Critical Minerals and a Coalition of the Competent
What if supply chain fixes don't require the US? How could they be resolved?
The last few months I have been quiet here due to being engaged on commercial matters and also taking a watch and wait attitude to the Trump administration on issues of economic security. The rhetoric has always been robust from Trump world in this area, but execution was lacking during the first administration, and it seems it will be weak in the second one too. Ukraine has no rare earths, but the US now has a minerals deal whose value add in supply chain pain points remains wholly unclear. Similarly deep-sea mining might be deliciously transgressive and help the administration “own the libs” but it does little to solve near term supply issues or market structure problems.
Meanwhile China has been ratcheting up mostly well targeted pressure campaigns where it hurts across minerals, processing technology and toolchains with significant spillover effects to the rest of the world. I think it is a fair assumption that barring US critical minerals reserve legislation with offtake writing capacity ex-US along the lines of that advocated by Employ America that the United States is not going to come riding over the hill to solve any of these vulnerabilities any time soon. Similarly, it will not have the capacity to stop China engaging in supply chain precision strikes or give China any reason to do so with tariffs as they stand. The rest of the world is going to have to come to its own defence on economic security matters much as Europe is in the face of an ambivalent US attitude to NATO on conventional security.
The good news is that there are already signs of this happening. Moderate centre left parties have been returned to government in Australia and Canada with more conventional policy development frameworks. The Australian government now has a critical minerals reserve policy which thus far looks a great deal like the Employ America work we discussed with Australian Treasury in early 2024. Carney is a serious and deep economic thinker and may very well do the same. Combined with long standing European efforts in this space which have had mixed but complementary success - generally more progress downstream (refining, processing) than upstream (mining and extraction) - a broader supply security policy could be implemented for many of these materials and quickly — with or without the United States.
The key here will be in not getting bogged down in international frameworks and meetings but countries staying in touch with allies but pursuing near term opportunities quickly much as with central banking. Reserve swaps and sharing can be done afterwards once there is something to share. The anti-action bureaucratic bias of the EU has slowed their progress in this space, and it will be important for all parties to get moving quickly because China’s industrial coercion efforts wait for no one.
In the following series I will outline the key materials and near-term opportunities to close the supply gap in them ex China. It should be noted here that while China is the focus of industrial coercion efforts today it may not be tomorrow. The only free lunch in finance remains diversification and supply diversification should remain an objective for everyone especially below threshold levels for coercion, generally around 80% according to an excellent paper by Clayton, Maggiori and Schreger called “Putting Economics Back into Geoeconomics”. This threshold is doubly important because standing up production from zero is a lot harder than having to do a rapid capacity expansion at a brownfield site. I am no great fan of Peter Thiel’s politics but going from zero to one is very different from going from one to ten in terms of output and often forgotten in policymaking though not among former CHIPs office members like Hassan Khan. Closing the gap to some degree of security should prioritize speed - the everything bagel-ism of the Biden administration at times wholly missed this in pursuing marginal mining assets in a manner that kept everybody happy but got little done. To be fair to the LPO and MESC there were a lot of wins out the Loan Programs Office downstream and midstream - just that for some materials the US endowment is mediocre.
In each of these pieces I will outline why the material matters, why the market is not working particularly well and what could or should be done about it using a combination of the tools outlined in the Employ America work: offtakes, stockpiles, financing. All of these tools can be purely financial: warehouses can be leased, offtakes can be managed via professional commodity traders and there are multiple arms of government that already lend. This should make it easy to stand up these entities in terms of headcount and get up and running quickly.
Some of these gaps are easy and quick to fill with very modest and low-cost intervention indeed these are small markets and most of them are. But understanding market failures and getting the design right is key to both success and ensuring the minimum cost to the public sector. In most of these materials the necessity for intervention is principally due to adversarial dumping: China can underwrite balance sheets that are losing money longer than the EU or US private sector and, in an endurance race they know that they can drop competitors faster than a juiced-up Lance Armstrong on a mountain stage in 2005. The question - to stretch this analogy to its limits - is to work out the minimum level of e-bike to make these strategies not work or cease to be appealing.