear requirements, but requires them to be“presented in bulk or in bales, sacks or similar packings”. The same low coverage is true for remanufactured goods, for which there exists only one six-digit code for a remanu­ factured good which is retreaded tyres as it is easy to visibly identify a retreaded tyre as distinct from a new one. It is worth highlighting, however, that several countries have in­ troduced 8- to 10-digit classifications(ex-outs) for remanu­ factured or“rebuilt” parts and goods, typically for industri­ 11

al manufacturing equipment and vehicles. For example, Mexico has introduced a unique classification for certain re­ manufactured goods(such as heavy machinery), which can be imported only via a single port and by a pre-selected shortlist of traders. Nonetheless, these classifications are not globally harmonised. Enabling the differentiation of measures applied to similar imported products based on their circularity, such as the use of recycled materials or their durability, repairability and re­ cyclability, or their intended use, would be a valuable tool for countries looking to accelerate their transition to a circu­ lar economy. At present, however, there is no easy way for customs officials to determine such non-physical traits. COORDINATION BETWEEN POLICY AREAS Perhaps one of the least recognised problems with achiev­ ing coverage of circular economy goods(and environmen­ tally important goods) is that a government, or an intergov­ ernmental organisation on behalf of governments, needs to make a proposal to the relevant committee and sub-com­ mittee at the WCO. However, the representatives at these bodies are normally customs officials and customs is not the primary policy area for the circular economy. If policymakers do not come to customs representatives with ideas and needs, or customs, or the WCO, are not involved in the dis­ cussions, then it can be difficult for customs to marshal the awareness, knowledge and expertise to create proposals. As noted above, there is a strong desire among many Con­ tracting Parties to support this work, but it needs pro-ac­ tive cooperation between the administrations and bodies who have the policy lead and expertise and the customs administrations. Considering these challenges, Chapter 4 provides four sug­ gestions for reform to the HS which may help facilitate cir­ cular trade flows. But in recognition that some of the re­ forms outlined in Chapter 4 would, if accepted, occur over a long timeframe and that some of the inherent structural and procedural aspects of the HS cannot be overcome, Chapter 5 explores some alternative yet complementary technical and procedural border control innovations that may help overcome these limitations. FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR 12

Reforming the HS to support a circular economy 4 REFORMING THE HS TO SUPPORT A CIRCULAR ECONOMY Chapter 3 presented the benefits and limitations of the HS in facilitating circular trade. Maximising the benefits while minimising the limitations will require a certain level of amendment and in some cases reform of the HS. This chap­ ter outlines four potential reforms. 4.1  NEW OR REVISING EXISTING CLASSIFICATIONS Perhaps the most straightforward way the HS could be im­ proved to support circular trade is through the revision of existing headings, sub-divisions of headings, and sub-head­ ing classifications. Recognising the challenges involved in this, as outlined in Chapter 3, this paper suggests two prom­ ising focus areas:(i) adjusting classifications to differentiate between waste, secondary raw materials, and used goods for reuse; and(ii) creating new classifications for goods that enable circular economy activities. Additional HS2022 revisions included a new heading titled “Electrical and electronic waste and scrap”(85.49), which was added to Chapter 85(Electrical machinery and equip­ ment…). The new heading, along with 11 subheadings 14 will, for the first time, allow more granular collection and evaluation of global e-waste trade data and enable gov­ ernments to differentiate tariff and non-tariff measures for different types of e-waste. This new heading will be critical given that e-waste is the fastest growing waste stream globally. 15 Although this is a beneficial development in terms of tracking waste flows, it does not yet go as far as to help customs officials distinguish between e-waste and used electronic and electrical equipment(UEEE) items des­ tined for direct reuse, refurbishment or remanufacturing. The recent HS revision, however, did insert a Note which outlines that the expression“electrical and electronic waste and scrap” means electrical and electronic assem­ blies, printed circuit boards, and electrical or electronic ar­ ticles that: DIFFERENTIATING BETWEEN WASTES, SECONDARY RAW MATERIALS AND USED GOODS FOR REUSE As outlined in Chapter 3, there is a need to better track the flows of different types of waste. If various types of waste are all classified under one code it makes it very difficult for governments to differentiate the use of tariff and non-tariff measures between, for example, wastes which have a high potential for resource recovery and reuse, versus those that do not or are hazardous and require specialist handling. This is not a new idea; in fact, there are many examples of HS re­ visions where this has been achieved successfully.  been rendered unusable for their original purpos­ es by breakage, cutting-up or other processes or are economically unsuitable for repair, refurbishment, or renovation to render them fit for their original purpos­ es; and  packaged or shipped in a manner not intended to protect individual articles from damage during trans­ portation, loading and unloading operations. Point 2 of this note provides useful guidance to customs of­ ficials on how to determine whether a consignment com­ prises WEEE or UEEE for direct reuse or reuse after refurbish­ ment or repair. In the most recent HS2022 revisions, Chapter 44 was updat­ ed to differentiate sawdust(440141) from wood waste and scrap, not agglomerated(440149). To date, both products have been recorded under the same code 440140. The HS also differentiates between paper produced from(i) virgin wood pulp,(ii) pulp made from other fibrous materials; or(ii) pulp obtained from recycled paper and paperboard(waste and scrap). In addition, the HS has numerous changes aimed at providing more specific provisions of a range of environ­ mental interest, including such areas as tropical woods, solar technologies, LEDs, bamboo and rattan products, and so on. The recent HS distinction because different e-wastes is sim­ ilar to the long existent distinction in relation to used cloth­ ing and textiles in heading 63.09(Worn clothing and other worn articles), which has a Note restricting it to used cloth­ ing and textiles in bulk or bundled together in bails or simi­ lar packaging. This Note, like the Note on e-waste, is intend­ 14 Covering waste and scrap of primary cells, primary batteries, and electric accumulators; spent primary cells, spent primary batteries, and spent electric accumulators, among other things. 15 https://ewastemonitor.info/gtf-2022/ 13

FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR ed to ensure that the respective headings do not cover goods that enter the economy of the importing country with the intent of being sold for their original use. As such, 63.09 would normally cover textiles for recycling, disposal or reuse in other forms, such as conversion to rags, but not used clothes for resale not baled or in other bulk forms. Aside from the recent e-waste HS classifications, considera­ tion will also need to be given to how the HS can align with and support the Swiss–Ghana amendment to the Basel Con­ vention, which was passed at COP15 in 2022. This amend­ ment, which comes into effect on 1 January 2025, will es­ tablish new definitions for hazardous and non-hazardous e-waste and ensure that these two categories of e-waste will either be banned from trade, or at a minimum, require notification by the exporting country and consent by the im­ porting country prior to export(otherwise known as Prior In­ formed Consent – PIC). The strengthened requirement for a PIC procedure will in theory support customs administration efforts to more efficiently classify and inspect shipments of e-waste. However, currently many governments(particularly those in the Global South) are underprepared and lack the fi­ nancial, institutional and technological capacity to conduct the PIC process efficiently, and building such capacity could take several years. Additionally, the Global E-waste Monitor 16 has shown that a large proportion of e-waste trade is conducted illegally. If e-waste trade rules become overly restrictive or cumber­ some there is a risk that the illegal proportion of e-waste trade may increase, putting a greater burden on receiving customs administrations. Finally, a major loophole remains in the amendment which allows exporters to avoid the Con­ vention’s rules altogether if they claim that the exports are to be repaired and sign a contract to that effect, yet it is im­ possible for customs officials to verify whether these items are in fact reused or repaired once they cross the border. Therefore, in addition to the strengthened Basel rules around e-waste and recent amendments to the HS, there needs to be greater focus on more novel approaches, such as resource recovery lanes to combat illegal e-waste trade and facilitating legitimate trade in e-waste for safe recovery or reuse while at the same time reducing the burden on cus­ toms officials. Chapter 5 discusses these novel approaches further. Numerous additional headings, sub-headings and codes have also been made to the HS in previous rounds to help better align the HS with various multilateral environmental agreements. Many of these are related to chemicals, such as provisions for chemicals listed under the Rotterdam Conven­ tion(for example, the new subheading 2932.96 for carbofu­ ran(ISO) in HS 2022) or the Montreal Protocol(for example, the creation of new subheadings 29.03 and new heading 38.27 in HS2022), but they also include non-chemical mat­ ters, such as waste provisions of importance for the Basel Convention. Box 3 Provisions for used solar panels? Trade in used solar panels is an additional area for fur­ ther consideration in terms of developing a unique classification with respect to e-waste. As new genera­ tions of solar technologies enter the market, offering much greater efficiencies, existing solar installations will be swapped out(often referred to as repowering) and resold to secondary markets. Wood Mackenzie expects that 800 GW of solar power systems will be repowered between 2021 and 2025 because inverters will reach the end of their 10-year lifespan. This will likely result in a rapid growth in global trade in used so­ lar panels(which have lifetimes up to 20 years) with the intention of aggregating them in centres for repair, refurbishment and remanufacturing or for direct sale into secondary markets. Currently, however, used solar panels are either classified as e-waste and classified under the heading 85.49, thereby facing numerous tariff and non-tariff barriers, or, if still suitable for use as solar panels and hence not meeting the criteria for e-waste, are classified with new solar panels and thus invisible in the trade figures. Ensuring access to af­ fordable and high quality used solar equipment in emerging markets will be critical to realising global en­ ergy poverty reduction goals. Providing a separate classification for second-hand solar panels would help them navigate their way through global trade streams to be reused or repur­ posed. Supporting trade in used solar panels, howev­ er, increases the risk of traders misclassifying PV pan­ els which are unfit for reuse or recovery, resulting in the creation of waste in importing countries. The risk of damage to fragile PV panels during shipment also increases the risk of waste dumping. Used panels fit for reuse cannot easily be differentiat­ ed from used panels destined for disposal. The provi­ sion of a certain level of training to customs officials to understand how to inspect the label, the wafer crystal composition, evidence of leaching, wear or tear could be provided, although this is unlikely to be effective. Rather, it is more pragmatic for trade agreements to include provisions for mutual recognition of standards for refurbishment and testing of used panels or the need for a digital product passport. Currently, there is no international regulation or certification pro­ gramme for the reuse of second-hand modules. How­ ever, Sustainable Electronics Recycling International (SERI) is working on new solar reuse and recycling re­ quirements for the R2 Standard. The final revision is expected to be released late 2023. 16 https://ewastemonitor.info/gtf-2022/ 14

Reforming the HS to support a circular economy Another point to remember is that the requirements for definition and criteria for a global provision in the HS are of­ ten far more difficult to satisfy than for national or regional provisions in tariff schedules or for other national or region­ al customs measures, such as permits. This is simply a reflec­ tion of the range of countries involved globally, all of which must be satisfied that the proposed provision is acceptable. Box 4 Questions the circular economy trade community needs to consider when recommending a change in classification:  the goods be clearly and simply described?  it possible to distinguish these goods from similar goods?  the defining characteristics of the goods ones that can be easily inspected or verified at the border(for example, composition, components, physical specifications)?  is it important to have a specific provision for these goods?  is the good currently classed in the HS?  is it proposed to add the new provision?  is the traded value of the goods in international trade and is it expected to grow significantly? GOODS THAT CONTRIBUTE TO A CIRCULAR ECONOMY An additional area in which new classifications could be considered is the trade in goods which are considered es­ sential for performing circular activities, such as implement­ ing product system services(leasing or renting), circular ma­ terial production or repair, refurbishment, remanufacturing or recycling activities. Parallels can be drawn with the ongoing process of assign­ ing unique codes to trade technologies that contribute sub­ stantially to climate mitigation. For example, HS 2022 cre­ ates several more categories, including fully or partially elec­ trified“road tractors for semi-trailers”(that is, the famous “big rigs” that pull trailers laden with goods) under heading 87.01 and non-articulated trucks or lorries used for trans­ porting goods under heading 87.04. A second example is that HS2022 created a new subheading specifically for solar water heaters(8419.12) to differentiate them from other water heaters. 19 The International Renewable Energy Agency(IRENA) and the International Network for Bamboo and Rattan(INBAR) have played an active role in the HS change process across multiple editions. Their aim is to increase the visibility of en­ vironmentally friendly technologies, such as LED lighting, and promote the use of materials that can be produced more sustainably than their counterparts, such as bamboo. This collaborative effort has persisted and has culminated in the inclusion of several new subheadings in HS 2022, relat­ ed to these products and materials. Besides considering the addition of codes, there is also an option for countries to begin to work towards harmonising 8- or 10-digit national classifications linked to circular trade flows. As an illustration, the HS Recommendations put for­ ward a series of suggested domestic subheadings at the 7and 8-digit level, which could be adopted by countries to ensure uniformity in data collection and monitoring at inter­ national level. This implementation would take place prior to the introduction of a new HS. These Recommendations 17 call upon countries to modify their tariff laws and regulations outside the introduction of a new HS edition. 18 Normally, these only recommend word­ ing when it will be used in the next edition. But the possibil­ ity of using this type of Recommendation – that is, with wording recommendations – to help enable statistical com­ parability of goods of global policy importance in the ab­ sence of agreement on HS implementation could be con­ templated. This possibility has been raised by some bodies in other contexts, for example in pandemic responses. Currently, the goods related to the circular economy that fall under the Environmental Goods and Services discussions are primarily limited to those used in waste recovery, end-of-pipe pollution control, recycling equipment, spare parts for indus­ trial equipment, and a select few items of resource efficiency equipment. However, there is still a lack of coverage for other important aspects of circularity, such as equipment for re­ manufacturing or for manufacturing circular materials, equip­ ment for circular agricultural practices, and goods that facili­ tate circular business models and activities(for example, sen­ sors, computer vision equipment, circular building materials and tools). It would be valuable to draw up a shortlist of goods crucial for conducting activities that contribute signifi­ cantly to the circular economy. One starting point may be to start with activities that contribute substantially to the circular economy as defined by the EU's Sustainable Finance Taxono­ my and identify a subset of goods necessary to conduct such activities, which concurrently are subject to high tariffs. 20 Chatham House has identified an initial shortlist of circular economy–enabling goods categories that could be consid­ ered environmentally preferable goods and that require fur­ 17 https://www.wcoomd.org/en/topics/nomenclature/instru­ ment-and-tools/hs_recommendations.aspx 18 https://mag.wcoomd.org/magazine/wco-news-91-february-2020/shi­ ning-a-light-on-dangerous-commodities/ 19 https://www.iisd.org/system/files/publications/code-shift-2022-har­ monized-system.pdf 20 https://www.chathamhouse.org/2022/06/trade-inclusive-circu­ lar-economy/framework-inclusive-circular-trade 15

FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR ther investigation concerning the need for an assignment of unique HS codes 21 : – Equipment, machinery, spare parts, and tools for conducting circular activities such as reuse, repair, remanufacturing, recycling and waste management, or for conducting sustainable/regenerative agricultural ac­ tivities(such as precision agriculture, aquaponics and vertical farming systems). – Monitoring and sensing equipment to track the flow of materials along the entire value chain. – Digital hardware necessary to store and retrieve sup­ ply-chain data, as well as conduct product-service sys­ tem business models. – Equipment for producing circular materials(such as industrial biotechnologies and 3D printers). – Best practice cleaner production technologies that save water, energy and materials during production The Bureau of International Recycling has already identified a shortlist of essential goods specific to recycling activities that are still classified under generic subheadings and not identified separately, making it difficult to reduce or remove tariff rates for those goods. 22 An example is reverse vending machines which are essential for the efficient functioning of deposit return schemes, yet they are not recognised as a type of vending machine within the heading 8476. Besides targeting goods that enable actors to perform circu­ lar activities, consideration may also be given to goods that are considered“circular” by virtue of design or intended use. However, this category of goods raises many questions. For example, could a retreaded tyre be considered a circular good? On one hand, it has been remanufactured, thereby resulting in substantially less environmental impact than the production of a new tyre. On the other hand, its use creates the same level of micro-plastic pollution and it will eventual­ ly become waste. Similarly, could a refurbished laptop be considered a circular good? The answer may be yes if com­ pared with a new laptop, but when considering the full life 21 https://www.chathamhouse.org/2022/10/role-international-trade-­ realizing-inclusive-circular-economy 22 https://www.wcoomd.org/-/media/wco/public/global/pdf/ events/2022/ greener-hs/session-4/5_bir_recycled-metals-contribution.pdf?la=en Table 1 Shortlist of goods essential to recycling activities which would benefit from unique classification (as identified by the Bureau of International Recycling) Good Benefit to recycling activities HS Classification Recycling vehicles Collecting and compacting separated curb-side recyclables 870590 Trommels and sink& float plant Used in the recycling process to separate and sort materials enabling the recovery and recycling of valuable resources for a circular economy 8479 Wind sifters and sensor and optical based sorting equipment Used in the recycling process to separate and sort materials, enabling the recovery and recycling of valuable resources for a circular economy 8474 Wire granulators Used by recyclers to reduce wire and cables into granules and separate metals from non-metals to meet recycled raw materials specifications 8479 Eddy current sorters Electromagnetic separators used to separate nonferrous metals from an input waste stream, enabling the recovery and recycling of valuable resources for a circular economy 8505 Reverse vending machines For collecting plastic, aluminium, glass containers(deposit refund/ EPR) 8476 Balers Used by recyclers to compress materials into bales for ease of handling and use 8479 16

Reforming the HS to support a circular economy cycle of the laptop, it still contains hazardous materials that need to be handled in specialised facilities when it reaches end of life and so if it is imported into a country which lacks those facilities its level of circularity may be questioned. The EU’s proposal for an Ecodesign for Sustainable Products Regulation(ESPR) aims to address this challenge by estab­ lishing a framework to set ecodesign requirements for spe­ cific product groups to significantly improve their circularity, energy performance and other environmental sustainability aspects. Products that enter the EU market will need to meet a range of circularity requirements, including levels of durability, upgradeability, repairability and avoidance of sub­ stances that inhibit circularity. 23 A declaration of compliance with the ESPR will need to be provided at the border via a digital product passport unique to each good. The initial set of products targeted by the ESPR may offer a starting point when considering how“circular” goods may be classified. impacts of the global waste trade. It may be best to lead this consultation through a consortium of relevant organisa­ tions, such as the TESSD Informal Working Group on the cir­ cular economy and circularity or Friends Advancing Sustain­ able Trade(FAST Group). 26 4.2 INSTITUTIONAL CAPACITY TO IMPLEMENT EFFECTIVE SYSTEMS Ensuring that the necessary updates to the HS to better fa­ cilitate circular trade(and other environmental goods) are done correctly and in a timely manner requires significant resource investment from the WCO review committee and support staff. Equally, customs administrations will need to invest time and resources to ensure they can regulate based on those changes, but many lack the c­apacity. Although the next revision of the Harmonized System(HS), the eighth in its history, is not expected to be finalised until June 2024(negotiations finalised March 2024), the Review Sub-Committee(RSC) of the World Customs Organization's Harmonized System Committee(HSC) began exploring po­ tential amendments as early as November 2019. As part of this effort, the RSC is already examining proposals, includ­ ing some related to environmentally friendly goods. Given the short time left until HS finalisation in 2024(final negoti­ ations are in March 2024) only a small window remains open for the next edition. But even a very small window is significant. In addition, it is not premature to start contem­ plating a set of desired changes that could support the cir­ cular economy for HS 2032, on which negotiations will start in November 2024. One essential focus might be to identify a concise list of goods that are critical for conducting activities that contrib­ ute significantly to the circular economy, as in the case of the EU’s sustainable activity taxonomy, 24 but are presently subject to high tariffs. Alternatively, one may also consider exploring the option of publishing a reference list of goods to use as ex-outs. 25 Before taking any steps on this issue, there remain numer­ ous unresolved issues that require collective and extensive consultation with various relevant stakeholder groups, par­ ticularly low-income countries that currently face the worst INSTITUTIONAL CAPACITY AT THE WCO The HS covers all possible traded goods, so the work of the relevant Committee and Sub-Committee is both di­ verse and heavy. While ways of addressing workload is­ sues are under active discussion, significant limitations re­ main. For example, it is not always possible to complete agendas in a meeting simply because of the volume of agenda items. It is also not realistic within the WCO and member budgets to add extra inperson meetings. HS meetings are held five times a year(two meetings of the Harmonized System Committee, two of the HS Review SubCommittee and one of the Scientific SubCommittee). Some of these meetings require countries to send dele­ gates to Belgium for two weeks at a time. This imposes considerable costs at a time when many governments are working to reduce spending. In addition, the dual impacts of the Covid-19 pandemic and the workload will affect how many changes will be successfully negotiated by the end of the March 2024 meeting. There is normally a five-year schedule between editions coming into force, and while this is not mandated under the Convention, the period of two and a half years between the approving WCO Council in June and coming into force on 1 January is mandated. To achieve an HS 2027, then, the negotiations must be concluded in time for the June 2024 Council. 23 https://commission.europa.eu/energy-climate-change-environment/ standards-tools-and-labels/products-labelling-rules-and-require­ ments/sustainable-products/ecodesign-sustainable-products_en 24 The EU taxonomy is a classification system, establishing a list of en­ vironmentally sustainable economic activities. The EU Taxonomy Re­ gulation establishes six environmental objectives, including the tran­ sition to a circular economy and provides for different means to make a substantial contribution to each objective. See: Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustain­ able investment and amending Regulation(EU) 2019/2088(Text with EEA relevance), PE/20/2020/INIT OJ L 198, 22.6.2020, pp. 13–43. 25 https://www.wcoomd.org/-/media/wco/public/global/pdf/events/ 2022/greener-hs/session-5/2_carlos-kuriyama_apec-psu.pdf?la=en The HS faces many pressures to adapt and deal with these changes in trade characteristics and the growing need for environmental regulation of trade. While customs adminis­ trations and the WCO support these needs, it may be time­ ly, if a comprehensive programme is desired, to consider the immediate and future resources and support required to make that successful. 26 https://www.chathamhouse.org/2022/06/trade-inclusive-circu­ lar-economy/framework-inclusive-circular-trade 17

FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR Another area of focus could be to scale up support for the WCO Green Customs initiative. While it is working on the circular economy and customs matters, increasing the lev­ el of support from other administrations and bodies to work specifically with the WCO and customs on circular trade facilitation challenges would help to deepen the ex­ pertise and resources that could be bought to bear on the issues. REGULATORY CAPACITY OF CUSTOMS ADMINISTRATIONS AND ENVIRONMENTAL AGENCIES Customs administrations, particularly those in developing countries are often severely resource constrained, lacking the physical and digital infrastructure and skills training they need to conduct rigorous border checks. This means that even if there are new or revised classifications to aid circular trade flows, their impact will be limited if customs administrations simply cannot do all the relevant checks. The WCO engages in extensive capacity-building work with its members. However, it is provided through donor fund­ ing, and the availability and interest of funding organisa­ tions in work in specific skill areas and in specific countries or regions affects the level of provision. (UNODC) and UN Environment Programme(UNEP)’s“Un­ waste: tackling waste trafficking to support a circular econ­ omy” initiative implemented in 2021. A comprehensive programme to combat the illegal waste trade could utilise the findings from initiatives such as the Green Customs Initiative and DEMETER Operations, and be coordinated by organisations including UNEP, WCO, Inter­ pol, Europol, and the Secretariat of the Basel Convention, with support from individual governments through com­ mitments to report illegal waste crimes. This would require a sustained effort to ensure that resources and attention are consistently directed towards the issue of illicit waste trade. In addition to increasing capacity-building, further consider­ ation should be given to the merits of adopting additional trade facilitation mechanisms to lighten the burden on cus­ toms administrations. Examples include the establishment and enhancement of Single Windows, trusted trader schemes or special economic zones for certain circular trade activities. These are discussed further in Chapter 5. 4.3 COORDINATION WITH MULTILATERAL ENVIRONMENTAL AGREEMENTS Dedicated support is needed from the international commu­ nity, through targeted assistance programmes, to mitigate the adverse impacts of increasing trade barriers and chang­ ing demand patterns. One focus area may be the greening efforts of the WTO’s Aid for Trade initiative. Aid for Trade could emphasise important areas for circular capacity-build­ ing, such as investing in infrastructure to facilitate domestic circular practices, such as repair, remanufacturing, and recy­ cling, as well as trade infrastructure, customs systems, and enforcement measures to combat illegal waste shipments. Other areas of focus could include training and develop­ ment for circular production skills and policies that support circular practices. The HS plays an important role in helping businesses and governments comply with multilateral environmental agree­ ments(MEA). But ensuring alignment can be challenging and requires strong and sustained collaboration between the secretariats of the MEAs and the HS secretariat. There is merit in increasing efforts to improve coordination and alignment between MEAs and the HS. Two MEAs offer po­ tential scope for improvement:(i) the Basel convention on the transboundary shipment of waste(Basel Convention); and(ii) the Global Plastics Treaty. BASEL CONVENTION To combat international illegal waste trade effectively, a well-funded, globally coordinated and long-term approach to policing is required. As circular trade continues to grow in volume and complexity, the risk of an illegal waste trade al­ so increases. Several successful international collaborations have been established to address this issue, including DEM­ ETER Operations, a global initiative established in 2009 and run under the auspices of the World Customs Organization (WCO), which involved 90 customs administrations as of late 2022. 27 Other notable initiatives include the WCO Green Customs Initiative, the WCO Asia Pacific Plastic Waste Pro­ ject, 28 the Regional Enforcement Network for Chemicals and Waste(Project REN), and the UN Office on Drugs and Crime The Basel Convention, adopted in 1989, is an international treaty that aims to reduce the movement of hazardous waste between countries. The Convention regulates the transboundary movement of hazardous waste, including the export, import and transit of hazardous waste. The Con­ vention also aims to promote environmentally sound man­ agement of hazardous waste, and to ensure that the gener­ ation of hazardous waste is minimised. The Basel Conven­ tion requires that countries provide prior informed consent for the export of hazardous waste – using HS codes makes it possible to identify specific types of hazardous waste and countries can determine whether a waste shipment requires such consent. 27 https://www.wcoomd.org/en/media/newsroom/2022/december/ operation-demeter-viii.aspx 28 https://www.wcoomd.org/en/APPW.aspx Although the Harmonized System plays an important role in the regulations of the Basel Convention, the two are not per­ fectly aligned. This is because the HS codes describe the na­ ture and composition of goods and are used by regular cus­ 18

Reforming the HS to support a circular economy toms operations, whereas the Basel Convention provides waste definitions based on the intention to discard. This dif­ ference makes waste identification by customs very difficult and in many cases impossible, and this can lead to inconsist­ ent treatment of waste at the border. This misalignment be­ tween the Basel Convention and the Harmonized System has long been recognised but is not easy to resolve. Current HS codes that cover waste and scrap do not distinguish between those that are hazardous or non-hazardous, leaving the task to customs administrations to check on a case-by-case basis. Many years of work within the HS Committee, the Review Sub-Committee, WCO Member administrations, and the WCO and Basel Secretariats went into developing a worka­ ble solution. 29 After 25 years of negotiation, the Basel Con­ vention has identified more than 60 codes for wastes, but many waste codes still need to be more strongly reflected in the HS. 30 One of the challenges still faced by the WCO is that the defi­ nitions outlined in the Basel Convention were too vague and ill-defined for HS use and therefore it was very difficult to see how to incorporate these definitions into it objectively. Some level of verifiability is needed. This problem is not unique to the Basel Convention provisions, of course. For ex­ ample, the HS Sub-Committee received a request to pro­ duce a new classification for biodegradable plastic bags but were unable to reach a consensus on how to deal with the nature of the request because there was no clear global definition of biodegradability and it is virtually impossible to test in-situ at the border. What can be done to improve alignment between Basel and the Harmonized System? A recently published report by the STEP initiative outlines three areas of focus: 31  Basel Technical Guidelines on distinguishing waste and non-waste(used goods should be subject to testing results, supported by Single Windows)  regional“Basel Centres” actively working on raising awareness with competent country authorities and notifiers, controlling and monitoring response times, actively resolving disputes and providing infor­ mation to focal points as well as customs, working to­ gether with other trade structures, such as under the World Trade Organization.  lists under Basel should include HS Codes and har­ monised tariff code correspondence to make it clear and easy to apply. A web-based database would be useful in this respect. GLOBAL PLASTICS TREATY The Global Plastics Treaty is a proposed international agree­ ment aimed at addressing the issue of plastic pollution. The treaty would be the first-ever legally binding agreement on plastic pollution, and it is currently being negotiated by the United Nations. The treaty would establish a framework for global cooperation and action to reduce plastic waste and promote more sustainable use of plastics. It would also en­ courage countries to implement measures to reduce the production and consumption of single-use plastics, increase recycling rates, and improve waste management systems. The Harmonized System will play an important role in facil­ itating the governance of a global plastics treaty. By using HS codes, businesses and government agencies can identi­ fy the specific types of plastics that are being imported and exported, and target interventions(such as tax breaks or other financial incentives) to improve recycling and re-use and encourage the use of more environmentally friendly plastics and discourage the use of those that have a nega­ tive impact. Despite the important role of the HS, current codes assigned to plastics remain significantly limited. For instance, HS codes do not differentiate kinds of plastic waste(hazardous, contaminated, mixed, recyclable) or secondary materials (such as recycled plastic pellets). Meanwhile, transformed plastics(presumably through recycling) are classified under headings 39.01 to 39.14 but are not specifically identified as being recycled primary forms of plastic. The plastic wastes included in Chapter 39 sub-headings also do not include all kinds of plastic waste. Not only are there data gaps in the classification of plastics themselves, but there is no data on the percentage share of plastics embedded as materials in traded products. Nor does the global trade system capture plastic packaging that functions as a wrapper, but nevertheless is an integral part of global trade in products. 32 Fourth, the lack of standards/definitions and tests reliable enough to identify virgin or recycled plastic content are also restricting options for new classification provisions. Significant work is needed to look at how definitions and identification requirements can be built in to resolve some of these issues and at how other customs measures could be used in a harmonised manner to meet any needs the Har­ monized System cannot address to create a strong suite of solutions to the identification of this trade at the border. 29 https://mag.wcoomd.org/magazine/wco-news-91-february-2020/shi­ ning-a-light-on-dangerous-commodities/ 30 https://www.wcoomd.org/-/media/wco/public/global/pdf/topics/ facilitation/ressources/permanent-technical-committee/237-238/ pc0699eae2b.pdf 31 https://www.step-initiative.org/files/_documents/publications/PRE­ VENT-StEP_Practical_Experiences_Basel%20Convention_discussi­ on-paper%202022.pdf The next HS update in 2027 should be better aligned with the completed negotiations on the Global Plastics Treaty in 2025. However, the timeline of the HS 2027 negotiations, with completion in March 2024 and completion of the Treaty ne­ 32 https://tessforum.org/latest/plastic-pollution-and-trade-across-the-li­ fe-cycle-of-plastics-options-for-amending-the-harmonized-sys­ tem-to-improve-transparency 19

gotiations only in 2025, means that, as matters stand, there will no alignment early on. This is associated with risks of a significant delay to realising the full benefits of the Treaty. 4.4 TO AN EIGHT-DIGIT INTERNATIONAL SYSTEM As already discussed, countries can also choose to create additional tiers of codes for traded goods(up to 12 digits), offering a higher level of granularity and the ability to differ­ entiate between types of circular trade flow. A larger num­ ber of used products and several repaired, refurbished or re­ manufactured products can already be found in national statistics. For example, the United States has introduced a series of 10-digit codes to differentiate between new and used industrial equipment, while the EU has created eight-digit codes for used buses. Some used or remanufactured goods, especially associated with transport materials and machinery used in construction, are specified in detail. In the case of aluminium cans(which represent about 2.7 per cent of what the United States im­ ports in terms of circular goods), the more granular classifica­ tions also make it possible to distinguish between aluminium waste resulting from industrial processes and other alumini­ um waste. As these codes are applied unilaterally, however, their use risks further entrenching divergence in classifications around the world. It is therefore logical(albeit perhaps not easily achievable) to explore the feasibility of extending the inter­ national 6-digit HS to an 8-digit structure. This would be useful for providing more granularity not only on circular trade flows, but also on the trade in goods that contribute to global environmental goals, such as climate change, biodi­ versity loss, ocean acidification, pollution, and many others. The WCO has launched an exploratory study on a possible strategic review of the Harmonized System. This two-year study was launched in September 2021 to look at the over­ all health of the HS and its ability to meet changing needs. This offers an opportunity to look at the System and the needs of environmental and circular-economy policies. It will explore the feasibility of a range of options put forward by stakeholders, including granularity changes. At the time of publication, it has completed the formal stage of collecting inputs and is at the stage of analysing feasibility proposals. However, while the formal input gathering phase is over, it is still possible to send in input. When possible, in terms of time, this will also be included in the analysis. In the meantime, countries involved in negotiating trade agreements could agree on the mutual recognition or har­ monisation of 8- or 10-digit classifications related to the cir­ cular economy for incorporation in tariffs. 20 FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR

Experimental Circular Trade Facilitation Approaches 5 EXPERIMENTAL CIRCULAR TRADE FACILITATION APPROACHES Chapter 4 outlined four potential areas of improvement of the Harmonized System, which may help facilitate circular trade. Nonetheless, HS reforms can address only a subset of circular trade facilitation challenges and such reforms will take several years. Moreover, aside from the HS, customs administrations will increasingly play an important role in circular trade facilitation. For instance, they will be required to identify circular goods on criteria other than their physical characteristics(such as means of production, intended use, material composition). They will need to look beyond the HS and adopt additional approaches for this type of data col­ lection and monitoring. This Chapter therefore explores opportunities to experiment with other forms of circular trade facilitation tools and mechanisms to support customs administrations. It explores mechanisms that could offer low-income countries, which face the greatest environmental, social and economic threats from illicit and licit waste trade, the ability to maxim­ ise the potential benefits of participating in such trade flows while strengthening their capacity to enforce regulations against unwanted waste trade flows. These mechanisms in­ clude such things as trusted-trader programmes and re­ source recovery lanes, electronic data systems, and special economic zones for certain trade flows(SEZ). Table 2 Circular trade facilitation mechanisms that could complement HS reforms Trade facilitation mechanisms Description Examples Trusted circular traders and ­resource recovery lanes Initiatives designed to simplify and streamline customs procedures for businesses engaged in international trade. They facilitate trade in ­secondary raw materials and waste for recovery while maintaining ­border security by allowing pre-approved businesses to enjoy ­various benefits, such as reduced documentation requirements, expedited ­processing, and reduced inspection rates.  recovery ­facilities Electronic data systems An electronic system that allows businesses to submit all required doc­ umentation and information to comply with all import, export and transit-related regulatory requirements. Enables sharing of r­elevant ­circularity standards and certifications compliance with customs ­officials. An example is the digitisation of the Basel PIC procedure (e-PIC) or the exchange of trade relevant Digital Product Passport data.  Sea Roundabout  Circular Textiles ­Protocol Special economic zones for ­circular activities Geographically delimited areas within which governments promote cir­ cular industrial activity(for example, remanufacturing or refurbishment) through fiscal and regulatory incentives. Confining activities to bonded areas may ease the regulatory challenges associated with p­ roblematic circular trade flows(for example, used goods intended for reuse or ­remanufacturing), while capturing economic opportunities associated with such trade flows. Conversely, special customs zones can b­ ecome an attractive channel for illicit trade where there are poor inspection and auditing processes. The use of special zones must therefore be considered carefully.  used mobile phones in Egypt’s SEZ.  remanufactu­ ring zone  Eco-City in ­Singapore  de Monterrey in Mexico 21

FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR 5.1 CIRCULAR TRADERS AND RESOURCE RECOVERY LANES Trusted circular traders and resource recovery lane initiatives could help to reduce the procedural requirements for trust­ ed traders or recipients of circular trade flows which comply with strict quality and procedural standards. Trusted circular trader: A“trusted trader” scheme is a cer­ tification programme offered by customs administrations or relevant government agencies to businesses engaged in in­ ternational trade. Such schemes aim to enhance trade facili­ tation and supply chain security by providing certain benefits and privileges to approved traders who meet specific criteria and demonstrate a high level of compliance with customs regulations and security standards. An example of a trusted trader initiative is the WCO Authorised Economic Operator (AOE) scheme managed by the WCO(see Box 5). A more specialised trusted circular trade initiative could offer greater incentives to traders in waste or secondary raw materials which can be recovered, or used goods fit for direct reuse or reuse after repair, refurbishment or remanufacture. Box 5 Authorized economic operators AEOs are businesses that have been vetted and certified by customs administrations as meeting certain standards of security and compliance. They are approved and mon­ itored by customs administrations. AEOs are often eligi­ ble for certain benefits and privileges, such as expedited clearance or reduced inspections. AEOs are required to maintain accurate records of the goods they are import­ ing or exporting, and HS codes are an important tool for identifying and tracking these goods. The WCO has de­ veloped a framework for AEOs, which provides guidance and best practices for customs administrations on how to implement the AEO concept. The WCO also provides a forum for customs administrations to exchange infor­ mation and collaborate on AEO-related issues, such as the WCO SAFE Working Group and its ad hoc meetings. As the AEO programme is designed by each customs ad­ ministration along with the WCO’s SAFE Framework of Standards, it is technically possible to further clarify and establish more detailed criteria or designated operators’ categories for the circular economy. However, as far as is known, there is no specifically designed programme for the circular economy. Incorporating environmental criteria into the AEO programme is under discussion but a highly sensitive topic, with no agreement so far.* circular-economy-6ab6bb39-en.htm Resource recovery lane: A resource recovery lane may be considered a specialised version of a Green Lane. It would aim to tackle a current pain point facing companies that need reliable, timely and affordable access to secondary raw materials at scale from abroad to make their products more sustainable or to comply with increasing regulatory recycled-content requirements, yet which currently face se­ vere delays, administrative hurdles, and costs in trying to obtain such resources due to strict and often inconsistent transboundary waste trade regulations. A resource recovery lane could help to cope with this pain point by implementing necessary health and safety meas­ ures through streamlined procedures, reduced documenta­ tion requirements and prioritised treatment. The OECD Pre-­ consented facilities initiative offers an example of a resource recovery lane, although it is focussed specifically on recovery facilities for hazardous wastes and not necessarily facilities that undertake higher level circularity activities, such as recy­ cling, repair, refurbishment or remanufacturing. Box 6 OECD Pre-consented recovery facilities Pre-consented facilities specifically cater to the handling and recovery of hazardous waste and other waste. These facilities are given pre-consent authorisation by compe­ tent authorities if they meet certain environmentally sound management requirements in OECD adherent countries. It makes it clear to all competent authorities(typically, en­ vironmental protection agencies) concerned that the spe­ cific recovery facility has already been approved to recycle a listed number of waste streams* and allows the facili­ ties to expedite trade processes. Currently, there are 454 pre-consented facilities in 24 OECD countries and three non-OECD countries, as of January 2022.** Examples in­ clude Metallo Chimique in Belgium, which handles elec­ tronic scrap(printed circuit boards, electronic components, wire, etc.) and reclaimed electronic components suitable for base and precious metal recovery and Oil Salvage Ltd in the United Kingdom, which recovers waste lead-acid batteries, whole or crushed.  tps: // legalinstrument s.oecd.org /public /doc/ 221/ 221.en.pdf 25-January-2023.xlsx A real-world example of an attempt to create a resource re­ covery lane was the North Sea Resources Roundabout(NS­ RR) initiative established in 2016. The NSRR was a collabora­ tive effort of thirty stakeholders(NGOs, regulators, compa­ nies and policy experts) from France, the Netherlands, the United Kingdom, and the Flanders region of Belgium. The project aimed to facilitate the trade and transport of second­ ary resources, such as struvite, PVC, electronic waste, com­ post, and bottom ash, while also shedding light on the prac­ tical challenges related to secondary raw material and waste trade. The idea was to create fast track and financial guaran­ tees for these shipments to pre-consented facilities and was successful in reducing transit time from months to under three weeks, in some cases. A key finding from the initiative was that, although establishing resource recovery lanes takes time and a concerted effort to build trust and a culture of experimentation between governments and regulators, it can offer significant benefits to all the actors involved. 22

Experimental Circular Trade Facilitation Approaches A combination of trusted circular trader and resource recov­ ery lane initiatives could help to reduce the compliance bur­ den on customs administrations, while at the same time streamlining the process for importers and exporters, as well as freight forwarders and logistics companies. Window platforms are challenged to digitally absorb, store and report on additional data points to support sustainable product taxonomies, target setting and non-financial metrics to monitor the progress of the national sustainability targets underpinning the United Nation’s 2030 Agenda. There is an opportunity to further explore how the synergistic benefits offered by trusted trader and resource recovery lanes could be leveraged, for example in cases in which Authorised Economic Operators(AOEs) may be supplying goods to pre-­ consented facilities. To date, however, there has been little collaboration and knowledge exchange between the WCO, customs administrations and environmental protection agen­ cies as regards exploring these synergies. There is therefore an opportunity to facilitate knowledge exchange between the parties and consider opportunities for collaboration. 33 Another potential improvement would be to expand the scope of the OECD pre-consented recovery beyond hazard­ ous waste recovery(disposal or recycling) to circular activities higher up the waste hierarchy, such as repairing, refurbishing and remanufacturing used goods. It may make sense to start with pre-consented facilities for remanufacturing, given the existence of remanufacturing standards as well as its inclu­ sion in several bilateral and regional trade agreements. Re­ manufacturing as a process is also considered the gold stand­ ard when it comes to dealing with used goods(in compari­ son with to simply repairing or refurbishing). It should be noted, however, that pre-consented facilities do not apply outside the OECD. That means that currently they provide no advantage to recyclers wishing to ship to such fa­ cilities to and from low- and middle-income countries. To fa­ cilitate exports to and from such countries, it might also be useful to add the designation of pre-consented exporters to further support a pre-consent process. However, any sort of scheme that mandates the use of pre-consented facilities may disproportionally affect low-income countries that lack such facilities. Single Window mechanisms are yet to be fully utilised for coordinated border management to help establish reverse logistics for a circular economy. In fact, uptake of Single Windows in general remains low(albeit growing rapidly). In 2019, the WCO SW Survey showed that only 19 per cent of WCO members were at an“advanced stage of implementa­ tion” and that 22 per cent had an“implemented” sta­ tus. 34  35 International coordination of electronic notification systems is being proposed at the multilateral and plurilater­ al level, however, and is already available in some regions, notably North America and certain parts of Europe, to streamline data requirements for waste shipment notifica­ tion procedures. China is implementing another regulatory tool, namely the GTIN(barcode number) declaration for the Single Window system and for enterprises. 36 Electronic systems can also be used for other trade facilita­ tion purposes beyond Single Windows. For example, the Ba­ sel Convention has been investigating the potential applica­ tion of electronic approaches for notification and move­ ment documents(UNEP, 2016). 37 More recently, in 2020– 2021, the Basel Convention Secretariat reviewed the experi­ ences available at the national and international level in es­ tablishing electronic systems for waste shipment notification and movement documents(UNEP, 2020), and conducted consultations with stakeholders to explore possible options for its application. The European Commission is exploring the possible development of an EU-wide electronic data in­ terchange as a part of its proposed Waste Shipment Regula­ tion amendments in November 2021. Useful frameworks and tools for the development of Single Windows are avail­ able from UN/CEFACT standards and the WCO Data Mod­ el. 38 There are also many initiatives around the world that 5.2 DATA SYSTEMS Electronic data systems are a set of electronic tools and sys­ tems that enable businesses to manage, process and ex­ change information related to trade activities. Single Windows for trade are perhaps the most widely recog­ nised application of electronic trade data systems. Single Win­ dows allow businesses to submit all required documentation and information to comply with customs regulations(declara­ tion of conformity) through a single portal, rather than having to submit the same information to multiple government agen­ cies. This can greatly reduce the administrative burden on businesses and help to speed up the clearance process. With increased pressures on climate, nature and pollution, Single 33 https://www.oecd-ilibrary.org/docserver/6ab6bb39-en.pdf?expires= 1676666989&id=id&accname=guest&checksum=8B6E9385129D77 FBC3302DEDE3E63B76 34 Advanced implementation: a situation in which 60 per cent of regu­ latory requirements for trading goods across borders are processed by the Single Window system. Implemented: almost all regulatory requirements for almost all commodity codes are processed by the Single Window system. 35 https://www.wcoomd.org/-/media/wco/public/global/pdf/topics/fa­ cilitation/ressources/wto-atf-working-group/12/agenda-item-vi_a_ sw-study-results_en.pdf?db=web 36 https://www.wcoomd.org/-/media/wco/public/global/pdf/topics/ facilitation/ressources/permanent-technical-committee/237-238/ pc0699eae2b.pdf 37 In addition to the use of electronic data systems for Basel, there are also other environmental data exchange frameworks, such as eCITES which supports Convention on International Trade in Endangered Spe­ cies of Wild Fauna and Flora and ePhyto for phytosanitary controls. 38 The WCO Data Model(DM) is the data foundation for global trade interoperability. The WCO DM is a universal language for cross-bor­ der data exchange enabling the implementation of Single Window systems and fuelling Data Analytics. It is a compilation of clearly structured, harmonised, standardised and reusable sets of data de­ finitions and electronic messages designed to meet the operational and legal requirements of customs and other cross-border regulatory agencies(CBRAs) responsible for border management. See: https://www.wcoomd.org/datamodel 23

FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR are attempting to improve transboundary supply chain traceability and transparency and how that data can be shared with customs administrations(see Box 7). Box 7 Examples of value chain traceability and transparency developments DATAPIPE This project, run by TU Delft and TNO, aims to develop the extended data pipeline concept for the digitization and monitoring of the circular economy, which next to goods and logistics data will enable sharing of data on material composition and production processes.* Textiles and Garments Traceability and ­Transparency Protocol The UNECE Textiles and Garments Traceability and Trans­ parency Protocol is a framework to enhance cross-bor­ der traceability and transparency in the textile and gar­ ment industry. The protocol aims to address issues such as supply chain complexity, sustainability and social re­ sponsibility by establishing common standards and guidelines. It encourages the adoption of technologies and practices that enable tracking and tracing of prod­ ucts throughout the entire supply chain, from raw mate­ rials to finished garments. The protocol emphasises the importance of accurate and reliable information sharing, including details about the origin of materials, produc­ tion processes and relevant certifications.** TradeLens TradeLens used blockchain to help customs administra­ tions facilitate trade and increase compliance. Although no longer operating, TradeLens was a global, blockchain powered platform developed by IBM and Maersk that fol­ lowed the flow of cargo from source to destination, and connected the various parties involved in a shipment. As an open system it enabled all organisations involved in an international shipment to exchange shipment events and documents simply and securely in real time. Plat­ forms like TradeLens allow customs and other govern­ ment agencies to piggyback their supervision processes on top of existing commercial information exchanges. As soon as a container is filled in the exporting country, the importing country’s customs agency could pull the purchase order and packing list from TradeLens and use them to perform a risk assessment on the shipment. It is unclear why IBM and Maersk decided to end the initia­ tive, but what is evident is that such a system, if scaled to the global level, should be established and governed by an independent multilateral institution which can en­ sure over the long term that sensitive data is managed securely via a trusted neutral actor. *  https://www.tudelft.nl/tbm/onderzoek/projecten/datapipe-project Linking Single Windows with other complementary elec­ tronic systems could improve the efficiency of border proce­ dures and streamline regulatory controls for circular trade. One example would be enabling digital data exchange held in digital product passports(as outlined in the ESPR) with Single Windows. Such a development could be transforma­ tive in terms of providing verified information on different circularity aspects of a good, for example whether a reman­ ufactured good conforms to a widely recognised standard, compliance of functionality tests for used goods, the pres­ ence of hazardous chemicals, or the durability or repairabil­ ity of the item. The European Union Customs Data Model(EUCDM) is an example of such an electronic platform which could incor­ porate such data demands. It allows information exchange between businesses and government authorities inside and outside the EU and is the backbone of the EU Single Win­ dow. The value of the EUCDM is that it can be further en­ riched with data elements specific to EU customs require­ ments, such as circularity data related to the EU Sustainable Product Regulation(SPR) which will be contained within a Digital Product Passport, for example the durability, repaira­ bility or recyclability of a good. 5.3 ECONOMIC ZONES SEZs are geographically delimited areas within which gov­ ernments promote industrial activities through fiscal and regulatory incentives and infrastructure support. They go by many different names, including free-trade zones and in­ dustrial parks, and are widely used by developed and devel­ oping economies. 39 Creating a Special Economic Zone(SEZ) which facilitates cir­ cular activities, such as recycling or remanufacturing, could offer a practical solution to various challenges. By establish­ ing a bounded area, a country could prevent circular trade flows from competing with local industry or overcome its limited capacity to regulate and inspect such shipments by keeping them in a geographically constrained zone. In this setup, circular trade flows, such as used electrical equip­ ment destined for refurbishment or remanufacturing, as classified by the HS, could be confined within the geograph­ ical limits of the bounded area(see Box 6). Consequently, re­ covery, recycling and remanufacturing processes would be restricted to the bounded area, thereby simplifying regula­ tion and inspection. Despite the existence of over 3,500 free-trade zones world­ wide, only a handful actively facilitate circular trade. The SWITCH to Circular Economy Value Chains initiative, fund­ ed by the EU and Finnish Government in partnership with the Egyptian Government and Orange and Nokia, is trialling the import of used mobile phones from the EU into a spe­ cial economic zone in Egypt. Once the phones have entered the zone they will be refurbished in line with relevant stand­ ards before being exported to secondary markets and even­ tually being sold into the domestic Egyptian market. The 39 https://unctad.org/news/new-global-alliance-special-economic-zo­ nes-boost-development 24

Experimental Circular Trade Facilitation Approaches project is also partnering with Egypt’s leading waste man­ agement organisation to help ensure that the refurbished handsets sold into the market are collected at end of life and recycled responsibly. It should be noted, however, that special customs zones can become an attractive channel for illicit trade in zones that exhibit poor inspection and auditing processes. The use of special zones must therefore be considered carefully. LOOKING AHEAD: FOSTERING A CULTURE OF EXPERIMENTATION To make the most of the potential of trade facilitation mech­ anisms outlined above, it is recommended that multi-stake­ holder pilots be initiated among willing countries. These pi­ lots would enable the testing of technological and proce­ dural solutions that would improve circular trade, and help identify the technical difficulties that arise in integrating se­ cure and real-time data transfer between various stakehold­ ers in the trade process(including producers, retailers, logis­ tics companies, recovery facilities and regulatory bodies such as border agencies, customs administrations, port au­ thorities and environmental agencies). A particular focus of these experiments should be to try to understand the insti­ tutional and political challenges and practicalities faced by low-income countries when it comes to implementing such mechanisms and participating in circular trade. To overcome the issues outlined in a coordinated way, it is also recommended that a working group, including relevant stakeholders, is established to identify practical solutions to better capture and communicate circular-relevant infor­ mation on goods at international borders in a way that is globally interoperable and compatible with the HS system or other customs measures. The working group could con­ sider questions such as:  could value chain digital traceability systems(such as digital product passports) be technically integrated in­ to customs systems?  customs administrations(particularly those in low-in­ come countries) are severely resource constrained, how could adoption of such traceability systems be supported?  are the key stakeholders in piloting such solutions?  do other trade facilitation mechanisms integrate with such a solution(such as AOEs, pre-consented facili­ ties, SEZs).  there any best practice examples to draw from? 25

FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR SUMMARY This paper highlights the necessity of transitioning towards a circular economy(CE) as a crucial step in achieving both environmental sustainability and human development goals. It identifies trade as a key factor in facilitating this transition, by providing access to essential goods and services required for adopting circular activities, and by enabling the move­ ment of end-of-life goods, secondary raw materials and waste to areas with the expertise and scale necessary to achieve lifetime extension of material recovery. To facilitate circular trade flows, targeted trade facilitation measures are required to overcome current barriers. The Harmonized System(HS) classification system will be a criti­ cal tool in this regard, enabling governments to monitor, regulate and facilitate circular trade flows more effectively. However, to maximise its potential, this paper suggests four potential areas for improvement, including the creation of new or revised classifications for circular-enabling goods; strengthening the institutional capacity of the World Cus­ toms Organization(WCO) and customs administrations so they can do the additional work; improving coordination with multilateral environmental agreements; and extending to an 8-digit international system. Looking beyond the HS, the report also recommends mul­ ti-stakeholder experimentation with complementary trade facilitation measures to streamline circular trade flows and reduce the burden on customs administrations. Examples in­ clude trusted circular trader and resource recovery lane initi­ atives, integrating circular product data with electronic data systems, and the use of Special Economic Zones for certain trade flows. Such experiments could involve various stake­ holders in the trade process, including producers, retailers, logistics companies, recovery facilities, and regulatory bod­ ies such as border agencies, customs, port authorities, and environmental agencies. Finally, a much wider debate is required to achieve consen­ sus on what type of trade the global community(particular­ ly those from the Global South) wants to facilitate to accel­ erate an inclusive circular economy and what types of trade should not be facilitated. Without consensus on this, the benefits from all other recommendations in this paper will be constrained. 26

APPENDIX APPENDIX – RECOMMENDATIONS As an outcome of a three-day expert workshop on“HS and Circular Economy” hosted by the Friedrich-Ebert-Stiftung’s Geneva office and UNECE(19–21 October) and the addi­ tional research undertaken for this report, the authors iden­ tified a number of areas for further action to help advance the topic of circular trade facilitation. Under each area we present recommended actions and recommendations of po­ tential leads, as identified by the authors. Table 3 Areas for further action to help advance the topic of circular trade facilitation Area Recommended action Explore the possible value of creating new classifications to facilitate circular trade flows Brokering greater knowledge exchange between CE policy and trade communities on reclassification ­processes and their importance for CE goals(WCO, Chatham House) Develop a»Circular Trade Academy« for CE and trade policymakers(WCO, Chatham House, UNECE, WEF) Host a discussion on the need and process for identifying potential additional codes required to facilitate ­circular trade flows(WCO, TESSD Informal Working Group on circular economy) Identify initial shortlist of goods that are critical for conducting circular activities either as new classifications or as ex-outs(TESSD Informal Working Group on circular economy) Strengthen WCO and customs administrations’ ­institutional capacity to implement ­effective systems Provide additional institutional support to the WCO so it can meet growing demands to adapt HS towards supporting environmental goals and the circular economy Increase dedicated support to customs administrations – particularly in low-income countries(WTO AfT and WCO Green Customs initiative) Expand enforcement projects and operations such as DEMETER to support a globally coordinated approach to the policing of illegal waste trade(WCO – Green Customs Initiative) Strengthen coordination ­between HS and MEAs Implement a cooperation programme between environmental authorities and customs administrations, with a particular focus on e-PIC(Basel Secretariat, WCO) Consider delaying update of HS 2027 to 2028 to provide sufficient time for consideration of new classifi­ cations required to support the Global Plastics Treaty(WCO) Move to an 8-digit ­international system Identify list of circular goods and trade flows classed under 8- and 10- digit codes across different ­jurisdictions and shortlist the most promising for harmonisation/mutual recognition(WCO, TESSD Informal Working Group on circular economy) Experiment with ­additional circular trade facilitation approaches Explore how to leverage synergistic benefits offered by trusted trader and resource recovery lanes and ­potential to expand the scope of pre-consented recovery beyond hazardous waste recovery(that is, disposal or recycling) to circular activities(OECD, WCO) Establish and host a circular trade best practice library promoting innovative initiatives and case studies where circular trade is facilitated(WCO, WEF, UNECE, Chatham House) Examine, experiment and raise awareness on how to combine Single Windows with other complementary electronic systems to improve the efficiency of border procedures and streamline regulatory controls for ­circular trade. Integration of DPP data could be a primary focus(WCO, Basel Secretariat, EU Single Window Environment for Customs Secretariat) Investigate how SEZs can be further utilised to facilitate circular trade(WCO, Global Alliance of Special ­Economic Zones and UNCTAD) Establish a multi-stakeholder working group to identify practical solutions to better capture and communicate circular-relevant information on goods at international borders in a way that is globally interoperable and compatible with the HS system or other customs measures but can extend classification beyond physical ­ attributes(World Customs Organization, UN/CEFACT) 27

FRIEDRICH-EBERT-STIFTUNG – GOING CIRCULAR GLOSSARY Authorised Economic Operator(AEO): A party involved in the international movement of goods in whatever func­ tion that has been approved by or on behalf of a national customs administration as complying with WCO or equiva­ lent supply chain security standards. AEOs may include man­ ufacturers, importers, exporters, brokers, carriers, consoli­ dators, intermediaries, ports, airports, terminal operators, integrated operators, warehouses, distributors, and freight forwarders. Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal: An international treaty designed to regulate the movement and disposal of hazardous and other waste across national borders, with the aim of minimising its generation and en­ suring environmentally sound management. Circular trade: Any international trade transaction that contributes to realising an inclusive circular economy at the local, national and global levels. Circular trade is therefore an umbrella term that encompasses many different types of trade flows: circular economy-enabling goods, services and IP, used goods for reuse, repair or remanufacturing or goods that have been remanufactured, and secondary raw materials and waste destined for recovery. Contracting Parties to the HS: Contracting Parties refers to the countries or entities that have officially become sig­ natories to the Harmonized System of Codes(HS). Reuse: Using again for the same purpose for which it was conceived, possibly after refurbishment, repair, upgrading or remanufacturing. Single Window: A facility that allows parties involved in trade and transport to lodge standardised information and documents with a single-entry point to fulfil all import, ex­ port and transit-related regulatory requirements. If informa­ tion is electronic, then individual data elements should only be submitted once. Special Economic Zone: A designated geographical area within a country established to attract foreign direct invest­ ment(FDI), boost economic growth and promote industrial­ isation. The establishment of SEZs provides a controlled and regulated environment that aims to attract both domestic and foreign investors by offering a range of benefits and a more favourable business climate. Trade facilitation: The simplification and harmonisation of international trade procedures, including activities, practices and formalities involved in collecting, presenting, communi­ cating and processing data required for the movement of goods in international trade. Trusted trader: An individual or business entity that has been recognised and granted trusted status by customs ad­ ministrations, indicating a low risk level in terms of compli­ ance with customs regulations and security requirements. Direct reuse: Using again, for the same purpose for which they were conceived without the necessity of repair, refur­ bishment, upgrading, or remanufacturing. Global Plastics Treaty: An international agreement un­ der current negotiation that aims to address the challeng­ es posed by plastic pollution on a global scale. Harmonized System of Codes: An internationally stand­ ardised system for classifying goods traded across borders, using a unique code for each product to facilitate customs clearance and trade statistics. OECD Pre-consented facility: An OECD pre-consented facility refers to a facility or location that has obtained pri­ or approval or consent from the Organization for Econom­ ic Cooperation and Development(OECD) to carry out spe­ cific activities or operations. These activities or operations are typically related to trade, environmental compliance or regulatory standards. Resource recovery lane: A designated pathway or chan­ nel within a supply chain or logistics network specifically designed for the efficient collection, recycling or reuse of waste materials and resources. 28

ABBREVIATIONS AEO Authorised Economic Operator CE Circular Economy CEFACT United Nations Centre for Trade Facilitation and Electronic Business COP15 15 th Conference of the Parties CP Contracting Parties to the Harmonized System of Codes DPP Digital Product Passport EPR Extended Producer Responsibility ESPR Ecodesign for Sustainable Products regulation EU European Union EUCDM European Union Circular Economy and Waste Management FAST Framework for Assessing and Streamlining Technology FDI Foreign Direct Investment GIZ Gesellschaft für Internationale Zusammenarbeit (German Corporation for International Cooperation) GTIN Global Trade Item Number HR Human Resources HS Harmonized System of Codes IP Intellectual Property IRENA International Renewable Energy Agency ISO International Organization for Standardization MEA Multilateral Environmental Agreement NGO Non-Governmental Organisation NSRR National Single Window for Registration and Regulation OECD Organisation for Economic Co-operation and Development PIC Prior Informed Consent REN Renewable Energy Network SEZ Special Economic Zone STEP Sustainable Technology Education Project SW Single Window TESSD Trade and Environmental Sustainability Structured Discussions UEEE Used Electrical and Electronic Equipment UN United Nations UNCTAD United Nations Conference on Trade and Development UNECE United Nations Economic Commission for Europe UNEP United Nations Environment Programme UNODC United Nations Office on Drugs and Crime USA United States of America WCO World Customs Organization WEEE Waste Electrical and Electronic Equipment WEF World Economic Forum WTO World Trade Organization Abbreviations 29

imprint ABOUT THE AUTHORS IMPRINT Jack Barrie is a research fellow in Chatham House’s Centre for Environment and Society where he leads on pioneering research examining the intersections between the circular economy and international trade, geopolitics, finance and the Sustainable Development Goals(SDGs). He works on a range of different global projects including the European Commissions’ flagship circular economy project – SWITCH to Circular Value Chains and the UNCTAD Sustainable Man­ ufacturing and Environmental Pollution(SMEP) programme. Gael Grooby is the current Deputy Director of Tariff and Trade Affairs(TTA) for the World Customs Organization (WCO). TTA is responsible for Nomenclature, Valuation and Origin matters at the WCO. Published by: Friedrich-Ebert-Stiftung e. V. Godesberger Allee 149| 53175 Bonn| Germany Email: info@fes.de Issuing Department: Division for International Cooperation/ Global and European Policy Responsible: Hajo Lanz| Director| FES Geneva Chemin du Point-du-Jour 6bis| 1202 Geneva| Switzerland Phone:+41-22-733-3450| Fax:+41-22-733-3545 https://geneva.fes.de With support of UNECE – United Nations Economic Commission for Europe; Circular STEP – Stakeholder Engagement Platform to accel­ erate Circular Economy transition in the UNECE region Typesetting: pertext, Berlin| www.pertext.de Contact: info@fes-geneva.org Further Contributors Jan Raes has contributed to Section 5.2, and we are further grateful to Carolyn Deere-Birkbeck and Christoph Bellmann for their continuous support throughout this journey. Reviewers Olivia Chassot(UNECE) Lazzat Daniyarova(WCO) Valentina Ferraro(WCO) Taeyeon Kim(WCO) Anna Ewa Kobyłecka(WCO) Christian Lembke(WCO) Monica Mpairwe(WCO) The views expressed in this publication are not necessarily those of the Friedrich-Ebert-Stiftung(FES), of the WCO or its members. Any errors are attributable to the authors. Commercial use of media published by the FES is not per­ mitted without the written consent of the FES. Publications by the FES may not be used for electioneering purposes. ISBN 978-3-98628-336-0 © 2023 FES GENEVA The FES office in Geneva serves as a liaison office between UN agencies, other Geneva-based international organiza­ tions and FES field offices as well as partners in developing countries to strengthen the voice of the Global South. It contributes to the debates in»International Geneva« on tra­ de and sustainable development, decent work and social policies, human rights, economic and social rights in parti­ cular, as well as on peace. www.fes.de/bibliothek/fes-publikationen

GOING CIRCULAR How the Harmonized System Codes Can/Not Support a Circular Economy and What Else Could Be Done Trade is a key factor in facilitating the transition towards a circular economy. It provides access to essential goods and services required for adopting circular ac­ tivities. Trade enables the movement of end-of-life goods, secondary raw materi­ als and waste to areas with the expertise and scale necessary to achieve lifetime extension of material recovery. To facili­ tate circular trade flows, targeted trade facilitation measures are required to over­ come current barriers. The Harmonized System(HS) classification system will be a critical tool in this regard, enabling gov­ ernments to monitor, regulate and facili­ tate circular trade flows more effectively. This paper suggests four potential areas for improvement, including the creation of new or revised classifications for circu­ lar-enabling goods; strengthening the in­ stitutional capacity of the World Customs Organization(WCO) and customs admin­ istrations so they can do the additional work; improving coordination with multi­ lateral environmental agreements; and ex­ tending to an 8-digit international system. Looking beyond the HS, the report rec­ ommends multi-stakeholder experimen­ tation with complementary trade facilita­ tion measures to streamline circular trade flows and reduce the burden on customs administrations. Examples include trust­ ed circular trader and resource recovery lane initiatives, integrating circular prod­ uct data with electronic data systems, and the use of Special Economic Zones for certain trade flows. Such experiments could involve various stakeholders in the trade process, including producers, retail­ ers, logistics companies, recovery facili­ ties, and regulatory bodies such as border agencies, customs, port authorities, and environmental agencies. Finally, a much wider debate is required to achieve consensus on what type of trade the global community(particularly those from the Global South) wants to fa­ cilitate to accelerate an inclusive circular economy and what types of trade should not be facilitated. Without consensus on this, the benefits from all other recom­ mendations in this paper will be con­ strained. Further information on the topic can be found here: geneva.fes.de/