The US is Quietly Outflanking China in the Electric Vehicle Battery Supply Chain

Last week’s White House meeting between Joe Biden and President Ferdinand Marcos Jr. of the Philippines has been analysed extensively for its impact on the balance of US and Chinese military force in the South China Sea. Less noticed is the fact that Biden and Marcos also reached an agreement on US aid to develop the Philippines’ production and processing of copper and nickel – minerals that are critical to the construction of batteries for electric vehicles.

This US-Filipino partnership is one link in a new supply chain that US diplomacy is forging for critical minerals important for EV batteries. This includes efforts to ensure supplies of copper, cobalt and nickel are routed to the United States, along with efforts to undermine the PRC’s domination of processing for these minerals, which is critical to China’s current level of control over the supply chain.

Developments in US Critical Mineral Diplomacy

The typical EV battery contains around 16% nickel, 11% copper, 4.3% cobalt, and 28% graphite, among other materials such as lithium and manganese. Over the previous 12 months, the US government has taken proactive steps to forge new agreements with states in Asia and Africa to improve its access to several of these key EV battery materials.

·???????In early May President Biden and Filipino President Marcos agreed on further US aid to the Philippines to increase production of nickel and copper and to develop onshore nickel processing. The Philippines is the world’s largest exporter of nickel, with 31% of global exports.

·???????Indonesia, which holds the world’s largest nickel reserves, ?is also pitching a deal to the US government that will allow it to export nickel to the United States.

·???????In late March, US and Japanese officials reached a Critical Minerals Agreement (CMA) which allows the two states to trade materials such as lithium, cobalt, manganese, nickel and graphite without export duties.

·???????In March, US officials announced a deal with Tanzania which supports increased nickel processing in the country through a partnership with local mining company LifeZone and TechMet, a US firm which the Development Finance Corporation has a significant stake in. Tanzania also has other mineral resources which could support EV battery production, such as the 5th largest reserves of graphite in the world. The world’s largest current producer of graphite is China.

·???????In November 2022 the US government signed a Memorandum of Understanding with the governments of the DRC and Zambia to support the growth of processing plants for EV battery minerals in both countries. The DRC has 70% of global cobalt reserves and is developing the world’s second largest copper mine. Zambia currently produces 70% of Africa’s copper output. While the MOU does not automatically commit US funds for mineral production or processing in these states, it is a powerful signal of future cooperation.

·???????In June 2022 the US, with key allies in Western Europe and Asia, formed the Minerals Security Partnership to pool supply chains. Mineral-rich states such as the DRC, Tanzania and Zambia attended an MSP meeting in September 2022.

Significance and motivations

These agreements will aid the US to replace 50% of petrol-driven vehicles with EVs by 2030 to meet climate change targets. They will also allow the US to position itself as a leader in a growing market sector, providing it with the resources to compete with China, while reducing China’s power over the supply chain for EV materials.

The Inflation Reduction Act of August 2022 incentivises foreign countries to connect with the US supply chains for these minerals. Under the IRA’s provisions, US consumers can gain a tax credit of up to $7500 per electric vehicle if materials and/or parts are imported from a country which the US has a free trade agreement with, and the vehicle is assembled in the United States. While US policymakers may not want to sign full FTAs with producers, the CMA with Japan provides a model which could be applied to other producers. In fact, CMAs are explicitly included in the IRA provisions. Thus, the IRA acts as a magnet which attracts exports of critical minerals to the United States, creating a double dynamic where US diplomats push for agreements on critical minerals and countries such as Indonesia also take the initiative to secure US financing to develop their own minerals sectors.

US critical minerals diplomacy also threatens China’s current strong position in EV materials supply chains. Chinese companies are involved in mining operations in Australia, Canada, and the DRC. However, China’s current domination of the supply chain derives primarily from its role in processing critical minerals: especially of cobalt, nickel, manganese and graphite. The latest US moves threaten this position by supporting onshore processing in producer countries such as the Philippines and Tanzania, preventing China’s own processing capacity from “hoovering up” these supplies.

Although it may take a decade for this new supply chain to emerge, US officials aim to reduce the United States’ vulnerability to Chinese action in the EV supply chain, pursuing the Biden Administration’s “selective decoupling” in key economic areas.

Risks

While US diplomacy and aid can smooth the way for agreements to boost critical mineral production and processing overseas, private investment from US companies will be needed to further develop a new supply chain for EV battery materials. Companies will decide to invest based on profitability and political risk.

Resource Nationalism

Resource nationalism has been growing both globally and in Africa, leading to greater regulation and taxation for mining sectors. However, the intensity and likelihood of this risk varies between producer countries. The risk is highest in the DRC, where mining accounts for 55% of government revenues and the administration of President Tshisekedi sees the mining sector as a source of revenue to fund the expansion of public services.

However, this risk is lower in other states. President Hichilema of Zambia has explicitly disclaimed an approach based on resource nationalism and President Hassan of Tanzania has taken a more economically liberal approach than her predecessor. The risk is low in the Philippines. Indonesia has imposed export bans on critical minerals in the past to promote onshoring of processing but these could likely be dropped or, at worst, replaced with exit taxes, in return for a CMA agreement with the USA.

Labor Rights and Human Rights

Labor rights and human rights will be a concern for companies which operate within an ESG framework and are considering investment in the DRC and Zambia, due to previous reports of child, trafficked and forced labor in their mining sectors. Although this appears to be limited to smaller, local mining companies, resources from these companies enter the supply chain of larger multinationals. Armed militias operating in the DRC are also using resources from small-scale mining to purchase weapons.

These risks are lower in other states. None has a domestic conflict which is linked to mineral extraction. In Zambia, it is Chinese companies, not local or US companies, which have a poor reputation for compliance with labor laws. Indonesia’s labor standards are comparable to those of Mexico, which is a major exporter to the United States.

Two factors may mitigate the impact of labor rights issues on corporate decisions. Firstly, companies may de-emphasise these concerns to gain profitable contracts. Renewed investment in the DRC in 2022, after previous reports of illegal labor practices, was due to expected high returns from the EV battery boom. Secondly, the US government will likely build provisions on labor issues into CMAs or pursue other policies to mitigate these issues in key producer countries. For example, recent US agreements with the Philippines have included provisions to monitor and improve labor standards. Similar agreements could be made with states such as the DRC and Zambia. Even if these do not solve the issue, they may allay investors’ concerns over reputational risk.

?Governance

Governance will also be an issue. Zambia and Tanzania have recently returned to systems based on liberal democracy after democratic backsliding under previous administrations, which is a good indicator of increased political stability. The DRC has also had an elected President since 2019 but experiences high levels of corruption, which are unlikely to change in the near future.

Great Power Competition

Above all, potential investors will need to consider the impact of the Great Power Competition between the US and China, and the efforts of smaller states to navigate this competition. Producer states such as the DRC, Tanzania, and Indonesia have high levels of Chinese investment and they will not simply cancel the contracts of Chinese companies and replace them with US or Western businesses. Tanzania’s President signed further trade and investment agreements with the PRC in ?Beijing in November 2022, while Indonesian businessmen argue that the country needs investment from multiple sources: meaning that it should continue to seek and host Chinese investments. Although the US has reportedly successfully pressured DRC President Tshisekedi to audit contracts signed with Chinese mining companies, they have not yet been cancelled.

However, there is an opportunity for US companies to move further into this space. While Tshisekedi has not cancelled Chinese mining contracts, he has used the audit process to demand more investment from Chinese companies such as Sicomines in the DRC’s infrastructure, indicating a belief that original contracts were too favourable for China. Bringing in contracts for US companies – ones which improve domestic mineral processing capabilities – would improve the leverage of producer governments against Chinese companies. In addition, the tax credit provisions of the IRA, which state that battery components extracted or processed by foreign “entities of concern”, such as Chinese companies, provide a powerful incentive for local leaders to cooperate in the creation of facilities which do not contain Chinese investment or involvement, to benefit from the US market.

The United States could step into the space these factors create, seeking to sweeten the deal for the leaders of producer states by catalysing Western investments in local infrastructure through the Partnership for Global Infrastructure and Investment (PGII), while allaying the reservations of companies by offering government-backed political risk insurance through the Development Finance Corporation (DFC) to cover losses linked to resource nationalism and conflict.

The US has been active over the previous 12 months in creating an alternative supply chain for minerals critical to the production of EV batteries, driven by a mix of environmental and economic factors, and the US-China rivalry. The United States cannot fully remove China from this supply chain, but it can reroute more critical minerals toward its domestic EV industry through economic incentives and smart diplomacy which exploits the aspirations of producer country leaders to balance Chinese power and source further investment.

US companies who enter this market can expect strong support from the US state in terms of foreign aid which seeks to win deals or create the conditions for private investment, assistance from the DFC, and high-level diplomatic support.