Rules of Origin and Environmental Sustainability: Incentives, Limitations and Pathways Forward
This article is a further reflection on the opinion expressed in the WCO News 108 - Issue 3/2025.
“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
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Preference utilisation is optional. Companies are likely to pursue preferential treatment only when the anticipated benefits outweigh the compliance costs, including supply chain adjustments and production process changes. For this reason, RoO can only incentivise change.
RoO will likely contribute to the circular economy primarily through waste valuation, material recovery from discarded items and second-hand product refurbishment.
The effectiveness of green RoO would depend on whether the incentive promotes economic competitiveness while fostering environmental sustainability.
Introduction
As the world faces growing environmental challenges, trade policymakers seek innovative ways to incorporate sustainability into existing policy frameworks. One promising yet underexplored avenue lies at the intersection of international trade and environmental protection: the potential for rules of origin (RoOs) in free trade agreements (FTAs) to serve as tools for environmental policy. For the remainder of the discussion, this paper focuses on preferential RoO.
Traditionally, RoO are designed to prevent tariff circumvention and ensure that the discriminatory treatment is applied to the intended beneficiaries. However, the design process of the RoO makes them prone to instrumentalisation, as they may also offer significant opportunities to advance policy objectives, such as environmental sustainability.
This paper explores the conceptual foundations, practical applications, and inherent limitations of using RoO as an environmental policy tool. It examines current practices and future possibilities for aligning trade policy with sustainability goals.
The voluntary nature of preferences
Understanding the environmental potential of RoO starts with recognising 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 exceed the compliance costs. These costs include reorganising supply chains, adjusting production processes to meet origin criteria, and managing the administrative burden of documenting compliance, among others. For environmental objectives to influence business decisions through RoO, environmental compliance must be woven into origin requirements, either reducing trading costs or generating substantial returns to justify additional environmental investments.
This economic reality suggests that RoO can only function as discriminatory incentives to encourage sustainable practices within FTAs, rather than as mechanisms to 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.
Mapping entry points to environmental sustainability
Acquisition of the originating status
The most advanced area of environmentally conscious RoO focuses on provisions that promote circular economy principles. To date, the literature remains scarce on the topic; however, analysts have highlighted the potential to embed circular economy principles in the RoO, notably through provisions on remanufactured goods.
Moving forward, the following provisions can be considered as favourable entry points to consider the linkages between the RoO and environmental sustainability:
Waste and scraps recovery: Rules that allow by-products from manufacturing processes to count toward origin requirements incentivise the recovery and reuse of materials that would otherwise be discarded. For example, metal offcuts collected and melted into new ingots can contribute to the origin calculation, encouraging manufacturers to add value to waste.
Used articles as sources of raw materials: Provisions that recognise discarded items as eligible sources of components for new manufacturing cycles support the development of recovery industries. For instance, electronic waste recycling, where valuable materials are extracted from discarded devices, exemplifies how RoO can support resource recovery.
Remanufactured goods: The emerging recognition of refurbished products, such as laptops restored to functional performance comparable to new items, can help reduce the environmental footprint of traded goods by extending their product lifecycles.
From a more general standpoint, wholly obtained goods are typically extractive goods. Apart from the three exceptions mentioned above, which pertain to the extraction from their environment of goods that have reached the end of their life cycle, all other goods require the extraction of natural resources (e.g., fruits grown or harvested, fish caught, minerals extracted).
For these, further qualifying their extraction conditions provides some environmental leverage. However, should this environmental leverage incentivise only preference-eligible trade, or should it cover all trade regardless of the policy objective the FTA is specifically pursuing? For instance, would bilateral trade incentivise some environmental practice, such as deforestation-free agricultural products? Or should this incentive be foregone if formulated as such, and therefore be conceived as a mandatory requirement? The answer to the question will prescribe the policy tool. And when the response is incentivising, is the tool a complementary instrument or an inherent origin requirement? For instance, the Indonesia-Switzerland FTA conditions palm oil's preference-eligibility on deforestation-free certification.
Though an interesting example of a preferential trade mechanism incentivising sustainable land use under an FTA, the requirement is additional to origin, not in its interest, as it seeks to encourage environmental, social and governance (ESG) practices rather than deter trade circumvention. For this reason, it is more appropriate to consider such requirements as sustainability standards and origin requirements than green origin requirements per se.
Beyond the wholly obtained criteria, sufficient transformation criteria – ad valorem, change in tariff classification (CTC) and technical requirements (TR) – are less obvious entry points:
Advalorem criteria rely on calculation methods to determine value thresholds of local or foreign content ceilings. In itself, the calculation method does not affect the environmental footprint. Decision-makers may very well decide to incentivise trade in some goods of higher environmental value than others, but the choice ultimately lies in the differentiated restrictiveness between environmentally-friendly and conventional RoOs, not in the calculation method itself. However, while calculating local or foreign content thresholds does not inherently alter environmental footprints, policymakers can use differentiated requirements to incentivise trade in environmentally preferable goods. For example, lower value-added requirements for natural textile fibres than synthetic alternatives may encourage more sustainable material choices.
CTC-based criteria offer a straightforward framework. The primary focus is thus on the HS classification structure and its reflection of environmental goods rather than the CTC rule. For example, a change of chapter with some exclusion can have the effect of a multiple-stage transformation, thereby possibly discouraging the utilisation of some unsustainable or environmentally detrimental materials, provided that they are identified as such in the HS classification and differentiated from their more sustainable alternatives.
TR criteria, being prescriptive by nature, offer the strongest potential linkage with environmental sustainability by specifying processes with varying environmental intensities. However, the environmental effect depends more on the rule's economic effect than on the rule itself.
Moreover, insufficient transformation provisions restrict the acquisition of originating status by excluding certain low-added-value operations. Stricto sensu, it is difficult to conceive any environmental effect with respect to these rules.
Consignment- and evidence-related rules
Other relevant origin requirements may be considered.
Territorial and transport rules address a traceability issue but only indirectly impact environmental footprints. While transportation accounts for a significant share of the ecological impact of goods, these rules focus on administrative control and have minimal direct environmental impact.
Documentary evidence may carry environmental implications. Physical documentation is resource-intensive, while electronic formats consume energy. Evidence systems that integrate origin proof with other necessary commercial documentation can reduce environmental pressure by eliminating redundant documentation requirements and minimising resource consumption.
Toward green RoO
While innovative, current practices represent a cumulative rather than an integrative approach to environmental considerations in RoO. However, recognising the inherently political dimension of origin design and their policy objectives opens possibilities for more fundamental integration.
The sustainability standards distinction
The Indonesia-Switzerland FTA's requirement for deforestation-free certified palm oil illustrates both the potential and limitations of current environmental integration approaches. While commendable as an example of preferential trade mechanisms that incentivise sustainable land use, this requirement functions as an additional sustainability standard layered onto existing origin requirements rather than as an inherent component of origin determination itself. It seeks to encourage sustainable ESG practices as a supplementary condition rather than integrating environmental considerations into the core logic of origin qualification.
Although this layering approach is innovative from an environmentally friendly trade policy standpoint, it represents only an attempt to integrate the environment into trade preferences. It continues to maintain the determination of origin, focused on preventing trade circumvention, separate from sustainability standards, which aim to protect the environment. As a result, companies must independently meet both sets of requirements.
Free movement of certified goods
Some products have – and can be demonstrated to have – a genuine linkage with their territory of production, beyond RoO. Such goods may, for instance, be characterised by the local traditions required for their making, by some unique characteristics that are essentially related to their place of production, or because they meet some specifications which tie them to a circumscribed production area. In these cases, it can be assumed that the said genuine linkage with the territory is sufficient to prevent the risk of transhipment. Furthermore, the qualities that give them these specific characteristics are already guaranteed by some certification schemes.
One could thus consider that, assuming recognition of the certification schemes, such certified goods provide sufficient assurances to prevent tariff circumvention through transhipment and therefore do not require further rules of origin.
For instance, goods protected by a geographical indication (GI) or certified under certain circumstances, such as organic labels, have demonstrated a significant degree of territorial connection to their production methods prior to and during certification. It is therefore unlikely that any GI-protected goods, or certified organic goods, whose production methods, including the premises, have been vetted and are auditable by the certification body, be used for transhipment purposes.
Furthermore, these GIs and voluntary schemes often include ESG requirements in their specifications, which strengthen – and often essentially are – social and environmental sustainability standards.
Theoretical implications
Integrated green rules of origin challenge the traditional belief that environmental protection always leads to higher compliance costs. By incorporating environmental considerations into the core structure of origin determination requirements, green rules of origin may reduce costs for environmentally conscious producers while keeping costs stable for conventional producers. This approach can give environmentally conscious producers a competitive advantage. In doing so, it reverses the usual relationship between environmental responsibility and commercial competitiveness.
For integrated RoO to support environmental sustainability effectively, they must therefore be designed with several key considerations:
Economic viability: The environmental pathways must offer substantial economic advantages compared to conventional approaches. This requires careful calibration of thresholds, requirements and alternative options 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 recognising existing certification systems, industry standards or sustainability labels.
Value chain credibility: Green RoO should accommodate the diversity of global or regional value chains while providing clear incentives for environmental improvement.
The political economy of RoO
RoO are never purely technical instruments. They reflect political choices about which economic activities to encourage, which supply chains to privilege and which policy objectives to prioritise. Once we acknowledge this political dimension, it becomes possible to design RoO that intrinsically weaves sustainability considerations into the core logic of origin determination, rather than layering them as additional requirements.
The following examples show how integrated green rules of origin might function:
Garments: Instead of requiring garments to meet a transformation requirement plus additional sustainability certification, a green rule of origin might read:
"Manufacture from yarn OR Manufacture from organic fabrics."
This approach provides multiple options to obtain the originating status, including conventional ones, with the environmentally preferable option (organic fabrics) offering a potentially simpler compliance route.
Automotives: Rather than imposing uniform value-addition thresholds plus separate environmental standards, an integrated approach might establish:
"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."
This structure explicitly rewards sustainable production methods with more favourable origin treatment.
These tiered origin acquisition modalities would fundamentally alter the business strategies and incentives toward sustainability. Instead of viewing environmental compliance as an additional cost layered onto origin requirements, companies would thus pursue sustainability as an alternative opportunity to origin qualification, potentially even a more economically attractive one. This transforms environmental considerations from external constraints into strategic options within the core business of supply chain optimisation.
Concluding remarks
By shifting from layered sustainability standards to integrated sustainability requirements, RoO can make environmental responsibility a competitive advantage.
Examples like organic textile rules and green steel incentives demonstrate that sustainability can incentivise environmentally friendly manufacturing practices. To do so, green RoO requires designing criteria that provide economic benefits that promote environmental sustainability while contributing to market competitiveness.
