A mechanical claw collects trash in the bunker hall at a waste energy plant. (Photographer: Matthew Lloyd/Bloomberg)

China’s Costly Ban on Foreign Trash

(Bloomberg Opinion) -- Giant bales of recycled paper and plastic are piling up across the U.S. Six months ago, most of them would’ve been bound for China, the world's leading importer of recyclables. But earlier this year, China started restricting and even banning some of those imports on environmental grounds. It's a crowd-pleasing policy for the Chinese government, but the real beneficiaries are up-and-coming Southeast Asian economies keen to relocate China's "workshop to the world" to their own industrial parks.

Over the past four decades, several factors helped China transform itself into a global manufacturing powerhouse, including low-wage labor, good infrastructure and far-sighted policy. In addition to these well-known advantages, however, is a crucial one that's often overlooked: recycling.

During the 1980s and 90s, Chinese manufacturers had few options for raw materials. State-owned natural-resource monopolies supplied state-owned manufacturers, not small businesses. Opening a mine, oil well or logging operation was prohibitively expensive for a private company. So in the mid-1980s, entrepreneurs began importing the rich world's unwanted recycling and selling it at a discount.

That proved to be a major benefit to manufacturers, and a big business in its own right. At its peak, imported recycled material was the feed stock for more than half of China's paper production, while imported scrap may have accounted for a third of its copper production. The recycling industry employed 1.5 million people, and indirectly supported another 10 million jobs. By 2011, recycling businesses devoted to non-ferrous metals were churning out products worth more than $64 billion a year.

This wasn't just good for China's economy; it was also good for the environment. Between 2002 and 2011, China's recycled aluminum sector saved 350 billion kilowatt hours of electricity and prevented the generation of 522 million metric tons of carbon dioxide. For a country desperately trying to reduce air pollution and greenhouse-gas emissions, that was a huge benefit. There were still dirty and polluted recyclers, of course. But compared to the alternatives -- mines, petrochemical refineries, destructive logging -- recycling remained the most responsible option.

Now that virtuous cycle is breaking down. In addition to the new restrictions, China's economy is changing markedly. In 2012, the country's labor pool shrank for the first time, thanks to decades of declining fertility. Costs rose, especially for labor-intensive businesses, and many manufacturing hubs went into decline. That same year, the volume of U.S. recycling exports to China fell for the first time since 1996 (barring a one-year dip after the financial crisis).

In 2013, more foreign direct investment flowed into Southeast Asia than into China, thanks partly to Chinese manufacturers moving to lower-wage countries. As manufacturers moved, recyclers followed. Although this process started long before China's recent restrictions, it has only accelerated since. In the first two months of 2017, China imported 1.23 million metric tons of recycled plastics; during the same period in 2018, it imported just 10,000.

As China has started imposing more stringent restrictions on recycled imports, prices have risen significantly -- by more than 10 percent for some products -- and so has the cost of manufacturing. Outside China, though, prices have fallen as exporters flooded markets with recyclables that were suddenly unwelcome on the mainland.

For Southeast Asia, that's been a boon. Its emerging economies now have even lower-cost raw materials to feed their manufacturers, whether homegrown or relocated from China. Over the past year, Vietnam's imports of U.S.-generated recycled PET, the plastic used in water bottles, has risen by 137 percent, while Malaysia's have risen by 63 percent. China, meanwhile, is turning to Houston's petrochemical industry (among others) to meet its plastic demand, increasing costs and greenhouse-gas emissions along the way.

Far from becoming the world's new "dumping ground," in other words, Southeast Asia is capitalizing on the virtuous cycle that China seems to be abandoning. In all likelihood, it can look forward to a more sustainable, affluent future built on the junk that other countries don't want.

©2018 Bloomberg L.P.