Rare earth for export at the port of Lianyungang, China. Courtesy of Imaginechina Limited / Alamy Stock Photo
As the world transitions away from fossil fuels, what will the consequences be for global geopolitics and the stability of the international system?
To slow anthropogenic climate change, the world must roll back its consumption of hydrocarbons and transition to renewable, green-energy sources such as solar and wind to generate electricity and fuel transportation. The technologies necessary to harness these green sources require a variety of minerals and metals, which we cumulatively refer to as ‘critical’ minerals and are vital to the production of semi-conductors, lithium-ion batteries, solar panels and wind turbines, as well as non-energy technologies such as mobile phones, computers, robots and military hardware. Countries cannot grow economically and address climate change without these minerals, but a growing reliance on them will have a cascading series of political effects whose exact shape is unclear. Transitioning to green energy will undoubtedly make the world healthier, but will it also make it safer?
The answer depends on whom you ask and how freely and cheaply critical minerals can be produced, processed and acquired. China, thanks to its command of critical minerals supply chains, can keep prices artificially low, discourage new free market entrants from eroding its position, and temporarily hold developed economies hostage by limiting exports. More importantly, China’s capacity for mass producing green-energy technologies may allow it to capture the lion’s share of geopolitical benefits from the transition to green energy.
Some Western commentators argue that free markets will meet consumer demand for critical minerals supplies. Building on the work of economists such as M A Adelman and Mancur Olson, they maintain that higher prices for natural resources incentivise investment to find alternative sources of production while encouraging greater efficiency. Another approach to blunting China’s ability to leverage its command of the critical minerals supply chain is market intervention by restarting and subsidising domestic production – even at the cost of relaxing environmental standards – and controlling potential sources around the world, while blocking access to Chinese firms and working with allies. The administrations of both Donald Trump and Joe Biden have embraced these strategies.
We argue that neither letting markets work their magic nor intervening in markets in an autarkic fashion will solve this quandary. The former is wishful thinking that will only exacerbate dependence on China, while the latter will sharpen US–Chinese competition, discourage global trade, encourage economic self-sufficiency, and increase the likelihood of war. Lest we all lose in this scenario, and the planet continues to warm, the US, China and the world must embrace a cooperative and interdependent approach to managing supplies of critical minerals and developing and scaling up technologies to enable the transition to green energy.
Oil, Dollars and Ships
US faith in free markets for energy stems from its apparent success in supplying its oil needs and blocking the rise of a monopolistic or cartelistic entity – the Organization of the Petroleum Exporting Countries (OPEC) being the epitome. Yet the OPEC example is flawed. First, OPEC failed to control oil prices because there were too many ‘outsiders’ (the US, the Soviet Union/Russia, Mexico, the North Sea, etc.) eager to boost production to take advantage of any price increases that OPEC engineered through production cuts. Second, OPEC lacked an enforcement mechanism against members who violated their quotas. In essence, both flaws are manifestations of the ‘collective-action’ problem – that is, the propensity of individual actors to ‘free ride’ on collective sacrifices.
China's share of global critical minerals production, exports, refining and reserves far exceeds OPEC’s highest shares for oil in the early 1970s
China’s command of critical minerals is nothing like OPEC’s influence over oil. As a unitary actor, China need not worry about any partners undermining its national aims. More importantly, its share of global critical minerals production, exports, refining and reserves far exceeds OPEC’s highest shares for oil in the early 1970s. In 2020, China accounted for 58% of global production, 70% of global exports, 80% of refining, and 37% of global proven reserves. While the US and others have eroded China’s dominance over production, from 92% in 2010 to 81% in 2015 and 58% in 2020, China’s refining share has remained untouched, which explains why the US still draws 80% of its imports from China. US exports of raw rare earth minerals to China grew in 2020, but only so that they could be processed there.
China’s position today bears similarities with the US during the Age of Oil. The transition from coal to oil in the late 19th and early 20th centuries helped elevate the US to a position of global hegemony because of its prodigious domestic supplies and initial dominance of production and exports, which led oil to be priced in dollars. Consequently, buyers needed dollars, which meant running surpluses elsewhere on their current accounts or attracting dollar investment. This reliance on dollars and the consequent dependence on US financial intermediaries created a second point of vulnerability. Even if countries did accumulate dollar surpluses, they remained vulnerable to non-violent coercion through financial sanctions. For example, when the US froze Japanese dollar accounts in US banks, it severed Japan’s imports of US oil without imposing a formal embargo; more recently, the US wielded sanctions against Iran and Venezuela to similar effect.
Even as the US share of world oil production and manufacturing shrank after the Second World War – and with it, the gold reserves that maintained the Bretton Woods system – the oil-backed dollar remained central to world trade. After the Second World War, countries accumulated dollar surpluses to buy oil and pay for imports from the US. Dollars that ended up in the coffers of oil producers were ‘recycled’ in the US or Europe in the form of bank deposits, foreign investment, or purchases of services or weapons, leading to the rise of the ‘petrodollar’. As a result of these practices, countries continued relying on the dollar as a convenient measure of exchange even when they were no longer buying goods from the US. Today, dollars still account for nearly 80% of inter-regional trade and nearly 50% of the value of total international trade.
Of course, the US could only exercise this power if it secured the global oil trade. Moving oil from upstream fields to downstream markets went through pipelines or tankers. The former had lower costs through superior economies of scale but were more expensive to construct and were vulnerable to sabotage. Tankers, by contrast, could be redirected to meet shortfalls in different markets and were less obvious targets than immobile pipelines, but they also carried less oil and were vulnerable to interdiction at sea. The US Navy’s oil-powered ships allowed it to defend the high seas against these vulnerabilities, while US firms channeled supplies to US allies and partners and export earnings to friendly producers, as during the 1956–57 Suez Crisis and the 1984–88 Tanker War. Adversaries, meanwhile, had to rely on either overland imports or blockade running, while unfriendly exporters could not find markets for their oil or repatriate their foreign earnings (Iran’s problem today).
Electricity Flows Overland
Much as with oil, finance and the capacity to secure supply chains will determine the winners and losers of the green economy, and the US is vulnerable in most of these areas. As when oil displaced coal and the dollar replaced sterling as the global reserve currency, the transition to green energy may undermine the status of the dollar as the dominant currency, if oil importers like China replace their dollar-denominated oil imports with locally sourced electricity produced from solar, wind and nuclear power and perhaps even hydrogen. China can also export its green-energy technologies, especially to raw-materials producers, further reducing its dollar requirements, and it already offers creative ways to finance such purchases through digitalisation, its own digital currency, and barter deals. China, moreover, has sufficient dollar reserves, stockpiles of oil, and ties to oil exporters including Russia, Central Asia and Iran to bridge the transition from oil to green energy, even if it needs to make progress in creating alternative payments systems to circumvent US sanctions.
A world of overland, continental flows of electricity may finally vindicate Halford Mackinder's premonition of the re-emergence of continental powers as the drivers of world history
Despite its higher costs, the transshipment of energy in a green economy has much to commend it compared to overseas oil or natural gas imports, and portends a cardinal difference with hydrocarbons – overland versus overseas trade. The rise of hydrocarbons coincided with the rise of the first global maritime economy following the European ‘discovery’ of the Western Hemisphere. Hydrocarbons became ubiquitous because Western merchants could leverage their advantage in sea-going transportation, and countries that dominated the maritime commons exploited this commercial development and became the great powers.
A world of overland, continental flows of electricity, on the other hand, may finally vindicate the premonition of Halford Mackinder in 1904 of the re-emergence of continental powers as the drivers of world history. Overland electricity transmission lines make it easier for China to supply cheap, clean power to its neighbours, something it is already doing with the Northeast Asia power grid, which connects cheap Chinese green energy to Japan, North Korea, Mongolia, Russia and South Korea. China also seeks to build, as part of its Belt and Road Initiative, new, interlinked ultra-high-voltage transmission lines spanning from its western border across Central Asia to the eastern Mediterranean and Europe. Transporting its refined critical minerals, meanwhile, is cheaper than transporting oil because they are less voluminous, while those that must travel by sea are easier to disguise and protect from rival naval forces. Such considerations, alongside its burgeoning manufacturing sector, mean that China is presently best positioned to exploit the transition to green energy and secure the flows of electricity and the materials and technologies that power it.
It is fortunate that critical minerals are so abundant – the world can rely on producing enough of them to transition to green-energy technologies to slow climate change. Their abundance, in theory, bodes well for calming geopolitical competition over their control. Green-energy production, moreover, provides lower power density than hydrocarbons and requires more complex and expensive transmission systems, limiting the scope of its distribution to local or regional markets. As practically every country has access to the sun or wind, states could also ideally produce more energy domestically, thereby reducing the spectre of future resource conflicts. Yet resource competition will remain with us, even if the geography of that competition changes (for example, Africa and South America replacing the Middle East as the most valuable producers of raw materials).
Interdependence and Competition
China’s current dominance in critical minerals portends competition but not necessarily conflict with the US. China, leaving aside its myriad demographic, environmental and political challenges, has its own mineral vulnerabilities, relying on the rest of the world for imports of iron ore and copper, both of which are among the traditional primary or intermediate goods necessary for green technologies. China also cannot afford to dispense entirely with exports as a component of future growth. Five countries accounted for 88% of China’s critical minerals exports in 2019, with Japan and the US receiving the largest share. Given the array of critical minerals, all countries are vulnerable to economic warfare or supply chain disruptions.
The Trump administration grasped this problem in September 2020, issuing Executive Order 13953 to bolster domestic mining and processing of critical minerals, a strategy the Biden administration has continued, along with alliance-building with the so-called Quad of the US, Australia, India and Japan – a grouping coalescing, in part, out of fear of China’s dominance of critical minerals supply chains. These modest, unprofitable, government-backed investments in production and refining, however, will not close the gap with China, while the dearth of manufacturing capacity in the West makes plans to use non-violent economic coercion against China to fight climate change – through, for example, carbon border adjustment mechanisms – fanciful, since the US and Europe cannot produce sufficient goods to replace less expensive Chinese products. Conversely, the massive scale of China’s manufacturing of green-energy technologies has resulted in price declines of 69% for wind turbines and 88% for solar panels since 2009. One could argue it is morally unjustifiable for the US and Europe to halt this process.
The US and its allies must recognise that interdependence with China is critical both to bolstering critical minerals supply chains and fighting climate change
Interdependence was the only viable path for security in oil and will be necessary for critical minerals. It binds countries together and, ceteris paribus, renders them less likely to pursue war, particularly against their trading partners. One of the principles that scholars cling to when predicting that the US and China will not choose war is that each side has too much to lose and too little to gain from conflict – a variant of Norman Angell’s thesis before the First World War. The corollary, then, is that as the two powers grow less interconnected, war becomes a less costly and more-plausible tool for resolving other political differences.
The US and its allies must recognise that interdependence with China is critical both to bolstering critical minerals supply chains and fighting climate change. Both the US and China have pledged to build net-zero carbon emissions economies – by 2050 and 2060, respectively. This will require them and others to look beyond concerns about growth, invest aggressively in new infrastructures and technologies, abandon antiquated policies such as ‘Great Power Competition’, and embrace a new variant of collective security that combines US innovation with Chinese skill at scaling up industrial production. Such cooperation should entail expansive technology sharing and licensing, as well as regulations regarding the production and availability of critical minerals. Cooperation between these two powers will also be essential to mitigating conflict elsewhere in the world and assisting other countries with transitioning away from hydrocarbons.
The US is still the world’s strongest country because of its accumulated military, economic and financial strengths, but owes much of its position to the centrality of oil in modern life. The necessity of curbing carbon emissions, meanwhile, means that green-energy sources will gradually play a preponderant role in the world’s energy mix, which will in turn fashion a new geopolitical order. If we do not manage this process carefully, it could have negative consequences for the standing of the US and the stability of the international system more broadly.
The views expressed in this Commentary are the authors’, and do not represent those of the US government, RUSI or any other institution.
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