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Breaking Free from China’s Hold: U.S. - EU Deal on Critical Minerals

Apr 04, 2023

On March 10, 2023, the United States and the European Union announced a deal to provide America favorable treatment to European critical minerals, preventing them from engaging in detrimental competition and, more decisively, to reduce their dependence on China, which currently dominates the global supply chain for many of these materials, raising concerns about the risk of disruption. 

The joint statement issued by Presidents von der Leyen and Biden reflects a positive attitude towards the forthcoming negotiations, which aim to address trade impediments related to critical minerals, underscoring the significance of upholding enhanced environmental and labor standards across the supply chains. Furthermore, both pledged to engage in transparency regarding their respective incentives for green energy, with the purpose of ensuring that they combine efforts and resources to achieve the common goal of zero emissions, while avoiding potential state aid and subsidy wars on EVs. 

However, the negotiation may extend over several months due to the procedural intricacies on both sides of the Atlantic, which have the potential to introduce significant alterations, or even impede the finalization of the agreement. 

The underlying concern for the U.S. and EU is rooted in the significant rare earth element industry dominance of China, accounting for approximately 80 percent of global production, providing 98 percent of Europe’s rare earths and 74 percent of those for the U.S. Moreover, establishing a new mine can typically take a decade. 

Yet, the bilateral agreement at hand represents a noteworthy milestone in the realm of global trade and geopolitics. Following a decade of the U.S. not prioritizing its relationship with the EU -even taking opposing stances at times- the U.S. and EU are now deepening cooperation, decreasing their dependence on China, and ultimately, embarking on a new phase of understanding. 

The deal follows their compromiseon sanctions against Russia and support for Ukraine during the invasion, which also indicates their growing collaboration and new relational phase, as it demonstrates their commitment to sustainable development, economic stability, and international cooperation, and shows that the two partners intend to avoid a zero-sum competition that could ultimately be damaging to both.  Alternatively, deal on critical minerals also sidelines Chinese dependency on strategic raw materials, and could exacerbate the ongoing U.S.-China rivalry, theoretically leading to a further deterioration of global trade relations. This could also trigger retaliatory measures from China, especially given China’s near-monopoly over the rare earth supply chains.

The potential consequences of the deal remain uncertain. Conversely, it is important to note that the U.S. and EU exhibit divergent strategies in their approach towards China, and hold distinct positions on global issues. The EU has generally maintained a neutral stance towards the U.S.-China trade war, as opposed to the alignment with the U.S. in imposing sanctions on Russia referred to above. This discrepancy holds significant relevance in the context of the trade tensions between the two superpowers. 

Nonetheless, in the event that the U.S. succeeds in convincing the EU to impose sanctions on China, it is likely that Beijing would respond with retaliatory measures, which would weaken the European companies’ position in the international market. Consequently, EU leaders are acutely cognizant of maintaining a balanced approach towards China, acknowledging its status as a partner, rival, and competitor in various spheres of influence. Von der Leyen reiterated in Davos last January the EU’s stance to “de-risk”, rather than “de-couple” from China

Within this framework, the U.S. uses a strategic approach whereby every negotiation with the EU is seen as an opportunity to persuade and implement its criteria, employing a transactional perspective. It will be of interest to observe the level of expectation that Biden places on the EU to undertake measures against China subsequent to these negotiations. Actually, the most recent issue that caused disagreement prior to the critical mineral deal was related to the conflict in Ukraine. The U.S. made several accusations that China had plans to supply weapons to Russia, which was publicly denied by German Chancellor Scholz. 

Nevertheless, the U.S. has been successful in persuading EU member states on certain occasions. For instance, on the day preceding Biden and von der Leyen’s meeting, the Dutch government said they would align with the U.S. to impose export restrictions that curtail China’s access to crucial materials required for the production of advanced processor chips. 

Notwithstanding the potential benefits of the agreement, minor tensions between the U.S. and EU will persist until a conclusive agreement is achieved, primarily due to the protectionist U.S. Inflation Reduction Act (IRA), signed last August 2022, which still allocates roughly $369 billion in state aid to clean energy development and climate change mitigation, basically demanding U.S. consumers eligible for clean vehicle tax credits of up to $7,500 to buy “any vehicle meeting certain critical minerals requirements,” as long as they are “made by qualified U.S. manufacturers and excludes those manufactured or assembled by a hostile foreign entity.” 

It is worth recalling that the EU regarded those measures as unduly favoring U.S. carmakers and have deemed them as “dumping,” running contrary to the principles of equitable and fair international trade and damaging the level playing field. In fact, the automotive industry’s contribution to some EU member states’ economies provoked deep concerns in some capitals, namely the ones reliant on exports to China. Some brands such as Volkswagen said to await EU response to IRA, pausing in the meanwhile on Europe battery plants. The mounting concerns surrounding potential layoffs of EU enterprises to the U.S., exacerbated by elevated energy costs, have prompted increased apprehension. 

In response, the EU announced the Green Deal Industrial Plan on February 1, 2023, which is expected to streamline subsidies for green industries and facilitate the implementation of large-scale, cross-border projects throughout the EU, providing “a predictable and simplified regulatory environment” and a better and faster access to finance. Furthermore, in the near future, the EU is set to introduce the Critical Raw Materials Act, designed to ensure the extraction of 10 percent of critical raw materials within Europe and to process 40 percent of its consumption by 2030. 

Owing to the more favorable circumstances that were negotiated, European’s “targeted critical minerals” would receive an exemption from the IRA, basically on the production of batteries for EVs suitable for U.S. tax credits. In this same vein, to address potential future disagreements over “respective incentive programs,” they have initiated the “Clean Energy Incentives Dialogue,” which “will become a part of the EU-U.S. Trade and Technology Council where it will also facilitate information-sharing on non-market policies and practices of third parties—such as those employed by the People’s Republic of China.” 

In light of the considerable changes in the geopolitical environment, the subsequent circumstances condense the current scenario. 

On one hand, the U.S. is merely eliminating an unjust practice, a tactic the EU must accept to prevent harming European companies. In any case, the situation between the EU and U.S. has now been ameliorated and peace seems to be restored. Von der Leyen underlined in a later statement that the deal will allow EU critical raw materials to have access to the made-in-America subsidies program, “as if they were sourced in the American market.”

On the other hand, China is by no means lagging behind in green energies’ policies, and has placed significant emphasis on environmental protection and sustainable development through the “Ecological Civilization” initiative, setting a target of achieving peak carbon emissions by 2030 and carbon neutrality by 2060. However, China still heavily subsidizes national “energy-sensitive companies,” distorting global trade as well. 

In the contemporary geopolitical context, characterized by increasingly assertive posture among global powers, there exists a pressing need for the EU to assert more forcefully. The adoption of a more ambitious stance by the EU may involve a gradual process of integrating China into an agreement on state aid and tariffs related to both renewable energy sources and rare earths, with the potential to bolster economic cooperation between the two regions, and even with the U.S. This move would strengthen the EU’s position as a self-reliant and influential global geopolitical force, skillfully navigating the delicate balance between China and the U.S. Nevertheless, today it appears more akin to an idealistic aspiration than a feasible reality.

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