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New Battery Investment Numbers for Europe Point to the Real-World Challenges of Decoupling from China

Against the backdrop the accelerating global push toward net zero carbon emissions and escalating tensions, worries about strategic vulnerabilities and the specter of supply chain disruptions have prompted the United States and its allies to forge new alliances designed to bolster supply chain security – and, to the extent possible, decouple their critical mineral supply chains from China.

The Mineral Security Partnership (MSP) between the U.S., Canada, the United Kingdom, France, Germany, Japan, South Korea and other members, exemplifies what Cullen Hendrix, a senior fellow at the Peterson Institute for International Economics, calls a “major move away from a fundamental faith in the ability of market mechanisms to adequately supply the raw materials and the manufactured goods that are necessary for energy transitions (…) – obviously a much more interventionist kind of stance than had been pursued in the past.” 

Followers of ARPN are aware of policy initiatives like the United States’ Inflation Reduction Act (IRA) or the European Union’s Critical Raw Materials Act (CRMA), which are currently being followed by bilateral trade agreements, as well as U.S.-EU discussions to launch a “critical mineral club.”

The club will have its work cut out for it.  Decades of strategic investments in the sector have allowed China to effectively control almost every segment of the value chain for many metals and minerals deemed critical today.  With Beijing no stranger to playing politics with its leverage (one need to look no further than the 2010 decision to cut off Rare Earth exports to Japan) and rumblings over a new Chinese export ban getting louder, the urgency can be felt on both sides of the Atlantic.

For Europe, the “very hard lesson of being too dependent on energy from Russia and see[ing] how that could be weaponized” is another important driver.  However, while momentum is building, a new report by the consultancy Rhodium Group and the German Mercator Institute for China Studies (MERICS) points to the real-world challenges of decoupling from China:

While European national governments and the EU have worked to devise policies to strengthen domestic and regional critical mineral supply chains, Chinese companies continued to invest in the region.  Overall, Chinese foreign direct investment in the EU and the UK may have dropped but, as Mary Hui writes for Quartz“for the first time since 2008, the value of Chinese greenfield investments have exceeded that of M&A flows,” and was “mainly driven by several large-scale initiatives by Chinese battery giants to build factories in Germany, Hungary, the UK, and France.”

As the Rhodium report determined, “Europe has become a key part of China’s global electric vehicle expansions,” adding that “[b]attery investments are now the mainstay of Chinese investment in Europe.”

Hui lays out the conundrum:

“For Europe, these [investments] come as a double-edged sword. The ramp-up in EV and battery production capacity will help the bloc meet surging demand for electric cars and eventually phase out internal combustion engines. But it also deepens Europe’s dependence on Chinese technology and manufacturing, even as the EU works to build its own battery supply chain.”

The challenge is not lost on EU policy makers, and the EU is currently preparing a proposal to formally “recalibrate” its China policy, with an emphasis on “de-risking” by screening investments more closely and resorting to more robust export controls.

The West’s resolve to break China’s dominance may be building, but as Christina Lu writes for Foreign Policy:

 “(…) there are more questions than answers about how these efforts will pan out. As lawmakers continue to hammer out new agreements behind closed doors, it remains unclear how they align with global trading rules and what this momentum means for countries that lack free trade agreements with the United States. Engineering supply chains isn’t as simple as finding new mines, either; it involves an entire ecosystem of processing, refining, and manufacturing capabilities.”

She adds: “China spent decades building out its industry, and experts warn that wrestling new supply chains will be an expensive and arduous uphill battle that the United States is only just beginning.” 

Beijing will not slow down its global quest for resource dominance, and the critical mineral arms race will continue to heat up.  Thankfully, stakeholders here and elsewhere are finally beginning to acknowledge this fact and are “gearing up for the long haul.”

Joseph Majkut, director of the Energy Security and Climate Change Program at the Center for Strategic and International Studies, whom Lu cites, aptly sums up the challenge:

“You can’t build Rome in a day, (…) and you can’t build a critical minerals supply chain six months after you pass a big climate bill.”

Eventually, as we know, Rome was built.  Whether we will be able to say the same for the critical mineral supply chains that anchor the technology economies of the 21st Century remains to be seen.