“When I think about climate change, I think jobs,” U.S. President Joe Biden has repeatedly said. His landmark Inflation Reduction Act (IRA) embodies this idea, tying together U.S. climate and industrial policies with a vast array of subsidies aimed at sparking a green manufacturing boom. Built into these subsidies are mechanisms to secure U.S. supply chains and to shore up domestic manufacturing, which has atrophied in recent decades, strategic priorities that Biden inherited from his predecessor, Donald Trump.
Although recent U.S. policymaking has exhibited a hyperfocus on supply chain security for semiconductors and other dual-use items, an area of equal – arguably greater – strategic significance is the supply of critical minerals, the building blocks of most advanced technologies, including those with military application.
Ever-present, but often unspoken, in Washington’s supply chain strategy is China. From the nickel used in fighter jet engines to the rare earth elements used in wind turbines, China’s dominance in the global supply of critical minerals presents a potential chokehold on U.S. industry. China accounts for 77 percent of the world’s refined cobalt, 65 percent of its chemical lithium, and 91 percent of its battery-grade graphite. All three minerals are essential for the production of lithium-ion batteries, a key component in the green transition.
China’s market dominance exists in part due to generous state subsidies. Analysis by the Center for Strategic and International Studies calculates a “conservative estimate” of $230 billion in electric vehicle (EV) subsidies for the period 2009-2023. Increasingly, green technologies are fundamental to Xi Jinping’s “high quality growth” strategy, which aims to spur high-productivity advanced manufacturing sectors amid a broader slump in the Chinese economy.
Critical minerals sit at the intersection of three policy objectives for the United States. First, policymakers must ensure national security. If China were to cut off supply of critical minerals, it could devastate the U.S. economy, with particular impacts for the manufacture of advanced technologies, including those with military application. This is why the U.S. is seeking to decouple and reshore supply chains. Second, policymakers are seeking to revive the U.S. manufacturing sector and catalyze job creation by embracing fast-growing green industries, in particular the EV sector. Third, policymakers are addressing the climate crisis by accelerating the rollout of green technologies.
Although these three policy objectives are not directly in competition with one another, their implementation can lead to contradictory, even dysfunctional, outcomes.
The IRA, alongside the Bipartisan Infrastructure Law and the CHIPS and Science Act, ostensibly aims to address these three policy objectives in one fell swoop. A fundamental challenge is that U.S. industry, and that of Western allies more broadly, has struggled to compete with the low prices of Chinese producers, and the price gap is only getting wider. In theory, a balanced diet of policies that would correct the market distortions of Chinese subsidies (and the resultant oversupply that has flooded international markets) would be the ideal solution to safeguard U.S. green technology growth, but this is difficult. To de-risk supply chains and build up capacity – whether this be domestic or “friendshored” – requires a step incompatible with a genuine commitment to a global green transition: the exclusion, at least to some degree, of cheap Chinese green technologies from U.S. markets.
China is equally weaponizing supply chains, and nowhere is this clearer than in the area of critical minerals. Beijing has proved willing to employ export controls in pursuit of geopolitical ends, most notably following a 2010 diplomatic incident with Japan over the contested Senkaku/Diaoyu Islands. Most recently in 2023, Chinese restrictions on gallium and germanium exports, as well as greater export controls on high-grade graphite, have rung alarm bells.
The Three Competing Policy Imperatives
The contradictions between the competing objectives of security, jobs and growth, and climate, and the resulting policy pathologies, play out in the detail of policy. The IRA’s headline green policy is the landmark $7,500 EV consumer tax credit (known as “30D”). To qualify, EVs must be manufactured in North America, and the batteries must be 60 percent produced in the United States or countries with which the U.S. has free trade agreements.
Security: The tip of the spear for U.S. security incentives in the IRA are the requirements relating to “foreign entities of concern” (FEOCs). FEOCs are those entities – usually companies – based in or otherwise controlled by “covered nations”: China, Russia, North Korea, and Iran. EVs with batteries or battery components manufactured by an FEOC are excluded from the 30D tax credit. From 2025, the requirements will expand to include critical minerals produced by an FEOC, effectively excluding China from any part of the EV supply chain. Separately, the Defense Production Act was invoked by both Trump and Biden to include rare earth elements and battery minerals, opening up a range of policy levers for increasing domestic production in the name of national security.
Jobs and growth: The 30D tax credit also includes a sourcing requirement that eligible EVs are manufactured in North America and that the batteries must be at least 60 percent produced in the U.S. or partner countries with which the U.S. has free trade agreements, ensuring U.S. manufacturers are likely to benefit at all stages of the supply chain. Somewhat confusingly, however, the investment tax credit (under Section 48C) and the production tax credit (under Section 45X) for renewables, batteries, and critical minerals do not include the same FEOC restrictions. If Chinese companies were to invest, this disconnect leaves open the scenario that batteries subsidized by Section 48C or 45X couldn’t be used in EVs seeking to qualify for the tax credit under Section 30D.
Green transition: Policymakers have also been forced to carve out exemptions to these requirements, lest they throttle mid- to down-stream production. Graphite, over 90 percent of which is produced in China, is excluded from the FEOC requirements of 30D in recognition of the limited domestic capacity. Indeed, U.S. domestic graphite production was non-existent until only February this year, when Syrah Resources commenced production at a facility in Louisiana. Likewise, tariffs on graphite and permanent magnets for EVs will not be implemented until 2026, indicating continued dependency on China.
Yet, in a nod to competition with China over its burgeoning EV industry, Chinese EVs will this year face a 100 percent tariff, with tariffs on solar cells and EV lithium-ion batteries rising to 50 percent and 25 percent, respectively, in an attempt to insulate U.S. industry from a “China Shock 2.0.”
These are just some examples of an increasingly complex regulatory web in which competing and overlapping policy tools are inadvertently hampering U.S. grand strategy. Such dysfunctionality is also doing harm to business where confidence is everything.
In the particular area of critical minerals, a balance must be struck in between the green transition and protectionist decoupling. Tariffs and exclusion from subsidies serve primarily to exclude China from supply chains, going beyond simply leveling the playing field. Although the Biden administration has carefully considered climate goals, we should be honest that protectionism and national security have remained priorities.
What’s in a Name?
The blurring of policy priorities is partly a definitional issue. The term “critical minerals” disguises the question: critical for what? Critical minerals required for sustaining armed conflict are overlapping but distinct from those required for the green transition. Generally defined by their economic significance and their risk of supply chain disruption, lists of critical minerals vary in length and composition across jurisdictions.
This broad definition can lead to somewhat inconsistent categorization. Take nickel and rare earth metals, both categorized as critical minerals. For the former, Indonesia is the leading producer; China produces 28 percent of global processed supply. For the latter, China produces 92 percent of global refined supply. The former is used primarily in lithium-ion batteries, as well as superalloys with military and aviation applications. The latter is used in wind turbines, lasers, electronics, and guidance systems. It is challenging to produce a coherent geopolitical strategy for a sector that encompasses such a range of characteristics.
If the effectiveness of Chinese export restrictions on critical minerals is likely to be limited, what else is driving U.S. policy? We have two suggestions. First, U.S. policymakers fear a conflict scenario with China in which the IRA and other policies have failed to build up sufficient domestic capacity, and U.S. military industrial capacity is left crippled by an embargo. Amid rising concerns over Xi Jinping’s intentions for Taiwan and bullish Chinese behavior in the contested waters of the South China Sea, a conflict scenario appears ever more real. However, as aforementioned, critical minerals for a conflict don’t necessarily reflect the minerals essential for the green transition.
Instead, perhaps this is an example of what Graham Allison called the “Thucydides Trap.” The term refers to the structural stresses at play when a hegemon is challenged by a rising power. A sense of insecurity felt by the ruling power pushes it to behave in ways that escalate tensions with the rising power. China’s dominance in critical minerals and green technology is a significant issue, but we should recognize that U.S. grand strategy is also about addressing the broader symbolism of industrial strength in today’s great power rivalry.
A Change of Guard?
A tight presidential race in the United States makes it difficult to draw long-term predictions over policy direction in the area of critical minerals. A proper understanding of the three objectives of the IRA and other legislation provides some insight into the possible fate of these policies should Vice President Kamala Harris lose.
Trump has repeatedly called climate change a “hoax,” and the green transition is not an area he would be likely to prioritize. Nevertheless, the securitization of critical mineral supply chains has been a unique point of continuity between Trump and Biden. Indeed, the IRA can be understood as a soft-spoken continuation of Trump’s “America First” protectionism. We can expect such efforts to be turned back up to eleven if Trump returns to the White House; he recently mooted a 60 percent blanket tariff on Chinese goods.
An instinct for destruction of his predecessor’s policy innovations might blind Trump to the synergies between his platform and various Biden-era policies. Nonetheless, the outsized share of green tech investment received by GOP districts provides a major incentive for a Republican Congress to support the IRA, or at least elements of it. During an attempt to repeal parts of the IRA in 2023, the Republican-controlled House Ways and Means Committee spared a tax credit for producing batteries and components. Indeed, given bipartisan support for mining subsidies, a Trump administration might well focus on expanding FEOC regulations and curbing EV credits.
Some remain hopeful that green industry has reached a tipping point where growth continues without government support. We must hope this is true. The world cannot afford to slow the green transition, nor can we afford an escalation with China; getting critical minerals wrong would be disastrous for both scenarios.