Morocco, an Unexpected Winner of China’s Strategy to Circumvent the U.S. Inflation Reduction Act

Over the years, China’s dominance over the supply chain of critical minerals—minerals used in clean energy transition and electric vehicle (EV) batteries—has become a serious concern for many Western governments. From Washington to Brussels, the dependence on a Chinese-dominated supply chain has been dubbed a national security threat.

Legislation and policies have been put in place to increase government control over countries’ critical mineral supply chains and, to some extent, restrain China’s. Between 2022 and 2023, critical minerals-specific policies and strategies have been adopted in Canada, Australia, and EU countries to secure, develop, and diversify supply chains. In all these policies, critical minerals and their supply chains are intimately connected to national security.

Under these policies and legislation, a country like Canada has succeeded in blocking some Chinese investments in the mineral sector. In November 2022, invoking national security reasons under the Investment Canada Act, Ottawa ordered a number of Chinese companies to divest their stakes in Canadian lithium mining companies. In its decision, the government mentioned that “the government’s decisions are based on facts and evidence and on the advice of critical minerals subject matter experts, Canada’s security and intelligence community, and other government partners.”

In August 2022, the United States passed Inflation Reduction Act (IRA), “a piece of legislation that is designed to decarbonize the U.S. economy, re-shore supply chains of critical minerals, and break dependence on China.” The legislation contains a series of economic measures designed to incentivize U.S. companies to invest in those supply chains within U.S. borders. Beyond the tax credits it provides, the IRA relies, among other things, on “friend-shoring” where the United States relies on minerals mined and a supply chain developed in U.S.-friendly countries and those with free trade agreements with the United States. If successful, the IRA should, in principle, allow the United States to develop its own less China-dependent critical minerals supply chain.

However, the success of these governmental initiatives depends heavily on the willingness of their private sectors to align behind their respective government’s geopolitical priorities to decouple from China. So far, however, the opposite seems true. New partnerships between Chinese private or state-owned companies and Western private companies reveal some reluctance of the Western private sector to back their governments.

The legal restrictions and economic incentives seem not efficient enough to deter cooperation with Chinese entities, and some go as far as to delocalize their headquarters just to be able to deal with Chinese companies.

Canada’s SRG Mining and China’s Carbon One New Energy Group

On November 29, 2023, Canada's SRG Mining announced an agreement with China’s Carbon-ONE New Energy Group. The agreement follows a prior agreement signed in July where China’s C-One agreed to invest in SRG and acquire 19.4 percent stakes in the company.

The signed agreement provides for the development of a graphite-based anode plant for EV batteries in Morocco. It also confirms China’s Carbon-One $12.7 million (CAD 16.9 million) investment in SRG, which, while still listed on the Toronto Stock Exchange, agrees to relocate outside Canada. The maneuver aims to expedite the agreement by not requiring the Canadian government’s approval under the Investment Canada Act.

As a Canada-based company, SRG would run the risk of the government’s opposition on national security grounds, just like it happened in November 2022. SRG’s willingness to relocate to secure a partnership with a Chinese entity reveals the extent to which the private sector is at odds with the government.

The need to work with China is driven by both economic and technological necessities. China’s early and huge investments in large-scale and efficient processing entities have provided the country with the technological edge and cost-effectiveness that Western or any other country’s private companies in that sector need to remain profitable. Since sourcing in China may be problematic, outsourcing in a third-party country is now the way to go for many Chinese companies that still want access to U.S. and European markets.

Morocco, an Unexpected Winner

By leveraging both free trade agreements between the United States and other countries and partnerships—on different supply chain levels—with companies from U.S.-allied countries, Chinese companies have found a way to maintain access not only to the U.S. market but to Europe as well and are now trying to take advantage of its friends-shoring concept to circumvent the IRA.

When SRG signed with China’s Carbon One, Morocco was chosen because of its geographical and economic proximity to EU countries and the United States. Just a few miles away from Europe, Morocco has also the advantage of having free trade agreements with the European Union and the United States, which makes it an ideal hotspot for Chinese and Western/U.S. allies’ companies’ joint ventures in the critical minerals space.

In September 2023, South Korea’s largest chemical company LG Chem and China’s Youshan—a subsidiary of Zhejiang Huayou Cobalt—announced a partnership to build in Morocco a lithium-phosphate-iron (LFP) cathode plant, scheduled to come online by 2026 and produce up to 50,000 metric tons of LFP cathodes.

One key element of China’s overall strategy success is the willingness of U.S. allied countries’ private companies to engage with Chinese companies on different supply chain segments. On the mid and downstream, aside from Canada, South Korean companies are developing joint ventures with Chinese companies in lithium processing and the manufacture of EV batteries. On the upstream, Australian companies are engaged with them, especially in Africa, where they are working together on several lithium projects

It's worth noting that Canada, Australia, and South Korea are all members of the Minerals Security Partnership, a U.S. initiative launched in June 2022 that aims to “catalyze public and private investment in responsible critical minerals supply chains globally.”

With China’s latest strategic move, the biggest winners will be countries like Morocco, with its solid industrial landscape, stable political and economic environment, geographical proximity to Europe, free trade agreements with Europe and the United States, and finally, its cheap labor cost compared to developed countries such as South Korea and Canada, which will certainly keep on attracting more investments in the energy transition industry. Morocco and those other countries thus find themselves as the “collateral beneficiaries” of the Sino-American rivalry in the supply chain of critical minerals.

Christian Géraud Neema Byamungu is a senior associate (non-resident) with the Africa Program at the Center for Strategic and International Studies in Washington D, C.