The U.S. Needs to Ditch Its America-First Approach to Critical Minerals
China’s coercive actions and domestic policies represent unacceptable economic and resilience risks to rare-earth and critical mineral supply chains. Diversified supply chains are now needed to mitigate the economic and national security risks associated with disruption.
Japan has led the way in responding to China’s dominance of the rare-earth market. Its investment in Australian company Lynas Rare Earths should provide confidence in an alternative, resilient supply chain. And its approach reveals the superiority of collaborative responses over economic nationalism.
Other nations, like the US, have been slower to recognize the benefits of a coordinated response, showing early signs of a preference for an America-first approach. However, in doing so, the US may deny itself and its allies the opportunity to achieve resilience through approaches that engage with such concepts as near-shoring and friend-shoring.
The landmark US Inflation Reduction Act, or IRA, is a case in point. The act is intended to catalyze investments in domestic manufacturing capacity; encourage procurement of critical supplies domestically or from free-trade partners; and jump-start research, development and commercialization of leading-edge technologies such as carbon capture and storage and clean hydrogen. It was passed by the US Congress and signed into law by President Joe Biden in August 2022.
Many of the IRA’s tax incentives are aimed at quickly scaling up domestic production and domestic procurement. For example, to unlock the full tax credit for an electric vehicle, a percentage of critical minerals in the vehicle’s battery must have been extracted or processed in the US or in country that is a US free-trade partner. The percentage will increase by 10 percentage points each year, from 40% in 2023 to 80% in 2026.
The IRA, even with its reference to free-trade partners, creates advantages for domestic US rare-earth and critical mineral supply and value chains that will impact Australian industry.
In its submission to the IRA, Australia encouraged the US to consider policy measures that acknowledged Australia’s role as a secure, reliable and trusted free-trade partner that can support achieving the IRA’s objectives.
The IRA could be a disincentive for North American companies to enter into mineral offtake or processing agreements with Australian companies or battery manufacturers. BHP CEO Mike Henry argues that the IRA ‘has improved quite markedly the attractiveness of the US as an investment destination’. He also notes that the act has ‘stimulated other countries into the race, and they’re now trying to compete in their own way’. The rapid growth of the US sector is also likely to intensify competition for labor, materials and capital.
In the face of great-power competition, geostrategic uncertainty, more regular global disruption and domestic narcissism, the US must avoid reflexively responding with economic nationalism. Recent reports have indicated that the US government is exploring the development of ‘narrowly focused trade pacts on critical minerals with Japan and the UK, in addition to talks with the European Union’.
Australia is investing heavily in growing its manufacturing capability and should be a partner of choice for the US industry to support diversified and resilient supply chains. Given Australia’s important role in the Indo-Pacific and its enormous potential to supply rare-earth elements and critical minerals, the US should be looking in our direction as a matter of priority.
John Coyne is head of ASPI’s Northern Australia Strategic Policy Centre and strategic policing and law enforcement program. This article is published courtesy of the Australian Strategic Policy Institute (ASPI).
