Restructuring of Critical Mineral Supply Chain Faces “Trilemma”

Summary

Developed countries and regions, mainly the US, EU and Japan, are attempting to implement a fundamental restructuring of their critical mineral supply chains. They have three goals: (1) de-risking (reducing dependence) from China, (2) decarbonization, and (3) economic stability. The first, de-risking from China, reflects the fact that critical minerals are essential inputs for high-tech equipment like semiconductors. As critical minerals also have an important role in military technology, the geopolitical risk posed by extreme dependence on Chinese supply — that has been weaponized in the past — raises serious concerns. The second, decarbonization, derives from the fact that critical minerals also play a vital role in the production of electric vehicles (EVs) and equipment related to renewable energies. Critical minerals are indispensable to the shift to clean energy, where rapid progress is required to avoid catastrophic climate change. The third, the importance of economic stability, has arisen from the reality that disruptions in critical mineral supply chains and failures in the energy transition pose significant economic risks. Fiscal sustainability is also at risk when pursuing decarbonization and de-risking from China through the use of government support. Reviewing the supply chain is imperative to mitigate and minimize risks, and to find strategies to avoid fiscal and other risks.

China currently supplies clean energy-related equipment (such as batteries and other renewable energy-related instruments) and its components, including critical minerals, at low cost, thereby alleviating some of the economic burden of the global clean energy transition. Given that the world still relies on China as the primary source for the clean energy transition, it is unrealistic to expect that “de-risking from China”, “decarbonization”, and “economic stabilization” will proceed simultaneously.

The restructuring of critical mineral supply chains faces this trilemma. In other words, the only possible combinations are (A) de-risking from China and decarbonization (sacrificing economic stability), (B) de-risking from China and economic stabilization (sacrificing decarbonization), or (C) decarbonization and economic stabilization (sacrificing de-risking from China), thus leaving no choice other than to abandon one of the three goals. Should developed countries, especially those that are fiscally constrained, attempt to forcefully restructure critical mineral supply chains based on the current priorities of de-risking from China and decarbonization, it would accelerate inflation and deteriorate fiscal conditions, destabilizing the economy.

Both “de-risking from China” and “decarbonization” appear to be priorities in developed countries and might remain significant paths forward. If both directions are followed, a further move toward restructuring critical mineral supply chains must proceed, resulting in a greater risk of compromising price stability and fiscal sustainability.

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Updated:  20 May 2024/Responsible Officer:  Crawford Engagement/Page Contact:  CAP Web Services Team