The triple environmental crisis – climate change, pollution and biodiversity loss – calls for a global response. As a key transmission belt for innovation, changes in production and consumption models, and ultimately structural transformation, trade can be a powerful engine for promoting and disseminating more human- and environmentally friendly practices.

Although usually conceived from a market access enhancement perspective, negotiations on the liberalization of trade in environmental goods and services have gained traction worldwide. A recent milestone in this area is the signing of the Agreement on Climate, Trade and Sustainability (ACCTS) in November 2024 by trade ministers from Costa Rica, Iceland, New Zealand and Switzerland. Under the Agreement, these countries commit to eliminating Customs duties on a total of 360 environmental goods and more than 100 services for all WTO members, in line with the most-favoured-nation principle.

Some free trade agreements (FTAs) also contain specific provisions aimed at boosting trade in environmental goods and their input products, including through differential tariffs applied to six-digit HS codes that specify particular environmental goods and/or subheadings containing both environmental and non-environmental goods.

A promising yet underexplored application lies in using rules of origin (RoO) in FTAs as tools for environmental policy.

“The connection between environmental sustainability and rules of origin is not obvious. Trade agreements with rules of origin provisions that strengthen environmental sustainability are rare. Time for policymakers to get creative.”

Christopher Wingård, Trade Policy Adviser, National Board of Trade Sweden

Most FTAs that focus on sustainability impose additional requirements on liberalized goods, adding an extra layer of sustainability standards on top of existing origin requirements, rather than incorporating sustainability as part of the origin determination itself. For instance, the Indonesia-Switzerland FTA, which includes forward-looking requirements, permits only palm oil that is certified as deforestation-free to qualify for tariff reductions under the treaty’s sustainability clauses.

Although this layering approach is innovative from an environmentally friendly trade policy standpoint, it continues to keep the determination of origin, focused on preventing trade circumvention,[1] separate from sustainability standards, which aim to protect the environment. As a result, companies must independently meet both sets of requirements.

RoO are never purely technical instruments. They reflect political choices about which economic activities to encourage, which supply chains to prioritize and which policy objectives to pursue.[2] Once this political dimension is acknowledged, it becomes possible to design RoO that intrinsically weave sustainability considerations into the core logic of origin determination, rather than layering them as additional requirements.

The following examples show how integrated green RoO might function:

• Garments: Instead of requiring garments to meet a transformation requirement plus an additional sustainability certification, a green rule of origin might provide for a transformation from certified inputs. For example, a rule stating “Manufacture from yarn OR manufacture from organic fabrics” provides producers with a choice between a more labour-intensive process using conventional inputs (a double transformation effect) or a more flexible process if the inputs are certified under a voluntary sustainability scheme (a single transformation effect). This approach offers multiple paths to obtaining originating status – including conventional ones – while the environmentally preferable option (organic fabrics) may offer a simpler compliance route.
• Automotives: Rather than imposing uniform value-addition thresholds and separate environmental standards, an integrated approach might state: “Value of non-originating materials does not exceed 60% of EXW price OR value of non-originating materials does not exceed 70% of EXW price, provided that the steel is made using green energy.” In both cases, this structure explicitly rewards sustainable production methods with more favourable origin treatment.

Embedding circular economy principles in the RoO

The most advanced area of environmentally conscious RoO focuses on provisions that promote circular economy principles. Although the literature on the topic remains limited, analysts have identified the potential for embedding circular economy principles in the RoO, notably through provisions relating to remanufactured goods.[3]

Currently, circular economy principles are primarily found in a few wholly obtained provisions:

• by-products derived from the manufacturing process, e.g. metal offcuts or fabric scraps. This would incentivise the recovery and reuse of materials that would otherwise be discarded.[4]
• used parts derived from the dismantling process, e.g. valuable parts of electronic discarded devices. This would support the development of recovery industries.
• remanufactured goods, such as laptops, restored to a functional performance comparable to that of new items.[5]

Integrated green RoO challenge the traditional belief that environmental protection inevitably leads to higher compliance costs. By incorporating environmental considerations into the core structure of origin determination requirements – as an option – green RoO may reduce market access costs for environmentally conscious producers while maintaining preferential treatment for conventional ones. This approach can give environmentally conscious producers a competitive advantage. In so doing, it reverses the usual relationship between environmental responsibility and commercial competitiveness.

To be effective in supporting environmental sustainability, integrated RoO must be designed with several key considerations:

• Economic viability: Environmental pathways must offer substantial economic advantages over conventional ones. This requires careful calibration of thresholds, requirements and alternatives based on market practices and production costs.
• Administrative feasibility: Verification procedures must be capable of assessing environmental criteria without creating prohibitive bureaucratic burdens. This may require leveraging and recognizing existing certification systems, industry standards or sustainability labels.
• Value chain credibility: Green RoO should accommodate the diversity of global and regional value chains while providing clear incentives for environmental improvement.

Understanding the potential of RoO to support social and environmental sustainability starts with recognizing a fundamental characteristic: preferences are optional, not mandatory. They set the eligibility criteria for preferential treatment, but economic operators can decide whether to claim these preferences. This discretionary aspect has significant implications for their effectiveness as environmental policy tools.

Companies will only pursue preferential treatment when the expected benefits outweigh the compliance costs. These costs include reorganizing supply chains, adjusting production processes to meet origin criteria, and managing the administrative burden of demonstrating compliance.[6] To influence business decisions, environmental compliance must be embedded in the origin requirements in a way that either reduces trading costs or generates sufficiently high returns to justify additional environmental investments.

This economic reality suggests that RoO can only function as discriminatory incentives designed to encourage sustainable practices within FTAs, rather than impose them. They cannot enforce fundamental changes in production structures or sourcing decisions. Instead, they are most effective when they align environmental goals with economic incentives.

Goods classification and origin determination are closely interlinked. In many cases, RoO are based on a change in tariff classification (CTC)[7] at the chapter, heading or subheading level – a criterion that requires the correct classification of both the final manufactured product and the input materials used in its production.

The 2033 HS version presents an opportunity to build on previous efforts to promote sustainable practices and support various intergovernmental processes, as has already been the case with several multilateral environmental agreements. For instance, the ongoing Intergovernmental Negotiating Committee on Plastic Pollution has identified “leakages” – plastic that enters terrestrial or aquatic environments due to inadequate collection and disposal – as an area for cooperation aimed at reducing the global plastic footprint. In this context, certain goods prone to contributing to these leakages may be considered for classification amendments, making them more easily identifiable in Customs and trade nomenclatures and statistics. These same goods could then be subjected to differentiated treatment under FTAs – specifically RoO – as a means of steering market behaviour toward more sustainable and desirable trajectories.

In the same spirit, at the WCO Green Conference in 2022, speakers discussing the textile industry proposed several policy options to increase the visibility of the international sustainable fibre trade. These include identifying recycled fibres in the HS, specifying textile materials and their use in blended materials throughout the value chain, and recognizing machinery and equipment used for fibre recycling.

Increasing the granularity of the HS structure for environmental goods – along with ensuring clear identification at borders – is likely to facilitate the negotiation of differentiated preferential tariff treatments. However, it is important to note that specifying environmental goods in the HS requires careful consideration to ensure they can be clearly identified at the border. For example, earlier proposals to create HS codes for “biodegradable plastics” failed owing to the lack of a clear and globally accepted definition. Nevertheless, such proposals continue to attract the interest of trade policymakers. A current example is the ongoing negotiations on RoO for natural and man-made fibre textile products under the African Continental Free Trade Area.

By transitioning from layered sustainability standards to integrated sustainability requirements, RoO can transform environmental responsibility into a competitive advantage. Customs administrations can play a significant role in developing greener RoO. This includes assisting trade negotiators in identifying environmentally friendly goods and embedding, where appropriate, global environmental policy ambitions into Customs instruments, such as through the identification of environmental goods compared to their conventional alternatives, where they exist, under the HS; leveraging underexploited provisions, such as the “regional appellation certificate” which, though primarily referring to intellectual property rights, have the effect of circumscribing merchandise to a geographical area – thereby essentially providing the origin the goods, albeit not through canonical proofs of origin; or introducing good practices such as remanufactured goods in Special Annex K to the Revised Kyoto Convention.

More information
guillaume.gerout@wcoomd.org

[1] See, for instance, Gourdon, J., Gourdon, K., and De Melo, J. (2023). A (More) Systematic Exploration of the Trade Effect of Product-Specific Rules of Origin. World Trade Review, 22 (3-4); Inama, S. (2022). In Rules of Origin in International Trade; UNCTAD (2019). Economic Development in Africa Report 2019: Made in Africa – Rules of Origin for Enhanced Intra-African Trade. Economic Development in Africa Report 2019; WCO (2017). Origin Compendium.

[2] On the political economy of FTAs and RoO, see, for instance, Chase, K. A. (2008). Protecting free trade: The political economy of rules of origin. International Organization, 62 (3); Laaker, D. (2019). Preferential Rules of Origin: Deflection or Protection? Working Paper; Angeli, M. (2023). Rules of origin in North-South preferential trade agreements. In Rules of Origin in North-South Preferential Trade Agreements.

[3] See Bellman, C., and Sell, M. (2021). Options to Incorporate Circular Economy Provisions in Regional Trade Agreements; Wingård, C. (2020). Rules of origin for the 21^st century – including services, digitalisation, sustainability and a more user-friendly approach.

[4] See Gérout, G., and Addo-Obiri, H. (2019). AfCFTA, value chains and overlapping origin regimes: A complementarity assessment along a segment of the copper value chain in Africa. In D. Luke and J. MacLeod (Eds.), Inclusive Trade in Africa : The African Continental Free Trade Area in Comparative Perspective.

[5] See Kliangpiboon, C. (2025). Assessing the Necessity of Integrating Remanufactured Goods Provisions in Regional Trade Agreements: Considerations and Implications for Thailand.

[6] See Gutierrez, I. (2022). The Rules of Origin and Global Value Chains Conundrum. https://expansion.mx/empresas/2021/09/03/bmw-pago-de-aranceles-exportar-a-eu

[7] See WCO. (2022). Comparative Study on Preferential Rules of Origin.