Steps Forward to Strengthen the Lithium-Ion Battery Supply Chain

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Introduction

The supply chains for lithium-ion batteries (LIBs) illustrate the intertwining of national security concerns with climate and trade policies, as the United States aims to strengthen supply chains by relocating production of essential items, including those vital for meeting climate objectives, back to domestic or nearby shores. The LIB supply chain spans globally, but key inputs and processing capabilities are concentrated in a few countries. This combination of dispersion and concentration makes the global supply chain vulnerable to geopolitical disruptions and changes in trade relations. Compounding this challenge is China’s dominance in lithium-ion manufacturing, particularly in processing mineral inputs and producing key end products like electric vehicles (EVs), alongside its status as an economic rival and strategic adversary to U.S. interests.

Need for Policy Adjustments

The Biden administration appears to have three primary objectives: reducing reliance on China for crucial manufacturing, reshoring manufacturing to the United States to regain lost jobs and resilience, and accelerating the shift away from hydrocarbons to mitigate climate change in line with international agreements. However, these goals present contradictions. Reducing dependence on China and bringing manufacturing back to the United States would enhance supply chain resilience but might impede progress toward climate goals. Conversely, liberalizing trade with China could facilitate scaling up manufacturing and access to affordable inputs, supporting decarbonization efforts at the expense of supply chain security. Balancing these objectives requires a nuanced policy approach.

The Scholl Chair in International Business’ Friendshoring the Lithium-Ion Battery Project aimed to address current deficiencies in U.S. policies surrounding LIB production and deployment. The project broke down key stages of the lithium-ion battery supply chain into three individual publications. The first delved into processing critical minerals and materials, the second explored the creation of cathode and anode active battery material, and the final piece examined the assembly of battery cells into modules, which are packed and sold to manufacturers of different end products, including EVs, solar power backup storage, consumer technology products, and emergency power backup systems.

The Scholl Chair identified several adjustments to U.S. trade and economic policy to accelerate the production and deployment of lithium-ion batteries as well as LIB end uses. These recommendations, outlined below, aim to enable the United States to better secure the LIB supply chain while accelerating the green transition.

Recommendations

Trade

  1. Ramp up friendshoring efforts by crafting new agreements and expanding old ones through a “trusted trade partner” model. By encouraging the movement of supply chains to countries that do not pose a national security threat and developing “trusted trade partnerships” with them, the United States can create a more resilient supply chain than it would by only focusing on domestic manufacturing. Ideal friendshoring agreements would be plurilateral arrangements with major players that enable the coordination of industrial policy efforts, the enhancement of information sharing for research and development efforts in the field to improve manufacturing efficiency, and the elimination of trade barriers in critical goods. It is also crucial to build upon existing agreements to foster increased regulatory cooperation with other countries in key areas of the battery supply chain, particularly with free trade agreement (FTA) partners that possess significant mineral reserves, such as Chile and Canada. Successful negotiations would create expanded extraction opportunities, but the United States may also be pushed to establish more value-added refining operations in partner countries.
  2. Prioritize trade agreements to enable the green transition. To accelerate LIB deployment, the Biden administration should focus on taking down barriers to trade on inputs for lithium-ion batteries, as well as the batteries themselves, between the United States and its allies. Eliminating most-favored nation (MFN) tariffs on goods related to lithium-ion batteries should be a high-priority item for nations with long-term environmental ambitions. One way to achieve that would be for the Biden administration to initiate negotiations for a non-MFN plurilateral agreement specifically focused on batteries and their inputs.
  3. Aim to complete critical minerals agreements (CMAs) with key partners such as the United Kingdom, the European Union, Indonesia, Argentina, and the Democratic Republic of the Congo. These efforts will need to overcome domestic opponents from both sides of the aisle, many of whom have resisted administration proposals to deem CMAs as FTAs under the Inflation Reduction Act (IRA). The discriminatory aspects of the IRA have received strong criticism from trading partners and may result in retaliation that could unnecessarily threaten a strategy built on trusted trade partners and the green transition. Reviving stalled talks and reaching agreements with these partners would be important steps toward enhanced supply chain resiliency.
  4. Enable Congress to play a larger role. More active involvement by Congress in shaping trade agreements and calibrating legislative requirements for domestic sourcing will be crucial to reduce dependency on China and build more resilient supply chains. Multilateral efforts at friendshoring will rely on active involvement from the legislative branch. The Biden administration should engage with Congress to find bipartisan solutions to balancing trade, industrial, and climate policy objectives in battery supply chains. Regulatory reforms that incentivize domestic production of key constituent materials for the supply chain should also be a priority for federal action.
  5. Reconsider barriers limiting the import of green technologies and their inputs. High and broad tariffs on imports and exports have disrupted the LIB supply chain and the industries that rely on it—including green technologies. The Office of the U.S. Trade Representative should take green transition priorities into account when it considers exemptions to tariffs, including the Section 301 tariffs on a broad swath of Chinese goods. For instance, the items critical to LIB manufacturing could be granted exemptions to support decarbonization efforts.

Domestic Economic Landscape

  1. Create an interagency team tasked with drafting an industrial policy plan to grow domestic production of lithium-ion batteries. This policy plan should be grounded in data through the preparation of specific estimates and projections for future needs for key critical minerals, constituent minerals, and chemistries that are necessary to reach production goals. The team’s assessment should include a projection of which CMAs and other newly enhanced trade relationships will be necessary to meet production targets.
  2. Establish an effective Environmental Protection Agency (EPA) fast-track process for permitting the production of key green transition technologies. An efficient EPA permitting process is critical to supporting the production and commercialization of green technologies. Current backlogs are hindering long-term U.S. environmental goals. Projects to produce items key to the green transition, such as lithium-ion batteries—or inputs to these goods, such as developing alternative chemistries—should be placed on a fast-track permitting process. This should include a fast-track process to scale up U.S. capabilities in mining.
  3. Design future climate and infrastructure investments to renew funding for grid improvements. The grid faces capacity shortages as demand surges, outpacing the rate of new generation capacity additions and the retirement of obsolete facilities. Past underinvestment has made authorizing improvements difficult. Simultaneously, electricity demand is escalating beyond initial forecasts, primarily driven by the proliferation of data centers and the expanding electrification of various economic sectors.

Conclusion

The Biden administration’s merging of goals related to bringing production back home and reducing supply chain risk factors with the transition to green energy sources has led to misaligned policies. For instance, the local content requirements in the IRA hamper its potential to stimulate electric vehicle demand by restricting access to critical minerals and assembly options. The failure of the United States to secure further CMAs has impeded manufacturers’ capacity to procure necessary resources, intensifying resentment toward local content requirements within the IRA. Curtailing the involvement of economic partners in U.S. decarbonization efforts undermines efforts to fortify critical supply chains through diversification. Additionally, integrating national security concerns into state-led investments in the United States makes it more difficult for manufacturers of essential goods like lithium-ion batteries to acquire the materials they need, given China’s predominant position in those markets.

Moreover, policies focused on reshoring are poised to face deficiencies in the capabilities of the U.S. economy, a reality already evident in lithium-ion battery manufacturing. For example, the government’s permitting process and the nation’s electric grid infrastructure are both overwhelmed. U.S. efforts to bring back production of cathode and anode active battery materials have already faced significant challenges due to severe shortages in the workforce. In short, adjusting trade policies to prioritize cultivating strong partnerships with economic allies over reshoring, implementing gradual de-risking strategies instead of abrupt decoupling, and promoting state-led investments without geographical stipulations will aid in transitioning toward a carbon-neutral economy. The recommendations outlined above take a step in that direction.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Meredith Broadbent serves as a senior adviser (non-resident) with the Scholl Chair in International Business at CSIS. Thibault Denamiel is an associate fellow with the Scholl Chair in International Business at CSIS. Evan Brown is the program coordinator and research assistant for the Scholl Chair in International Business at CSIS.

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Meredith Broadbent
Senior Adviser (Non-resident), Scholl Chair in International Business
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Evan Brown
Program Coordinator and Research Assistant, Scholl Chair in International Business