The war in Ukraine has exposed the constraints imposed on the West’s ability to respond to Russian aggression due to European dependence on Russian oil and gas. As European countries rush to reduce this vulnerability, more careful attention has been focused on the geopolitical risks that confront highly globalized supply chains.
U.S. strategic competition with China, the disruptions caused by the pandemic and the rise of populist sentiments in the West had already led to a reassessment of supply chains that had previously focused excessively on reducing costs and were designed to eke out every efficiency on the way to delivering lower prices for consumers and higher profits for companies. Terms like reshoring (bringing back production to the U.S.) and multi-shoring (sourcing critical goods from multiple locations) made their way into the lexicon. The importance of building more resilient supply chains, capable of withstanding a variety of global shocks, was repeatedly stressed.
Now Treasury Secretary Janet Yellen has added to this list “friend-shoring” — or, working to “maintain strong economic ties with critical allies … while lessening the risks associated with the over-concentration of key supplies in unreliable countries.” The big worry is that such excessive reliance on unfriendly countries limits strategic choices and hampers the ability of the U.S. and its allies to respond to geopolitical crises. This policy would seek to replace trade with unfriendly countries with trade with strategic allies.
There can be little doubt that, first and foremost, Yellen has China on her mind. In comparison to Russia, China has a much larger economy, and the West is much more reliant on China for critical goods. This is especially true in the case of the green energy supply chain. A Department of Energy report “Securing America’s Clean Energy Supply Chain” notes how manufacturing capacity for solar photovoltaic technology is highly concentrated in China. It also notes that China controls large percentages of rare earth materials production and refining which are key inputs for green technologies.
For instance, 70 percent of the world’s cobalt supply (an input in lithium-ion batteries) comes from the Democratic Republic of Congo, with much of this being owned by Chinese companies, and China controls 72 percent of global cobalt refining. Similarly, neodymium, a key input in offshore wind turbines is primarily mined and refined in China. Chinese control of resources extends across the board in solar, wind and battery storage technologies. Increasingly, much of the world’s know-how in green technologies is also concentrated in China. For the foreseeable future, the U.S. and its allies will need to rely on China heavily for their green energy needs.
In an acknowledgment of the risk that such dependence on China poses and illustrating the principle of “friend-shoring,” the U.S. and Australia recently signed the Australia–United States Net-Zero Technology Acceleration Partnership. The joint statement emphasizes the crucial role of critical minerals and materials and outlines a variety of ways in which the U.S. and Australia intend to “collaborate on ensuring resilient, diversified, responsible and sustainable critical material supply chains encompassing production, processing and manufacturing capacity.”
Although the text of the joint statement is short on specifics and makes only oblique reference to China, what Energy Secretary Jennifer Granholm said while in Sydney is more explicit in its reference to both Russia and China. A good summation of the strategy behind the partnership would be her statement: “We’ve seen what happens when we rely too much on one entity for our source of fuel, and we don’t want that to happen — so to diversify those energy sources and to link up with partners is part of our energy security.” China’s belligerent reaction to House Speaker Nancy Pelosi’s Taiwan visit only serves to underscore this point. American strategic options in possible geopolitical crises would be severely constrained by excessive reliance on China for critical goods.
It is difficult to assess the “friend-shoring” policy as it relates to the green energy supply chain because so much will depend on details. In the shadows of the war in Ukraine, it is easy to agree with the principles being expounded by Yellen and Granholm that critical goods ought not to be near-exclusively sourced from “unfriendly” countries. However, it does not then follow that the U.S. and its allies should shut out China from their green energy supply chain. This would make green energy more costly and would likely hinder rather than help the transition to a green economy.
Behind the “friend-shoring” concept is the idea that if the group of “friend” countries is sufficiently large and diverse then the costs of reducing dependence on “unfriendly” countries can be made manageable. We can imagine a critical good where reshoring to the U.S. is too costly, but there may be some allied countries where it can be made cheaply, even if at a cost modestly higher than China. With this in mind, there is a case to be made for more active and broad Western engagement with Africa and other parts of the world that are central to the supply of rare earths. China already has a considerable head start in this.
In a similar vein, it will be important to develop an understanding of where the most significant vulnerabilities will be, should relations with China deteriorate, and to target investments in alternative sources of supply appropriately. The alternative sources do not have to replace China’s supply but should create sufficient capacity to enable the U.S. to rebound quickly from a geopolitical shock. Geopolitical calculations also need to inform investments in alternative forms of green energy that have not yet been widely commercialized (such as hydrogen, in which China is investing actively).
Recent progress in the climate agenda, in the shape of the Inflation Reduction Act, has injected new hope that the U.S. will now begin to make its much-delayed transition to a green economy. Indeed, the increasingly dire climate outlook leaves no other option. Unfortunately, the current geopolitical situation has added a whole new layer of complication. It has made an accounting of both environmental and security needs essential for planning the way forward to a greener future.
Kislaya Prasad, Ph.D., is the academic director of the Center for Global Business at the University of Maryland.