Corporate Field Study Post I: Driving New Business Models for Textile Secondary Raw Materials in the EU Market

It’s a simple business idea: take used textile material and upcycle it. Making that idea into a profitable business, however, is another matter. We know that the hurdles faced by textile and apparel businesses include sourcing material and scaling production in an efficient, sustainable way. Yet, when a business decides that it will work with used/reclaimed textiles (“secondary raw materials”) instead of virgin/new textiles (“primary raw materials”), it becomes a Herculean task.

For instance, if you have a brilliant textile product idea that requires sourcing and production using primary raw materials, you would know where to turn next. There is a supply network already in existence for you. Even if it has recently been devastated by a pandemic, it is still in place, albeit, delayed, reduced, or temporarily inhibited. There will also be a production agent available to help you source production for the needs of your brilliant idea. Yet, in the case of a textile product idea that requires sourcing and production using secondary raw materials, there is often nowhere to turn. It is most likely that you will have to build your sourcing and production network from zero, as presently, there are few facilitating supply networks in place for such an idea. For small- to mid-size businesses, of which the EU textile sector is predominately composed, the obstacles involved in doing this are often insurmountable.

Presently, the European Commission is attempting to level the playing field for textile secondary raw materials in this regard. In March 2020, it adopted a new Circular Economy Action Plan as part of its European Green Deal, which proposes both legislative and non-legislative measures for the textile sector, among others. For instance, some of the measures are intended to ensure the future uptake of textile secondary raw materials and to improve the future business and regulatory environment for such materials and production processes. This will include guidance on the required separate collection of textile waste by 2025 for all Member States, as well as improving the sorting, reuse, and recycling of textiles through proposed extended producer responsibility regulation. In addition, an EU Strategy for Textiles is due in 2021, with several groups weighing in with their proposed solutions, like the European Centre for Development Policy Management (ECDPM) and a broad coalition of civil society organizations across Europe.

Will these efforts fully address the legal and practical problems faced by small- to mid-size businesses in the EU textile and apparel sector that source textile secondary raw materials and use them in production? Based on the challenges presented in this corporate field study, the answer is probably not in the near future. This is because prevailing domestic and international tax and trade systems have no straightforward mechanisms now or on the horizon that contemplate the ease of textile secondary raw material sourcing or use in production. For example, there are no clearly designated Harmonised System (HS) codes to accurately classify shipments of textile secondary raw materials to production countries solely for production purposes. Moreover, when such shipments reach foreign special economic zones for production, the secondary raw materials are often refused the standard exclusions from import-export customs duties, tariffs, and fees. Despite the entire shipped volume’s export immediately after the production value-adds, i.e., the shipped materials do not enter the production country’s local market, the shipment is still taxed as if it did. This creates a massive competitive disadvantage. As another example, domestic VAT legislation often considers store discounts offered as part of used textile product take-back schemes as “voucher purchases”, which require VAT payment on the discount offered. Yet, this results in taxes paid on an amount that does not generate an income for the business. In other words, in practice, it means paying tax on the used textile products collected, which is a tax disincentive. 

Law and finance matters, such as the duties, tariffs, fees, and VAT discussed above, are generally not considered thrilling topics, but it is imperative that these problems are remedied for the future success of small- to mid-size businesses whose circular production models include textile secondary raw materials. These issues make a massive difference as to whether such businesses will sink or swim financially. With continued perseverance on the part of the EU Commission and policy advocacy groups, perhaps it will become easier to do business with textile secondary raw materials in the long term, which will be good business for all of us.