Will the scramble for rare earths produce a transatlantic trade accord?

A global search is accelerating for new sources of rare earth elements—the metals or minerals vital to a wide range of commercial and industrial products, as well as computers, batteries, wind turbines, and electric vehicles. But for Europe and the United States, that pursuit is complicated because both depend heavily on China to access these elements essential to technological progress and combating climate change.

Only a small amount of rare earths has been extracted in the US but none yet in Europe. Paradoxically, both are considering negotiations on potential transatlantic trade arrangements in rare earths and even eventually a free trade agreement.

As the world invests heavily in the digital economy and green transition, the need for these rare earth elements—including bauxite, cobalt, lithium, and nickel—will increase five to six times by 2030, and seven times by 2050, according to estimates by the European Commission and the World Bank. But the European Union and the United States import 98 and 80 percent, respectively, of these rare earths from China, which controls large parts of the world’s mining and processing. China produces some rare earths itself but has also invested considerably in countries where the minerals are abundant and extraction is expensive and environmentally harmful.

With tensions rising between China and the West, the need to diversify supply chains is becoming acute. Several countries in the EU have minerals deep underground—for instance, France, Greece, Greenland, Portugal, and northern Scandinavia. LKAB, the state-owned mining company in northern Sweden, estimates that most critical minerals can be found in Swedish territory, with reserves measuring a million tons, potentially making Sweden the biggest supplier in Europe.

But investment costs are high; procedures to obtain permits and licenses and conduct environmental impact assessments are lengthy; and mining and processing the minerals is dirty work. For instance, the process to get permits can take 8 to 12 years. Moreover, in Sweden (as well as Norway and Finland), the discovery of rare earths threatens indigenous reindeer-herding populations in those areas. Addressing their complex demands would be another challenge.

Bearing these difficulties in mind, the European Commission recently presented a rare earth strategy aimed at ensuring access to “secure, diversified, affordable and sustainable supply of critical minerals.” A common framework is to be created to strengthen the EU’s capacity to extract, process, and recycle minerals and metals to diversify supply chains and better monitor risks. The Commission proposal suggests targets for increased rare earth activities on EU soil so European extraction can meet 10 percent of annual consumption, 40 percent of annual processing, and 15 percent for annual recycling, all by 2030. In addition, no more than 65 percent of the annual consumption of each strategic raw material should be sourced or processed from a single country outside the EU.

To achieve these objectives, member states have to accelerate their domestic procedures to grant permits. They are encouraged to identify strategic projects in recycling, extracting, or processing and create a one-stop shop. The Commission proposal also underscores the need to expand information sharing, skills training, and transparency to avoid big protests and “facilitate public acceptance” at a time of widespread public skepticism toward mining.

So, how can the EU accomplish these goals? EU countries can certainly shorten and simplify their internal processes, while jointly identifying needs and investment in research and innovation skills. But the percentage targets seem random and arbitrary.

Can a critical minerals agreement be a free trade agreement?

One striking feature of the European strategy is its plan to set up an agency to coordinate central buying of rare earths on the EU’s behalf from global sellers. This process would mirror the joint vaccine purchasing arrangements during the COVID-19 pandemic, although critical minerals are quite different.

Meanwhile, in the US, the Biden administration plans to provide tax credits, authorized by the Inflation Reduction Act of 2022 (IRA), to encourage the use of green technologies. But the act’s “Made in America” provisions require that the critical minerals going into electric vehicles have to be produced by the US or countries with which the US has a free trade agreement. The US and its official trading partners do not produce nearly enough of these elements to make the incentives work. Washington is going to have to expand the number of countries that provide these critical minerals—and that could lead to a trade agreement negotiation with the EU.

The European Commission’s rare earth strategy is a distinctly European one, but it should also be seen in a transatlantic context. In a recent meeting, Commission president Ursula von der Leyen and President Joseph R. Biden Jr. discussed the strategy and jointly announced that they would immediately begin negotiations on a targeted critical minerals agreement. A future deal could lead to the EU being treated as an equal partner in an equivalent of a free trade agreement, thereby qualifying the EU for certain tax credits for electric vehicles in the IRA. The objective is to have an agreement where critical materials sourced or processed in Europe are recognized as sourced or processed in the US.

The EU and the US have never had a free trade agreement, despite having such agreements with many other countries. President Barack Obama’s administration attempted to negotiate the so-called Transatlantic Trade and Investment Partnership (TTIP) with the EU. Talks came a long way, but disagreement over agriculture subsidies and standards and their application were hard to resolve. President Donald Trump then put the negotiations in the freezer.

Would an agreement on trade in rare earths be enough to qualify as a free trade agreement? Such an accord would need to be adopted by the European Council and the European Parliament, in a legislative process that could take up to a year. Would Congress support such an arrangement? Statements from Treasury Secretary Janet Yellen indicate that it would be adopted through a nonlegislative procedure, an innovative way to strike a trade agreement that could rankle many lawmakers. Treasury also confirmed that countries with “newly negotiated critical minerals agreements” would be able to qualify as trading partners and thereby meet IRA criteria.

The agreement being discussed between the EU and US would focus on the minerals needed for electric vehicle batteries, which must come from the US or one of its free trade agreement partners. To qualify for the US tax credits, electric vehicles must also meet certain local battery production requirements.

For the moment, and the foreseeable future, the EU has no critical minerals of its own to sell, but future commitments to battery production in the US are likely to qualify, as well as a commitment that no export restrictions would be imposed on critical minerals extracted in the EU in the future. The incentive for Washington is that US dependence on China would diminish. An accord on rare earths might thus calm transatlantic tensions and increase cooperation.

On the other hand, however advantageous to both sides of the Atlantic, such an accord would signify yet another step undermining global trading rules. According to these rules, which go back to the traditional approach of the General Agreement on Tariffs and Trade (GATT), any free trade agreement should cover a substantial part of trade of two or more partners. Signaling that Washington could go along with such an approach, Katherine Tai, the top US trade envoy, announced this week that a critical minerals trade deal had been reached with Japan. Her comment suggested that a similar agreement with Europe could be in the offing, reinforcing their determination to secure supply chains and cooperate strategically. So there is a lot of confusing terminology here. The US calls the critical minerals pact a “free trade agreement,” but in reality the agreement is much more limited.

The European Union aims big

For the EU, an agreement with the US could pave the way for a broader diversification of the sources of critical minerals by reaching agreements with other trade partners—for example, Australia, Chile, and the Mercosur countries (Argentina, Brazil, Paraguay, and Uruguay), which also have large reserves of certain critical minerals.

Europe’s broader aim is to create a sort of global alliance, a critical raw materials club among like-minded countries, to work on strengthening global supply chains, aligning with rules of the World Trade Organization and working with partners to combat unfair trade practices. The EU also aims to use its Global Gateway infrastructure program—a response to China’s Belt and Road Initiative—which has heavily focused on extractive industries while identifying key projects to support infrastructure and ensure that processing of rare earths, as opposed to the Chinese approach, is environmentally sustainable—a path also recommended by my PIIE colleague Cullen Hendrix.

A targeted critical minerals agreement among like-minded partners may be a faster and more sustainable way to diversify supply chains, but it certainly does not follow the international rules of making traditional free trade agreements.