Critical minerals are key to economic security

Minerals deemed “critical” are key inputs in a host of military and green-transition technologies, as well as vital to industry more broadly. Depending on China for 60 percent of world-wide production and 85 percent of processing capacity in these minerals is a growing risk, given Beijing regularly engages in economic coercion.

Recent export controls on germanium and gallium highlight the point. Beijing has also used a range of WTO-illegal government policies to build its dominance in critical minerals, hence breaking China’s hold over critical minerals will be far from easy. 

Two main geoeconomic strategies to break China-dependency have emerged from two of the world’s largest trade blocks, the EU and US, namely “de-risking” and “decoupling” strategies. Each has different implications for Australia’s domestic policy settings, and for domestic mining firms’ investment strategies. Currently the EU favours a de-risking approach to economic relations with China, seeking to manage risks without hard decoupling. 

The EU’s Critical Raw Materials Act is de-risking in action, setting benchmarks for diversifying EU minerals supply by 2030. These include targets for EU-located extraction (10 percent of total), processing (40 percent), recycled minerals (15 percent) and not more than 65 percent of the Union’s annual consumption of strategic raw materials from a single third country.

Both the Critical Raw Materials Act and new tariffs on Chinese electric vehicles (EVs) will have long-term structural effects on global trade in critical minerals. They should reduce, if not drastically, EU import demand for China-sourced minerals, while increasing demand from what the EU terms “like-mined partners.” 

These policies signal greater EU market opportunities for Australian mineral exports, both raw and processed. No changes to Australia’s domestic policy settings or international agreements are required to access these new EU market opportunities.

Nonetheless, completing the currently stalled Australia-EU free trade agreement (FTA) negotiation would help, and this FTA should incorporate the recently signed Critical Minerals Memorandum of Understanding between Brussels and Canberra, providing greater certainty to investors. 

Washington’s bipartisan geoeconomic strategy, coined the “New Washington Consensus,” offers a more radical break with the existing norms and rules of the world economy. The new strategy involves both derisking and some hard decoupling strategies towards trade with China. Highly strategic sectors such as critical minerals, and increasingly EVs, are classed as priority national security issues, and appear headed for hard decoupling. 

To illustrate, the Inflation Reduction Act is a derisking strategy. Access to consumer subsidies of $7.5k for new EVs requires vehicles to contain large amounts of critical minerals from the US or countries that have an FTA with Washington, which includes Australia. In 2024, this restriction requires 50 percent of battery minerals to be “friend-sourced” to meet the qualification criteria, increasing each year and maxing out at 80 percent in 2027. IRA subsidised EVs will therefore offer a large market for Australian mineral producers. 

However, Washington’s geoeconomic policies are evolving quickly. From 2025, a new Treasury Department rule, titled Foreign Entity of Concern (FEOC), means no clean-energy vehicle can qualify for the $7.5k subsidy if it contains any critical minerals in the battery that are extracted, processed, or recycled by a FEOC, including Chinese firms. Hence IRA’s graduated scale of reductions have become moot for Chinese mineral producers.

That is not all. The Treasury’s FEOC rule captures Chinese firms operating overseas in third countries, and also applies to non-Chinese firms that have 25 percent or higher Chinese equity or board voting rights that offer “effective control” over firm decisions. This means an Australian ASX-listed lithium exporter with 25 percent or more Chinese equity would be classed as an FEOC, and its output would not qualify for IRA subsidies from 2025. 

Yet many Chinese EVs are produced so cheaply, due to government subsidies, that they would still be competitively priced even without IRA consumer subsidies. To ensure EV decoupling, the Biden administration has applied 100 percent tariffs on Chinese EVs, and has proposed to ban Chinese software and hardware in EV autos, irrespective of where they are produced. This hard decoupling strategy pushes far beyond the EU’s current approach and has major implications for Australian domestic policy settings and economic relations with Beijing. 

By collaborating with Washington’s critical mineral strategy, Canberra is defacto embarking on its own new economic security paradigm. This represents a break with Australia’s modern neoliberal era which began under the Hawke-Keating era, and resonates more with Alfred Deakin’s pre-war tradition of state-enabled national development.

The role of the state is significant in underpinning the Australia-United States Clean Energy Compact. This establishes a Critical Minerals Taskforce for cooperation on US critical mineral decoupling efforts, offering crucial access to US capital and Australian federal funds. 

Indeed, significant sums of public financing by both Australian and US federal governments have emerged. This author has calculated that, since 2022, at least US$4.5 billion has been provided or promised in Letters of Interest to ASX-listed firms, expanding ex-China mining and processing operations to feed North America’s industrial and military sectors.

Notable examples include Export Finance Australia’s AUD$1.25bn funding for Iluka’s Eneabba refinery in Western Australia, US Dept of Defence’s US$258m funding for Australia’s Lynas to build a rare earths refinery in Texas, and US Export-Import Bank’s US$600m finance package for Australian Strategic Minerals’ Dubbo project in New South Wales. 

For US-Australian critical mineral decoupling to succeed, other policy measures are needed beyond funding. Australia’s Foreign Investment Review Board will have a key role to play in managing the degree of Chinese investment going forward, including blocking or divesting Chinese capital in strategic mineral resources on national security grounds.

China has long been a major investor in the sector, and is currently Australia’s biggest customer for many mineral exports. This will inevitably create bilateral tensions with Beijing, but is an unavoidable risk. 

Lastly, policymakers must keep in mind that private firms will ultimately be the agents who implement Western strategic mineral policy, guided by regulations but based on their commercial interests. Australia is derisking rather than decoupling, and many firms will continue to have China as a key customer for critical minerals, while many Australian mineral firms have benefitted from Chinese investment.

Furthermore, US and Australian federal critical mineral project funding will go to only a few select projects, while the rest of the sector must depend on market opportunities. These firms now face a complex, and restrictive FDI environment for Chinese capital. While that is appropriate to achieve strategic decoupling, how the sector manages a transition from a one-world economy to a geopolitically bifurcated economy must be continually monitored. 

Firms are already adapting their own geopolitical strategies, for example, by building IRA-compliant lithium supply, yet other firms classed as FEOCs face increasingly restricted access to the North American market.

With long lead times for new mining assets, firms must consider current demand for minerals from China against emerging demand favouring China-free supply, particularly as restrictive supply chain policies take effect. For firms and governments alike, the critical minerals sector is shaping up to be a defining case study in the geoeconomic rewiring of world trade. 

This review was published by the Australian Institute for International Affairs.