Japan

The Inflation Reduction Act (IRA), passed and enacted into law last year, is considered one of the landmark pieces of legislation to combat climate change and strengthen U.S. critical mineral supply chains.

The package included funding for tax credits and rebates for consumers buying electric vehicles, installing solar panels or making other energy-efficiency upgrades to their homes, including, a credit of $4,000 for lower-and middle-income individuals purchasing used EVs, and up to $7,500 tax credits for EVs.  These represented a renewal of the existing $7,500 electric vehicle Federal tax credit starting in January of 2023, carrying it through until the end of 2032.

However – and of considerable interest for followers of ARPN — a new requirement is that qualified cars must be assembled in North America, and adhere to mandated “escalating levels of critical minerals to be sourced from the U.S. or a country with a free-trade agreement with the U.S.”

Said provision was hailed by some as key to addressing “emerging energy security vulnerabilities before they are intractable crises,” but the law’s vague terms left some of the United States’ partners scratching their heads wondering what these provisions meant for them.

A flurry of activity has followed, including the European Union’s response to the United States’ IRA in March of this year: the just-dropped Critical Raw Materials Act (CRMA) paired with sister legislation, the Net Zero Industry Act (NZIA), which aims to support investment in manufacturing capacity in ‘net zero emissions’ technologies in Europe.

(Read ARPN’s discussion of the EU’s response to the IRA here.)

Only days later, the United States Trade Representative Katherine Tai and Japan’s Ambassador to the United States, Tomita Koji, signed a critical minerals agreement (“Agreement Between the Government of Japan and the Government of the United States of America on Strengthening Critical Minerals Supply Chains”) which builds on the 2019 U.S.-Japan Trade Agreement and seeks to strengthen and diversify critical minerals supply chains and promote the adoption of electric vehicle battery technologies.

According to the Biden Administration, “in particular, the Agreement memorializes the shared commitment of the United States and Japan with respect to the critical minerals sector to facilitate trade, promote fair competition and market-oriented conditions for trade in critical minerals, advance robust labor and environmental standards, and cooperate in efforts to ensure secure, transparent, sustainable, and equitable critical minerals supply chains.”

Observers believe that the trade agreement may allow Japanese companies greater access to the Inflation Reduction Act’s clean vehicle credit.

Write lawyers Thomas G. Allen, Stephen M. Anstey and Kurtis G. Anderson in an Insights Alert for international law firm Kilpatrick Townsend:

“While the United States has established comprehensive free trade agreements with over twenty countries, Japan is not one of them. This has left Japan (a critical U.S. ally and the second largest democratic economy in the world) and its companies ineligible to benefit from valuable IRA tax incentives. The new trade agreement on critical minerals may change that.

The IRA does not define several key terms concerning tax credits, including what constitutes a ‘free trade agreement.’ The Biden Administration hopes that this new self-styled free trade agreement on critical minerals will suffice. The free trade agreement is specifically tailored to create eligibility, explicitly circumventing ‘prohibitions or restrictions on imports of critical minerals,’ including lithium, graphite, manganese, cobalt, and nickel, from and between the two countries.” 

Allen, Anstey and Anderson suggest that if this strategy is successful, the Biden Administration would use this tailored trade deal as a template for ongoing negotiations with the European Union currently excluded on the same basis from the benefits of the clean vehicle credit, and news reports seemed to confirm this suggestion.

With the Department of the Treasury and the Internal Revenue Service having released new guidance to clarify how manufacturers may satisfy the critical mineral and battery component requirements of the IRS’s clean vehicle tax credit on March 31, negotiators may have received more clarity and be able to reach agreement soon.

Treasury’s Notice of Proposed Rulemaking (NPRM) proposes:

“a three-step process for determining the percentage of the value of the critical minerals in a battery that contribute toward meeting critical minerals requirement: 1) determine procurement chains, 2) identify qualifying critical minerals, and 3) calculate qualifying critical mineral content. 

a set of principles for identifying the set of countries with which the United States has a free trade agreement in effect, since this term is not defined in statute. This term could include newly negotiated critical minerals agreements.”

These agreements, according to the proposed notice which is filed for public inspection and will be published in the Federal Register on April 17, 2023, “would be considered based on whether they reduce or eliminate trade barriers on a preferential basis, commit the parties to refrain from imposing new trade barriers, establish high-standard disciplines in key areas affecting trade, and reduce or eliminate restrictions on exports or commit the parties to refrain from imposing such restrictions on exports, including for trade in the critical minerals contained in electric vehicle batteries.”

The IRS has announced that an updated list of electric vehicles that qualify for the tax credit after April 17, will be available on April 18.

But while tax guidance can clarify, it can also sharpen points of contention.  U.S. Senator Joe Manchin has expressed his displeasure with the proposed notice arguing that ignores “the purpose of the law which is to bring manufacturing back to America and ensure we have reliable and secure supply chains,” and has threatened legal action against Treasury.

ARPN will be following the developments surrounding the proposed notice and related trade negotiations closely.   Consider it a sign of the rising importance of Critical Minerals:  Tax, trade and investment policies are being mobilized to incentivize Critical Mineral development.  ARPN will watch closely for progress as well as unintended consequences as these policies take shape.

This week, world leaders are gathered in Davos, Switzerland, for the World Economic Forum Annual Meeting. They are facing, as the New York Times’s Roger Cohen (NYT) titled his reporting on the meeting, a “New World Order.”  

Leaders must “pivot to the new reality provoked by the Covid-19 pandemic, the war in Ukraine, the growth of extreme inequalities and aggressive Russian and Chinese autocracies,” writes the NYT.

In the critical mineral realm, these recent events have served as a catalyst for the new “Great Game,” which the geopolitics of mineral resource supply had triggered and which had gained momentum with the adoption of the Paris agreement in 2015 which in turn had committed countries to significantly reduce greenhouse gas emissions and transition to renewables.

Over the course of the last few months, awareness of the importance of securing critical mineral supply chains and decoupling form adversaries, i.e. China, continued to grow against the backdrop of an increasingly volatile geopolitical landscape and mounting environmental pressures.  While, as the New York Times suggests, “the shape of an alternative international system is unclear,” we are seeing first steps towards a realignment as nations around the world rethink and reorganize their critical mineral supply chains.  

ARPN has discussed several developments involving the United States and key allies like Canada and Australia, but Asian nations, too, are taking steps to diversify their supply chains away from China, particularly in the rare earths (REE) space.

In spite of having signed a deal with Vietnam on rare earth development after having experienced the ramifications of an over-reliance on Chinese minerals first hand with the 2010 rare earths standoff between China and Japan, Japan’s domestic rare earth production has remained limited to date, with more than two thirds of the country’s rare earth supplies coming from China.  With demand surging in the context of growing EV markets, Japan is looking to “curb excessive dependence on specific countries, carry forward next-generation semiconductor development and manufacturing bases, secure stable supply for critical goods including rare earth, and promote capital reinforcement of private enterprises with critical goods and technologies,” according to a government strategy paper cited by Qu4tro Strategies this month.

To do so, Tokyo inked a critical mineral agreement with Australia in October of 2022 and Japan’s Organization for Metals and Energy Security (Jogmec) is working with private companies to take control of its holding in a joint venture to develop dysprosium-terbium heavy rare earths in Namibia.  Jogmec is also an investor in Australia-based Lynas Rare Earths’s latest push to increase its meaning capacity in Western Australia.

Vietnam, not traditionally known as a global mining powerhouse, is looking to become a key player in the global REE supply chain.  While, as Qu4tro Strategies outlines, North Korea is believed to be home to the world’s largest rare earth deposits, Vietnam’s large REE reserves are more viable as an alternative to Chinese REEs, as North Korea’s political situation and economic sanctions prevent the country from becoming a link in the global supply chain.

While exploration in Vietnam has so far been unable to tap into the country’s considerable mineral potential, that may be changing. As a fast-growing economy, Vietnam is attracting companies trying to find new regional bases as U.S.-Chinese trade tensions rise, and post-Covid supply chains remain strained.

In recent months, several countries have entered into partnership agreements with bot the Vietnamese Government and private companies to establish “an integrated supply chain for rare earths and other critical minerals.”

Qu4tro Strategies cites the December signing of an agreement between Vietnam and South Korea to jointly explore and develop core minerals including rare earths in Vietnam, as well as a partnership between Australia Strategic Minerals (ASM) and Vietnam Rare Earths for “long-term supply of rare earths to provide feedstock for ASM’s Korean Metals Plant.” 

Trade between Canada and Vietnam is reported to increase under the Trans-Pacific Partnership free trade agreement, and the Canadian province of Saskatchewan is actively exploring the “potential for the countries to collaborate on green energy, including sustainable mining and rare earth elements.”

The Middle East, traditionally known as a leader in the fossil fuel realm, could also emerge as a critical mineral player in a newly realigned world, particularly as nations like Saudi Arabia incentivize investment towards creating integrated value chains, with the country currently processing 145 exploration license applications sent in by foreign companies, according to a new report issued by the Future Minerals Forum in Collaboration with the Payne Institute for Public Policy Colorado School of Mines.

Meanwhile, Africa’s resource richness is well known. As the Future Minerals Forum’s report outlines, trade tensions with China as well as Russia’s ongoing war have triggered many Western countries to turn to Africa for investment opportunities in critical mineral supply during 2022.

Discussions between Minerals Security Partnership countries (see our post here) have begun involving African regions as targets for potential partnerships, and five countries — the DRC, Mozambique, Namibia, Tanzania and Zambia – have initiated conversations on development opportunities to “diversify and bolster critical mineral supply chains while lowering trade reliance with China and Russia” during the UN General Assembly conference in September 2022.  Deals made at the U.S.-Africa Leaders Summit, which included a commitment of over $150 million dollars into Zambia’s mining sector to develop copper and Cobalt, are a case in point.

However, as the authors of the Future Minerals Forum’s report point out, of Africa, “the scale and pace of investment inflows will largely hinge on the restructuring of domestic governance and policy changes.”

As leaders continue to deliberate on the new realities of the post-Cold War world order in Davos this week, we will continue our focus on the realignment underway in the minerals sector and will zero in on the West in our second post this week.

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