The geopolitical landscape is increasingly complex and nuanced.
Through WTW’s geopolitical risk research program, we continue to explore some of the most important issues in the geopolitical space. A key area of focus in 2024 is the implications of resource scarcity and climate fragility as drivers for inter-regional cooperation or conflict — an area the WTW Research Network will be exploring with Cullen Hendrix, a senior fellow at the Peterson Institute for International Economics (PIIE). In addition to his position at PIIE, Cullen serves as a senior research fellow at the Center for Climate & Security. His work with WTW focuses on exploring the catalysts and consequences of several key themes.
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With large investments in green energy and related infrastructure, the United States and European Union are getting serious about both climate change and energy security. Doing so, however, will require ramping up production of minerals such as lithium, graphite, cobalt, copper and nickel. These are just five of the over 60 ores and alloys identified by the U.S. Geological Survey, U.S. Department of Energy and U.S. Defense Logistics Agency as “critical” in the sense that they are both mission-critical for energy and national security purposes and at elevated risk of supply disruption. And no country looms as large in these supply chains as China, which has emerged as the United States’ and and Europe's most significant economic and strategic competitor.
For environmentalists in the U.S. and Europe, renewable energy has long been viewed as a solution to two related problems: the climate crisis and lasting energy security. The wolf-at-the-door, action-forcing event necessary to catalyze real change finally materialized in February 2022: Russia’s invasion of Ukraine and weaponization of its energy exports to Europe. It’s no accident that the most consequential pieces of climate legislation in the U.S. and Europe to date — the U.S. Inflation Reduction Act (IRA) and the EU’s Climate Law — arrived later that year, both with the explicit intent to drastically reduce dependence on fossil fuels. At the same time, however, it also provided space for fossil fuel interests — especially in the U.S. — to push for more domestic production and increasing liquefied natural gas exports to Europe.
Nevertheless, the U.S. and E.U. committed themselves to green energy in a big way. Over time, this commitment will both help mitigate further climate change and lessen exposure to oil and gas markets. These markets are increasingly dominated by national hydrocarbon companies whose behavior can be driven more by government priorities than market conditions — priorities that aren’t always in line with those of Western governments and consumers. In theory, renewable energy will lessen the ability of foreign interests to cut off supplies — a fear even more acute in oil-poor Europe than in oil-rich U.S.
But these commitments will trade one vulnerability for another, shifting the locus of energy geopolitics from hydrocarbons to the minerals that underpin renewable energy technology. The U.S. and E.U. are highly import-dependent for both downstream products such as solar panels and EV batteries and upstream, intermediate goods such as refined polysilicon, lithium and graphite. China and Chinese owned firms dominate global markets for EV batteries, solar panels and processed minerals. Although renewable technologies don’t consume resources on a constant basis — we get the “fuel” for free in the form of wind, sunshine and the like — the potential for weaponization is still there, though it doesn’t create the same ticking bomb problems that hydrocarbon supply shocks produce.
China has already shown a willingness to utilize its dominant position in green tech supply chains to restrict exports of graphite — demand for which has skyrocketed due to its use in electric battery anodes — to the U.S. and Japan in December of 2023. This move was reported to be in response to U.S. and Japanese export restrictions on advanced, dual-use semiconductor technologies to China: a tit-for-tat salvo in a U.S.-China trade war that’s been one of the strongest points of continuity between the Trump and Biden administrations. But the trade war is now seeping into areas that threaten green tech supply chains, indirectly imperiling not just China and the U.S. but also the world at large.
China’s dominance of these supply chains is not due to manna from heaven. China is rich in some minerals (antimony, graphite, rare earths and tungsten) but import dependent for many others. China achieved its position through large, heavily subsidized investments in infrastructure, energy, training in metallurgy and engineering, and gaining control of production and processing capacity outside its borders.
Given the substantial start-up costs and energy intensity of mining and mineral processing, some form of subsidized industrial policy was always going to be necessary to diversify and de-risk these supply chains. The IRA’s generous subsidies have catalyzed a U.S. green tech investment boom, with investments heavily slanted toward electric vehicle, EV battery and mineral recycling capacity — but not mining and mineral refining, due in no small part to their sizable energy and environmental footprints.
These policies have also led to tensions with Asian and European trade and security partners, who see U.S. subsidies diverting investment from their own economies and workforces. It has also stymied the ambitions of many mineral-rich, middle-income and developing countries such as Indonesia, Mozambique and Argentina, which would like to contribute to U.S. green tech supply chains but whose minerals are ineligible for the IRA’s tax credit-based incentives that are subject to increasingly stringent domestic/free trade agreement partner-sourcing requirements. And these policies have created uncertainty around planned U.S.-based Chinese joint ventures that would allow U.S. manufacturers to take advantage of industry-leading EV battery chemistries and production techniques. The rush to de-risk supply chains may claim the highly innovative, integrated global knowledge ecosystem supporting them as a casualty.
With twin crises — one geopolitical, one climate-related — unfolding, the world can ill-afford a return to Cold War-like competition for influence and control over the world’s critical mineral supplies. Such a turn would slow desperately needed green transitions and contribute to further fragmentation and instability in the global economy. We should also be paying close attention to the IRA to see if provisions favoring free trade agreement partners are amended to focus on an environmental and labor standards-based approach to sourcing, where products from any country meeting these standards would be welcomed.
