New report sheds light on the role of services trade in a circular economy transition

Moving from a linear, extractive produce–use–discard model to a more circular approach brings about significant changes to existing business models. In today’s highly integrated world economy, international trade will play a critical role in enabling this transition by facilitating the diffusion of circular solutions and exploiting international comparative advantages.

From a trade perspective, more attention has been directed towards goods in the circular economy, while much less attention has been paid to the role of services. Yet, services that help keep resources in the system for longer are at the heart of new circular economy business models, and the trade in services has grown significantly more than the trade in goods since 2005.

To fill knowledge gaps around the role of services trade in a circular economy transition, a new report by the International Institute for Sustainable Development (IISD) and the Finnish Innovation Fund Sitra, supported by the Finnish Ministry for Foreign Affairs, has compiled fresh evidence. The report is based on a survey conducted among 96 firms involved in circular economy business models as well as a series of in-depth interviews.

Exported circular services are strongly based on digital solutions

Based on the survey results, many of the companies selling circular economy services are relatively small or micro-sized firms (micro, small and medium enterprises, MSMEs). Interestingly, around 50% of these small or micro-sized firms report having an office or a subsidiary in a foreign country, which is unusual in the context of typical patterns of  MSME activity.

“It was interesting to find that the exporters of circular economy-related services seem to have specialised very clearly in circular economy business models and in exporting, even among the small firms,” says Saara Tamminen, senior specialist at Sitra.

“Impacts of the COVID-19 pandemic, digitalisation and ‘servicification’ – already emerging trends – are expected to become more amplified. This is evident in the circular economy transition as well, where digitally enabled services seem to be a rapidly growing area.”

The firms participating in the research indicated that a very wide number of services were relevant to their circular economy activities; the most common services bought or sold were recycling services, R&D and other professional services, including IT services.

The services related to the circular economy seem to be exported digitally in particular, and via foreign subsidiaries.

The 96 companies covered in the report include Lindström, a Finnish company renting out textiles as a service, ensuring their optimal use, and Closing the Loop , a Netherlands-based company selling “circularity as a service” to smartphone and other device consumers through waste compensation programmes; in other words, funding the recycling of waste phones in developing countries.

Enhanced interoperability of regulations and international co-operation are needed

The report identifies a wide range of barriers to trade in services related to the circular economy. The most frequent barriers concern differences in regulations, with over 25% of the firms referring to these.

“Well-designed trade policies can support a global transition toward a more circular economy by helping to increase access to circular economy-related goods and services; as part of a coherent policy framework, they can help countries exploit comparative advantages in the sustainable use of resources, and support clean technology diffusion and uptake”, says Alice Tipping, trade specialist at IISD.

The report underscores the interconnectedness between goods and services. Barriers affecting goods affect the services trade as well when it comes to circular economy solutions. In addition, barriers encountered in the services trade more widely – such as the challenges of data localisation requirements – were relevant to the participating companies too.

Advancing a global circular economy transition will require concerted action at the international level, not least because no individual country can achieve the transition on its own. International trade disciplines such as those enshrined in the World Trade Organization (WTO) rules can help in this process.

Download publication: Trading Services for a Circular Economy.