European Union leaders will meet next week in Spain to discuss one of the regional bloc’s most pressing geoeconomic challenges: lowering its heavy dependence on China for batteries, solar panels and other clean technologies.
Some Western pundits see the burgeoning push to de-risk Europe’s reliance on China as a threat to gains from decades of economic globalization. For them, China’s dominance in the production of green technologies cannot be broken and attempts to diversify will only set back the EU’s effort to fight climate change.
But such fatalism is short-sighted and dangerous. Diversifying the manufacturing of Europe’s green technologies away from China is a necessity in today’s volatile geopolitical climate and there is ample potential for de-risking to have a positive impact.
Without doubt, cutting back ties with the world’s largest manufacturer is an arduous task. China accounts for over 30% of global manufacturing output — more than the U.S., Japan and Germany combined.
When it comes to green industries, the EU’s dependence on China is staggering. China supplies four-fifths of the EU’s solar panel needs and over 90% of its demand for rare earth permanent magnets and battery-grade lithium, both key inputs for producing electric vehicles.
The COVID-19 pandemic and Russia’s invasion of Ukraine exposed the risks of overdependence on individual suppliers. With the risk of a possible military conflict across the Taiwan Strait that would block major trade arteries and cost the global economy over $2 trillion, the hyperconcentration of Europe’s green supply chain makes little sense.
There is also the reality that no one country — not even China — can alone mine, process and manufacture all the critical minerals, components and technologies necessary for the green transition.
According to a recent study by McKinsey & Co., investment in critical minerals must increase to $300 billion to $400 billion a year to support the green transition. China is on pace to make a record $20 billion in mining and metals investments this year.
That is an impressive level but not enough, and sitting back and letting Chinese players try to do all the work only raises the risk of supply shortages that may slow the effort to address climate change.
Even if realized, Europe’s de-risking plan would hardly result in a full-scale decoupling from China. The EU’s diversification strategies have specific, measured aims.
For example, the EU’s agenda on critical raw materials, including rare earths and lithium for the manufacture of green and digital technologies, targets securing 10% of EU needs from within the bloc and capping external dependence on any single outside nation at 65% across each stage of the metals’ processing.
These will still be challenging targets to hit, but de-risking will help Europe lower its vulnerability to a possible Taiwan crisis and minimize Beijing’s opportunity to exploit industrial dependence for political and economic ends. In this context, it is useful to reference China’s recent move to restrict the export of gallium and germanium, metals vital for making semiconductor chips.
More quietly, China is also informally blocking exports to Sweden of graphite, a mineral essential in manufacturing EV batteries. By cutting off these supplies, China is hamstringing Swedish upstart battery maker Northvolt.
Yet for Europe to develop resilience in green supply chains, it is essential that EU nations take action both up and down the value chain.
Japan can provide a model in how it has developed alternative green supply chains covering mining, processing and metal-making for magnets and batteries. This effort began after China imposed a brief ban on the shipment of rare earths to Japan amid a flare up in the two countries’ territorial dispute in 2010. As a result of its policy effort, Japan lowered its dependence on China for rare earths by 2020 to 59% from 90%.
Japan has de-risked from China by offering financing to Perth-based mining company Lynas Rare Earths to develop a mineral deposit in Western Australia and a processing plant in Malaysia. Japanese metals and magnet companies have also bolstered their production bases in Thailand and Vietnam. As a result, Japan continues to account for over one-third of global production of high-performance rare earth magnets for the EV industry.
Europe does not have the same industrial base to build on, but it has its own building blocks to work with.
The EU can leverage the mining partnerships it has formed with the U.S., Canada and Australia, as well as investment by European companies in mineral-rich countries in Africa and Latin America, to accelerate the de-risking timeline. The Nordic region has tremendous untapped critical mineral potential that could help satisfy Europe’s long-term demand. But the environmental risk created by new mines has to be balanced with support for recycling and circular industrial cycles in which Europe strives to be a world leader.
There is also critical mineral processing potential in Europe. Finland refines 10% of the world’s cobalt output already. Belgium and Germany refine smaller but significant shares of germanium. Estonia is home to one of the only rare earth processors operating outside China. A Norwegian company has attracted investment for another rare earth processing facility that will cover 5% of Europe’s needs using a new technology that it developed with a small amount of EU support.
Each of these projects represents just a sliver of regional demand, but together they can add up to a significant piece of the global pie.
Europe’s biggest challenge lies in manufacturing the super magnets essential for sophisticated systems like electric vehicles and wind turbines. Europe is by far the largest destination of Chinese-made magnets, according to the Rare Earth Industry Association.
There are sprouts of growth. In an effort to cut into Europe’s dependence, Canada’s Neo Performance Materials is developing a mine-to-magnet supply chain that will stretch from North America to Europe. But building up Europe’s upstream capability to produce alloys and metals for magnets will require state aid and other strategic backing to withstand Chinese monopolistic pressure.
Change never comes easy. Breaking long-standing dependencies and remaking supply chains is a costly, complex and lengthy process. China did not, after all, build its green industries overnight.
But developing alternative green manufacturing networks outside of China is not an insurmountable task. Europe’s de-risking plans can succeed.
Source: Nikkei Asia