Image Source: California Chamber of Commerce
The Biden administration’s 2022 National Security Strategy (NSS) says China is “America’s most consequential geopolitical challenge” and “the only competitor with both the intent to reshape the international order and, increasingly, the economic, diplomatic, military, and technological power to do it.” Two key parts of the U.S. strategy towards China outlined in the NSS are: investing in domestic American competitiveness, innovation, resilience, and democracy; and working closely with allies and partners. The Inflation Reduction Act (IRA) of 2022 aims to address American competitiveness. However, an unintended consequence of the IRA has been the alienation of many U.S. allies and partners. The European Union (EU), Japan, South Korea, India, and the United Kingdom (UK) have all spoken out against the IRA, claiming it is protectionist, violates World Trade Organization (WTO) rules, and will harm their countries’ domestic industries and competitiveness. A requirement of the IRA that is receiving particularly harsh criticism is the requirement that 40% of the critical minerals in an electric vehicle (EV) battery must come from the United States or a U.S. free trade partner for the EV to receive a subsidy. Neither the EU, UK, Japan, nor India has a free trade agreement (FTA) with the United States. At a time when the United States is pushing allies to reduce their reliance on China, especially for critical minerals, such conflict is counterproductive. The critical minerals agreement signed with Japan in March 2023 and equivalent agreements under negotiations with the EU and the UK are a step in the right direction. These critical minerals agreements will help mend fences with key allies while driving cooperation on critical minerals supply chains that are crucial to modern technology and have become a significant area of competition between China and the United States.
Angry Allies and Competition with China
The IRA contains provisions regarding federal spending to reduce carbon emissions, lower healthcare costs, fund the Internal Revenue Service, and improve taxpayer compliance. The IRA aims to increase domestic manufacturing, incentivize procuring critical supplies domestically or from countries the United States has an FTA with, and spur research and development and commercialization of cutting-edge technologies. While the IRA has been praised domestically and internationally as an important piece of climate legislation, countries have taken issue with certain requirements that they claim discriminate against their companies. Requirements that final-stage EV assembly must be in North America, at least 40% of the critical minerals in an EV battery must come from the United States or a country the United States has an FTA with, and at least 50% of the battery must have North American content have drawn much of the scorn from American allies. The European Commission warns that the IRA risks starting a global subsidy race, with countries instituting higher and higher subsidies to keep green technology manufacturing in their country. The EU and South Korea also claim the IRA violates WTO non-discrimination rules giving preference to products produced in the United States. The EU and India are already working on legislative responses to provide similar support for their industries. Additionally, EU policymakers are considering retaliatory tariffs.
Disputes with allies and partners are the last thing the United States needs at a time when it is trying to convince these same countries that they need to reduce their economic reliance on China. Europe has been reluctant to decrease its economic ties to China. However, there are signs Europe could be changing its position. For example, Germany is reviewing its use of equipment from China’s Huawei and ZTE in Germany’s 5G networks, and the UK is giving telecommunications companies until December 2023 to remove Huawei equipment from their networks. The United States should be leveraging Europe’s shifting policies to further America’s friend-shoring agenda, not starting subsidy or trade wars with Europe. The same goes for Japan, which recently joined the United States and the Netherlands in instituting crucial export controls on certain semiconductor manufacturing equipment, targeting China. Japan and the Netherlands are the only countries besides the United States who produce this equipment. If Japan and the Netherlands had not joined the United States in instituting the export controls, U.S. companies would have been harmed without having much of an impact on China’s semiconductor industry.
Steps in the Right Direction
The United States is taking steps to right its wrongs. In March 2023, the United States signed a critical minerals agreement with Japan that bans export duties on critical minerals and calls for cooperation in addressing “non-market policies and practices of other countries affecting trade in critical minerals,” sharing best practices on reviewing investments in the critical minerals sector by foreign entities, reducing the environmental impact of critical mineral extraction, and promoting labor rights for workers in the critical minerals supply chains. In addition to enhancing cooperation on critical mineral supply chains, the critical minerals agreement is seen as a workaround to the requirement that at least 40% of the critical minerals in an EV battery come from the United States or a U.S. free trade partner. The agreement is not an FTA in the typical sense where tariffs are reduced. However, U.S. law does not define “free trade agreement.” The latest rules guidance from the U.S. Treasury Department regarding the IRA EV tax credits says the Treasury will determine which countries the United States has an FTA with, and that its interpretation of FTAs could include critical minerals agreements. The United States is in the process of negotiating similar agreements with the EU and the UK.
The value of these critical minerals agreements goes beyond being a mechanism to help make EVs produced in these countries eligible for EV tax credits under the IRA. Critical minerals have been identified as essential to modern technologies such as semiconductors, vehicles, and clean energy technologies, among others. China is a leading producer and refiner of many critical minerals. The United States and its allies are concerned about their dependency on China for critical minerals and are striving to build alternative supply chains. Critical minerals agreements like the one signed with Japan can help further this goal. Banning export duties on critical minerals makes it cheaper for critical minerals to move between Japan and the United States. Additionally, while China is not called out by name, the provision regarding the scrutiny of investments in the critical minerals sector by foreign entities will help Japan and the United States identify when Chinese companies try to purchase stakes in parts of the critical minerals supply chains in their respective countries. China has a history of investing in key parts of the critical minerals supply chains in other countries. For example, China does not have large reserves of cobalt, but Chinese enterprises have invested in cobalt mines and smelting projects in the Democratic Republic of the Congo, which is home to around half of the world’s cobalt reserves. By identifying when Chinese companies attempt to invest in parts of the critical minerals supply chain within their countries, the United States and Japan can use their respective statutory authorities to prevent such investment if they deem it a national security risk. Other provisions of the agreement, such as addressing non-market policies of other countries and promoting labor rights for workers, would also apply to China, which has been accused of non-market policies and forced labor in mining. Signing critical minerals agreements with the EU and UK would expand the number of U.S. allies and partners working together to rework the critical minerals supply chain.
Congress Not on Board
There are risks involving how the Biden administration has gone about negotiating critical minerals agreements. The Biden administration’s decision to negotiate the agreements as executive agreements, which do not require congressional approval, has drawn backlash from Congressmembers of both parties. Democratic Senator Ron Wyden decried the administration’s “go-it-alone trade policy” while Senator Joe Manchin has threatened to go to court over the Treasury’s interpretation of the EV tax credit. Meanwhile, Republican Representative Adrian Smith called the critical minerals agreement with Japan “unacceptable and unconstitutional.” Congressional pushback in the United States has caused concerns among EU members regarding the future of the proposed critical minerals agreement between the United States and the EU. Additionally, the EU has its concerns over the final form of the agreement (i.e., a free trade agreement versus a non-binding instrument) and the appropriate approval process within the EU (i.e., approval from the European Commission versus approval from each member state). These challenges are holding up the U.S.-EU critical minerals agreement negotiations.
Constitutional questions cannot be ignored. While partisanship may make it difficult to pass the critical minerals agreements, the Biden administration should seek congressional approval. Congressional approval would prevent a legal confrontation between the executive and legislative branches. Congressional approval would also make the agreement harder to undo by future administrations, as legislation requires another piece of legislation to undo while an executive agreement can be withdrawn by the president.
An Opportunity for Expansion
Whatever legal form they take, critical minerals agreements with Japan, the EU, and the UK are important. The United States cannot win the competition with China on its own. To be successful, the United States must leverage its allies and partners. These critical minerals agreements can play a small, but important, part by both pacifying some concerns expressed by U.S. allies and furthering alternative supply chains for critical minerals. With this in mind, the United States would be wise to expand negotiations to include other countries. India is another country without an FTA with the United States. While India does not currently have large-scale mining for critical minerals relevant to battery production, it does have reserves of lithium, nickel, cobalt, manganese, and graphite, all of which are important for EV batteries. Beyond critical minerals used to make EV batteries, India also has the fifth largest reserves of rare earth elements, a subset of critical minerals that are key to producing electronics and semiconductors, among other high-tech goods. The United States and its international partners stand to benefit significantly from a critical minerals agreement with India.
Competing with China
The competition between the United States and China may occur across the economic, diplomatic, military, and technological domains, but geoeconomics is the current driver of the competition. Critical minerals and clean energy are two areas where this competition is playing out. China dominates the critical minerals supply chains, the production of solar panels, and the production of components used in wind turbines. This dominance gives China leverage over resources that are required for high-tech goods and clean energy technology that is vital to reducing carbon emissions.
As the United States aims to create alternative supply chains that do not rely on China, partnerships with allies and partners will be vital. Critical minerals agreements with Japan, the EU, the UK, and India are a good starting point. Such agreements will build on critical minerals supply chain efforts already underway among the United States and its allies. In 2021, during a meeting of the Quad, a security dialogue between the United States, India, Japan, and Australia, Australia agreed to deeper cooperation with the United States, India, and Japan on the supply, manufacturing, and processing of rare earth elements. Additionally, in June 2022, the United States Department of Defense signed a contract with Australian rare-earth element processor Lynas Rare Earths to build a rare earths separation facility, and in February 2023, Japan’s Sumitomo Corporation and the United States’ MP Materials signed an agreement to collaborate on the supply of rare earth elements.
Critical minerals agreements do not solve all the concerns expressed by U.S. allies and partners. Nor will these agreements alone create the alternative supply chains the United States and its allies are striving to develop. However, such agreements can help mend relations with key allies and demonstrate that the United States understands their objections and is willing to work with them to resolve their concerns where possible. At the same time, these agreements can serve as a baseline for future cooperation on critical minerals and clean energy technology.