CASE NUMBER: 341

CASE MNEMONIC: U.S.RECYC

CASE NAME: U.S. Recycling Laws and Trade With Canada

• IDENTIFICATION
• LEGAL CLUSTERS
• GEOGRAPHIC CLUSTERS
• TRADE CLUSTERS
• ENVIRONMENT CLUSTERS
• OTHER FACTORS

I. Identification

1. The Issue

In the past five years, the U.S. government has passed a series of laws and regulations designed to increase the use of recovered paper in the manufacturing of newspapers and other paper products. While these measures are concrete steps toward sustaining the environment, there are some negative consequences. United States recycling requirements are high, and it may be difficult for other countries to meet these standards. This case study focuses on the recent U.S. laws pertaining to specific amounts of recycled paper content, and the impact of these laws on trade with Canada, whose industries may be unable to meet U.S. requirements for such recycling standards.

2. Description

The idea of recycling has become fashionable and neighborhoods and businesses all across the United States have pledged efforts to become more green. However, recycling carries far more ramifications than many people might think. Trade, for instance, can be greatly affected by state or federal regulations on recycled products.

In 1991, the U.S. Congress passed H.R. 873, an amendment to the Solid Waste Disposal Act. This amendment set standards for producers and importers of newsprint, and mandated they must recycle a certain percentage of newsprint every year (1). The bill charged the United States Environmental Protection Agency with overseeing the recycling requirement. The bill highlighted the fact that paper and paper products contributed 40 percent, or 64 million metric tons, of the total waste in the U.S. waste-stream. Furthermore, 90 percent of old newspapers were not recycled and thus ended up in the waste- stream. In addition, the bill pointed out, there is such a glut of newspaper waste that something needs to be done with it in order to stabilize the market and regulate the cost of waste-paper (2). Dana Arnold of the Environmental Protection Agency reported that in 1994, paper and paperboard accounted for 81,300,000 tons of municipal solid waste. Of that amount, 28,730,000 tons, or 35 percent, were recovered materials, meaning they had been recycled at some point, and 52,000,000 tons were throw-away materials (3). On the whole, the newspaper industry is far ahead of the other industries in recycling. Glass, in 1990, was only being recycled at a rate of 20 percent, and a mere 2 percent of plastic was recycled (4). In 1995, it was estimated that the international demand for paper will increase by 10 million tons, and the U.S. will have to provide most of the supply to meet this demand. Naturally, this will further increase the strain on the waste stream (5).

There are also regulations on the government to insure the purchase of recycled paper. According to Arnold, paper purchased by the U.S. government must have 20 percent post-consumer paper recycled content. This means that the actual pulp must be recycled so that 20 percent of each sheet of paper is made of recycled material. Arnold likened the process to that of baking a cake, where a recipe calls for 20 percent whole wheat flour and 80 percent unbleached flour. The regulation deals with the composition of each unit of the item, not the overall amount of recycled paper (5).

In 1992, the U.S. Congress submitted a report on an amendment to the Solid Waste Disposal Act that dealt with the issue of recycling paper and paper products. By December 31, 1995, manufacturers of paper had to improve their recovery rate to at least 40 percent. By 2000, the rate will increase to a higher level. In addition, a report will be written highlighting the economic, social, and environmental pros and cons of such compliance. If for any reason these standards are not met by U.S. paper producers, further regulations will be implemented by December 31, 1998, that will impose measures designed to encourage producers to reach the rate requirement. These measures include such things as economic incentives and credit as well as minimum content standards. If there are further violations after the deadline, an offending company must label its product to state it is in violation of United States standards (6).

For newspaper producers, the requirements also are getting tighter. Effective the first of January, 1995, each year at least 35 percent of the total amount of newsprint used in publishing a newspaper with circulation over 200,000 must be of recycled content. By 2002, this minimum will increase to 50 percent. If it is discovered that any owner is not complying with this requirement, the owner must pay a penalty equal to the amount of the number of tons of newsprint in non-compliance during the year multiplied by $25. Further, the law requires that the following year, the newspaper must print each day that the paper does not meet the United States government s recycling standards (7).

However, the newspaper industry reported that by 1993, two years ahead of the deadline, it met the 40 percent recycled content criteria. In addition, it has set its own goal of recycling 50 percent by the year 2000, also two years prior to the deadline. The last three months of 1993 saw a 40 percent recovery rate, and the rate for the entire year was 39 percent. This increase is attributed primarily to higher domestic capacity to produce recycled paper (8). It is expected that there will be a 52 percent increase in the coming years in the rate of newspaper recovery.

With these stiff requirements, U.S. paper manufacturers and producers have great incentive to follow the laws regulating recycled content. There is, however, a significant trade problem in terms of trading partners lack of parallel requirements. Canada is the 5th-largest producer of printing and writing paper (9), and the single largest importer, by far, of U.S. exported waste-paper, at over 2 million tons, which represents a 94 percent increase between 1994 and 1995. The total for U.S. exports, worldwide, is 9 million tons. In addition, in terms of consumption of newsprint, Canada imported 7,005,285 tons, while the world total was 7,082,891 tons (10).

Canada is the world s largest newsprint producer, with 31 percent of the market and the second largest pulp producer, with 16 percent of world production. (11). The U.S. is the largest consumer of Canadian forest products, purchasing 66 percent of Canada s exports. Further, Canada exports 80 percent of its newsprint production to the United States (12). However, in Canada the recycled paper requirements are not as stringent as they are in the United States. Currently, Canada has one of the lowest paper recovery rates and is taking slow steps to improve this. Before 1990, only one plant in Canada produced newsprint with recycled fibers. As of 1993, there were 20 such plants (13). In the United States, more than 400 of the country s 550 paper mills are using recycled fibers in the manufacture of new paper products. In addition, over 200 of these rely on recovered paper exclusively as a raw material for papermaking (14). Part of the problem is the close trading relationship that the two countries share. Goods and services traded between the United States and Canada was about $270 billion in 1994 and was estimated to be close to $300 billion in 1995. Further, 84 percent of Canada s exports were bought by the United States (15).

Industry insiders in Canada say that eventually, almost 40 percent of all Canadian newsprint production will contain recycled fibers, whereas only 3 percent did so in 1988. At the current rate, though, the 40 percent rate could take years to reach. Even then, however, the average recycled fiber content of newsprint will be only 12 percent (16), which is a far cry from the U.S. requirement of at least 40 percent, soon increasing to 50 percent. One of the problems with Canada taking large steps to increase their recovery rate is that there are many small, independent dealers and manufacturers. While it is cheaper overall to recycle material than to dispose of it (17), the initial costs of switching production are immense. In 1993, the paper industry in Canada expected to spend about $2.6 billion on recycling equipment and rebuilding of infrastructure (18). However, the long term economic factors favor recycling. One company, after an initial investment of $76 million for start-up costs, has estimated their annual savings due to recycling to be $20 million (19). Therefore, it will take over three years for this company to realize true economic profits. However, numbers such as these do not take into account the overall savings that will come within an even longer period of time. In 10 years, or 20 years, the savings from having changed production capabilities to be able to recycle may be enormous, not to mention the impact on resource preservation that will come with such an environmentally sound move.

While these are improvements that Canada would most likely have undertaken in due time, there is now substantial pressure on the industry to make the changes at a quicker pace. In order to remain competitive on the world market, Canada has to improve its recovery rate at a rate that is not of its own determination. The signing of the North American Free Trade Agreement was intended to open up trade among the United States, Canada, and Mexico. Canada argues, however, that these regulations on recycling are really non-tariff barriers, so that the United States can retain its position as the lead exporter of paper. The U.S. supplies 50 percent of the world s recovered paper (20). Further, regulations such as the one passed by the United States with a minimum recycled content standard may set back Canadian waste management objectives. Now, Canada exports over 70 percent of its paper. In order to comply with the United States regulations on paper content, Canada would have to increase imports of paper from other countries, most probably the United States, to keep up with the demand for old papers. It is estimated that paper producers in Canada will have to import more than 3 million tons of paper from the United States (21). However, under NAFTA, it is legal for a member country to prohibit entry of goods that do not meet its standards. Parties to the agreement may enact tougher standards (22).

One problem is the urgency in dealing with potential negative environmental effects. As with any issue, there are reasons for and against increasing recycling efforts. The overarching aim for the many environmentalists who favor increased recycling is to ease the pressure on the overflowing landfills. In the United States, waste-paper is 35-40 percent of the total waste volume, while in Canada it is only 7 percent (23). Therefore, the control of landfills laden with waste are a far greater priority for the United States at this time than for Canada. The impact of the United States recycling laws on Canada will probably save no more than 2 percent of Canada s landfill space (24). While it is certainly true that any amount of space that can be saved is beneficial, producers are going to question whether the small amount is really enough to offset the costs of restructuring their plants to make them able to recycle.

Increased landfill space has its own negative impacts, which serve to further make the argument for recycling. As the area around landfills is increasingly taken up by the waste, many species of plants and animals will lose habitats. Harm may result as the surrounding areas are overtaken. Area residents may even be displaced, or see the value of their property decline, as landfills expand.

There are drawbacks to recycling as well. The logging industry will lose some jobs and those who work in the waste disposal industry will find a sizable portion of their work is no longer needed. Most of all, there is the possibility of an increase in waste to the waste-stream as the process of recycling is carried out. The de-inking procedure creates other waste material.

Canada is left with little choice, however, since the United States sustains Canada s s export market. In the short term, Canada s paper industry will suffer setbacks, as it is forced to import material from their largest export market and put up substantial sums of money with no quick benefits. In the long term, however, the investment should prove worthwhile as the costs decrease for disposing of waste and the production costs of paper fall.

3. Related Cases

DANISH case
ECPACK case
EULABEL case
GERMAUTO case
GERMPACK case
NAFTA case
ONTARIO case

Keyword ClU.S.ters

(1) : Trade Product =PAPER

(2) : Bio-geography =TEMPERATE

(3) : Environmental Problem = Lack of Landfill space, depletion of natural resources, increased liquid and solid waste

4. Draft Author:

II. Legal Clusters

5. Discourse and Status:

At this point, the United States has passed laws mandating that 40 percent of paper and paper products must be recovered. This amount will increase by the year 2000. However, while Canada is attempting to reform its system of recycling and improve newspaper recovery rates, it still has quite a way to go.

6. Forum and Scope:

Technically, it is possible that this can be part of NAFTA, and therefore, a multi-lateral concern, at its heart the conflict is between the United States and Canada. NAFTA, since it is an agreement among three parties, the United States, Canada, and Mexico, automatically establishes free trade among all three, not just the two who negotiated a particular agreement. Therefore, the U.S. changes in the standards for recycling, while most directly affecting Canada due to the large volume of import/export business the countries share, will also significantly concern Mexico. Canada will most likely have to increase their export prices in order to be able to afford the increase in imports that will be necessary to keep up with demand. Mexico, as a large importer of waste paper and paper products, from both countries, will be greatly affected. On the part of the U.S., the issue is in the hands of the federal government. Alternately, in Canada, the problem of parallel recycled fiber content standards is being handled more by the paper industry.

7. Decision Breadth:

The issue primarily affects the United States and Canada. However, while Canada is the largest importer and supplier of United States paper products, Mexico is the second-largest. Therefore, it is possible that this issue will grow into a full-fledged NAFTA debate. By passing such stringent recycling laws, the United States has effectively created non-tariff barriers to trade.

8. Legal Standing:

At this time, the United States is the only one of the two parties involved who has passed a law that specifies the amount of recovered waste paper to be used in manufacturing newsprint and other paper products. In addition, several states have passed laws stipulating a minimum recycled fiber content in newsprint, and many other states have decided to follow a rule of voluntary compliance, though they did not pass laws. (Paper Recycling in Canada: A New Reality, 11/93, p.8)

III. Geographic Clusters

9. Geographic Locations

a. Geographic Domain: North America [NAMER]

b. Geographic Site: northern North America

c. Geographic Impact: United States

The issue at this point concerns only the United States and Canada. However, if there is environmental degradation the potential exists for a far greater impact. The lack of landfill space as well as the potential for increased industrial waste could have an adverse effect on land and streams in both of these countries. This may jeopardize trade in other products, which may in turn affect other trading parties, as is the case with Mexico. NAFTA linked the three North American countries and thereby made all treaties tri- lateral, even if they are negotiated between only two of the parties. Therefore, residual effects may be felt by the third partner.

10. Sub-National Factors:

There is a national law in the United States about the percent of recycled fiber content mandatory for newsprint manufacturing. As with any issue, there are bound to be industry interests that are potentially different from those seeking long-term protection of the environment.

11. Type of Habitat:

Though both the United States and Canada have regions with extremely different temperatures, overall the countries are temperate. There are distinct and differing seasons, where clear changes in the weather take place. In Northern Canada, however, it is likely that the temperatures will be substantially colder.

IV. Trade Clusters

12. Type of Measure:

At this point, the United States government set certain regulations that must be met in order to produce newsprint in the United States. Therefore, for Canada to maintain its current level of export to the U.S., it will be necessary to meet United States regulations for recycled paper content.

13. Direct v. Indirect Impacts:

The case has an indirect impact on trade because it first seeks to solve an environmental problem. However, the technical classification of this issue is an indirect impact, the effects of compromised trade with Canada on paper and pulp would be felt immediately. Not only is Canada the largest importer of U.S. waste-paper, making up 58 percent of U.S. shipments in this product (Industry and Trade Summary, p.8-9), but the U.S. is Canada s largest importer of newsprint. Therefore, tensions in trade would be immense. In addition, it is likely that such tension would give rise to increased problems in continuing a suitable trade relationship in other product areas.

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: YES, Paper

b. Indirectly Related to Product: NO

c. Not Related to Product: NO

d. Related to Process: YES, Deforestation

The impact of recycling measures will have a direct impact on the environment. The benefits of recycling are numerous, including preserving the forests and halting the problems of overflowing landfills. However, there are also drawbacks to recycling, such as the problems of increased pollution in the waste-stream.

15. Trade Product Identification:

Products include newspapers, writing paper, bags, paperboard, and various other paper products.

16. Economic Data

There are several industries involved in this case. The recycling industry requires a large amount of personnel for the collection and sorting of materials in order to make the process as clean as possible. Further, once the material is sorted for recycling, there are several steps before the action is complete. In terms of newspaper, there also is a de-inking process. The paper plants also have a large number of employees, as does the timber industry on the other side of the issue. Logging is a labor-intensive operation.

Furthermore, the tensions that could arise from this issue may have ramifications for other trade situations as well. A great deal of money crosses the border between the United States and Canada, and the paper industry is very big business. The way things are handled in this case will likely affect the trade relationship for a long time.

17. Impact of Trade Restriction:

The ramifications for United States firms not following the new regulations are harsh. However, it is getting easier to meet these standards. More and more production facilities are equipped for maximum recycling. Therefore, initially, the trade effects will be quite serious. for Canada because the United States system will force the Canadian producers to increase recycling capabilities in order to maintain adequate levels of trade. In the beginning, Canada s industry will most likely be unable to meet its production costs because of low exports. Nevertheless, in the not too distant future the paper industry in Canada should be roughly on par with the United States in terms of ability to maintain a particular level of recycled paper content

18. Industry Sector:

This situation affects the timber industry, as well as manufacturing and services. In Canada, the publisher of a daily newspaper stated that his price for paper each day has increased 82 percent in the past 18 months( Maclean's, Vol. 108, no.20, p.32).

19. Exporters and Importers:

V. Environment Clusters

20. Environmental Problem Type:

Failing to use recycled paper fibers in the manufacture of paper and paper products means that waste paper has to be put somewhere. At the current rate, the landfills are not able to hold much more waste. If landfills are expanded, it reduces space of people and animals. Industrial waste from the production facilities must be disposed of, raising the potential for damage to waterways.

21. Name, Type, and Diversity of Species

Name: MANY

Type: MANY

Diversity: NA

There are many plants and animals that may be affected by the problems in the paper industry. If landfills are expanded due to noncompliance with regulations, some plants will be destroyed and animals moved. Industrial waste may deteriorate habitat. Drinking water may be affected as well.

22. Resource Impact and Effect:

As discussed above, the impact of increased pollution to both land and water has the potential to be quite serious. If such things as drinking water are in peril, people will be less likely to migrate to the areas in question. This will depreciate land value and may serve to hurt the overall economy if the towns. If there is not enough employment, because of a lack of fishing, hunting, or logging, the economy will be in further jeopardy.

23. Urgency of Problem:

This is not something that will only begin to be felt in coming generations. If recycling measures are stopped, landfills will be at capacity sooner. Yet, if the pace of recycling is sped up, there will be a rapid spill of solid waste into the land and water since the recycling and de-inking process have potential to increase waste. There is quite a dilemma for those Canadian producers who must change their systems so that they comply with American standards. At this point, it is difficult to see if the benefits to updating and recycling will outweigh the costs.

24. Substitutes:

VI. Other Factors