Prospecting with Partners: The Case for Bilateral Cooperation on Critical Minerals
Global minerals demand is projected to see strong growth while the risks associated with mineral supply disruptions remain dynamic. This reality renders it unviable for the United States to solely focus on domestic production to meet its minerals requirement. International cooperation has thus been a key element of U.S. approach to securing the supply chains for critical minerals. In particular, international cooperation under the Biden administration has taken on the notion of friend-shoring.
Washington has struck several bilateral cooperation agreements that specifically focus on critical minerals with “friends”—i.e., countries that have close diplomatic and strategic relationships and a shared set of political norms and market-based economic system with the United States. Such bilateral cooperation is at the core of U.S. prospecting endeavors, whereby the U.S. government makes financial, technical, and diplomatic investments to develop mineral supplies on a project-by-project and mineral-by-mineral basis. Through partnerships, the United States can leverage funding and cooperate to develop complementary resources and diversify mineral supply chains.
Canada is the second-largest import source for those critical materials for which the United States has net import reliance greater than 50 percent (after China). The bilateral trade in minerals has been part of the strong economic ties, yielding $95.6 billion for Canada in 2020. What’s more, Canada may be the only country that uniquely satisfies both the friend-shoring and nearshoring notions of U.S. critical mineral supply chains efforts. The country’s resource wealth is significant, but its geographical continuity and proximity to the United States provide a sense of physical security to mineral supply chains.
The close economic integration and strong security relationship render Canadian companies and persons to be the only non-U.S. entities and persons considered a “domestic source” for the purposes of Title III under the Defense Production Act (DPA) of 1950. Also, under the Inflation Reduction Act, an electric vehicle must meet sourcing requirements for minerals and battery components, and location requirements for final assembly to qualify for the Clean Vehicle Tax Credit (30D). Canadian entities along the EV mineral supply chains have much to benefit from the U.S. endeavor, since Canada as a North American country and a party to free trade agreement with the United States meets the criteria under the sourcing and location requirements.
The governments of the United States and Canada previously announced the Joint Action Plan on Critical Minerals Collaboration, but the Biden administration and the Trudeau Cabinet elevated bilateral cooperation in this area in early 2021, by releasing the Roadmap for a Renewed U.S.-Canada Partnership. The roadmap aims to guide bilateral efforts to combat the pandemic, as well as to augment the 2020 joint action plan to “target a net-zero industrial transformation, batteries for zero-emissions vehicles, and renewable energy storage.” Under the bilateral Supply Chain Working Group, launched in November 2021, the two countries have undertaken joint economic analysis to map supply chains for critical minerals in an effort to set priorities and identify potential vulnerabilities.
Australia is another country with a shared set of political norms and market-based economic system that holds vast deposits for a variety of critical materials on the U.S. list of critical minerals. Non-ferrous metals are key export commodities for Australia. In 2022, the country earned over $20 billion AUD from the exportation of lithium, nickel, aluminum, and zinc. The country’s mineral wealth suggests ties will expand, including greater U.S. support for mining and processing activities in Australia, not unlike what bilateral cooperation with Canada bodes for the United States.
Minerals supply chains has become a key area of bilateral engagement since the establishment of the U.S.-Australia Critical Minerals Working Group, under the previous administrations in Washington and Canberra. The Biden administration and the Albanese cabinet doubled down on the bilateral cooperation in this area by continuing to explore opportunities to finance projects together and agreeing to establish new environmental, social, and governance (ESG) and traceability standards to ensure responsible minerals sourcing.
Critical minerals were further elevated when the two governments announced the Climate, Critical Minerals and Clean Energy Transformation Compact in May 2023, and launched the ministerial level Australia-United States Taskforce on Critical Minerals. The task force will likely focus on facilitating the two-way flow of investments between the financial sectors of both countries to expand the mineral industries and their outputs. To the extent that Australia is a close security partnership with resource wealth, the Biden administration has announced a plan to ask the U.S. Congress to add Australia as a “domestic source” within the meaning of DPA Title III. The National Defense Authorization Act 2024, the pending bill in the 118th Congress, will very likely affect such modification. The inclusion of Australia as a domestic source could be a concrete instrument to accelerate the U.S. support for the expansion of Australian capacity to produce and supply critical minerals. The potential for bilateral investment in minerals is huge. Notably, Australia is home to Lynas Rare Earth Ltd., which is the largest rare-earth mining and processing company outside China. Its U.S. subsidiary is receiving $30.4 million from the DPA Title III investment agreement to establish rare earth processing capabilities in Texas.
What should be done to leverage this pair of bilateral cooperation? Both Canada and Australia are leading spenders on mineral exploration and expanded exploration for lithium and nickel in the recent years. In 2022, Canadian and Australian exploration spending grew by 40 percent over the previous year. For supplier countries, however, the security of demand is an important consideration. Diversifying global supply chains requires a bigger pool of mineral importer countries besides China. For example, over 94 percent of Australian lithium exports (in value) went to China in 2022. The United States could play a major role as an alternative to China as a demand center for Canadian and Australian supplies.
Also important is how the United States, Canada, and Australia could focus on alleviating the geographical concentration of global refining and processing capacity in China. Today, China dominates the global midstream in mineral supply chains, including 60 to 70 percent of lithium, 60 percent of nickel, and 90 percent of rare earth elements. While Canada mines and processes some critical minerals, such as nickel, cobalt, and zinc, the country does not have processing capacity for others, such as rare earth, despite having significant resources. The development of the midstream capacity is a rising focus for Ottawa, as the country seeks to capture a greater value from the growing clean energy economy. For example, Canada’s first rare earth processing facility is under development in the mineral-rich province of Saskatchewan. Meanwhile, Australia is home to several critical midstream facilities under development. A rare earth processing facility in Mount Weld would produce rare earth carbonites to feed a rare earth separation facility that is being built in Texas, while a facility in Iluka would be Australia’s first rare earth refinery. Projects in the development stage could be highly vulnerable to low mineral commodity prices or price volatility, as exemplified by the recent decision to pause construction at the rare earth processing facility in Saskatchewan. Investment tools, such as the DPA Title III, could help fill a short-term funding gap or facilitate private capital flow into these strategic projects.
International cooperation is ever more important as the United States accelerates its prospecting efforts to underpin the energy transition. Key bilateral cooperation with countries that have strong strategic, political, and capacity synergies are indispensable if the United States is to lead such efforts effectively.
Jane Nakano is a senior fellow with the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.