OPINION:
Shortly after taking office, the Biden administration declared the integrity of America’s critical mineral supply chains an important issue for “economic prosperity and national security.” Yet the Inflation Reduction Act’s (IRA) electric vehicle consumer tax credit scheme tells a different story. Provisions expected to take effect early this year will facilitate the offshoring of the critical mineral industry while providing a lucrative loophole for Chinese companies.
The new rules form part of the president’s agenda to pull U.S. consumers and manufacturers away from gasoline- and diesel-powered vehicles. Under the previous federal tax credit scheme, an auto manufacturer’s first 200,000 electric vehicles would be eligible for a consumer tax credit. While the IRA removes this cap, it also introduces a raft of new, location-specific content and manufacturing requirements.
One of these new requirements concerns the origins of the critical minerals used in electric vehicle batteries. Eligibility for the full tax credit is made conditional on a minimum proportion of a vehicle’s battery minerals being extracted or processed in the United States, a country with which the United States has a free trade agreement or being recycled in North America. This minimum proportion gradually increases over time, starting at 40% in 2023 and reaching 80% in 2027.
Herein lies the problem — a free trade agreement has nothing to do with a military, security or political alliance. Consequently, the United States does not have free trade agreements with some of its closest allies, such as Japan, the United Kingdom or France. Free trade agreements concern business, nothing more or nothing less. The IRA’s tax credit scheme will thus privilege minerals coming from Nicaragua, whose government is under U.S. sanctions, over those of a treaty ally such as Germany.
This policy of conflating business partners with trusted allies is reckless. Both the Biden and Trump administrations recognized that a reliable supply of critical minerals is integral to our economic and national security. While these minerals play a visible role in renewable energy technology, notably in the magnets in wind turbines or batteries in electric vehicles, they are also crucial for military technology, such as sonar, radar and satellite imagery.
Instead of addressing the regulatory roadblocks faced by the American mining industry, the IRA risks shifting America’s mineral reliance from one foreign, low-cost jurisdiction to another. The United States was once the world’s preeminent producer of rare earth minerals. Yet the onerous regulation of the American mining industry, coupled with high operating costs, has hamstrung American production.
Meanwhile, the communist regime in Beijing has exploited its own low local operating costs to establish its global mineral dominance. China now mines around 60% of the globe’s rare earth element supply while refining and processing around 90% of the global supply. Without leveling the playing field by addressing the regulatory roadblocks that raise costs for U.S. mining projects, the IRA merely shuffles American dependence on foreign producers.
The risk of allowing hostile foreign powers to control critical mineral supply chains is not solely hypothetical. In 2010, China cut off rare earth element exports to Japan after a Chinese fishing trawler was detained by Japanese authorities. More recently, propagandists for the Chinese Communist Party have raised the prospect of manipulating critical mineral supplies to gain leverage in trade disputes with the United States. The potential damage of this strategy would be profound as, for some minerals such as yttrium — an element key in industrial, medical and national security applications — the United States is 97% reliant upon Chinese imports.
Despite this risk, the critical mineral provisions within the IRA only belatedly tackle China’s dominance head-on. Critical minerals extracted, processed or recycled by Chinese companies become ineligible for the credit only in January 2025. This creates an almost two-year loophole for Chinese companies to profit from higher sales associated with the consumer tax credit scheme.
While Chinese companies would still need to comply with the other conditions of the scheme, this is not an onerous burden. Chinese companies could continue to mine lithium in a country such as Chile and process it in China before shipping it to Mexico for its inclusion in an electric vehicle battery.
Considering China’s evasive trade tactics in recent years, this circuitous route is not unimaginable. For over a decade, the United States has played a global game of whack-a-mole with Chinese solar panel manufacturers, who have sought to skirt American trade rules. When it comes to critical minerals, ignoring this history constitutes a strained act of willful ignorance.
There is recognition across the aisle that the integrity of critical mineral supply chains is integral to the United States’ economic and national security. Offshoring some of our most sensitive mineral supply chains to countries that are not closely allied with the United States contravenes this bipartisan common sense. Congress needs to tighten the critical minerals provisions within the IRA to safeguard America’s interests, but more sweepingly, reform the regulatory environment that only serves to offshore critical American industry.
• Oliver McPherson-Smith is a senior fellow at the Center for Energy & Environment at the America First Policy Institute.
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