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Addressing Critical Minerals Governance in Indonesia-US Relations

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Addressing Critical Minerals Governance in Indonesia-US Relations

Ahead of President Joko Widodo’s visit to Washington, serious obstacles stand in the way of cooperation in the vital minerals sector.

Addressing Critical Minerals Governance in Indonesia-US Relations
Credit: Depositphotos

On Monday, Indonesian President Joko Widodo will hold a bilateral meeting with U.S. President Joe Biden at the White House on Monday, prior to next week’s APEC Leaders’ Meeting in San Francisco. There will no doubt be a number of issues on the agenda, but according to some reports, one shared interest is both countries’ desire to reach an agreement in the field of critical minerals, especially nickel.

Both the U.S. and Indonesia have much to gain from closer cooperation on critical minerals. Indonesia has the world’s largest potential reserves of critical minerals for battery raw material components, especially nickel. At the same time, Indonesia needs to diversify foreign investment in this sector and prevent one country, namely China, from dominating. In the last three years, the Indonesian government has been quite aggressive in wooing the U.S.-based electric vehicle manufacturer Tesla to invest in Indonesia, as part of its ambition to establish itself as a regional hub for EV production. Jakarta views the recent passage of the U.S. Inflation Reduction Act (IRA), which includes hefty EV subsidies, as an opportunity to include Indonesia in the U.S. EV supply chain.

The U.S. also has an interest in encouraging imports of critical minerals from countries other than China, due security considerations regarding the long-term sustainability of the supply of raw materials for the production of EV batteries. Given Indonesia’s abundant supply of these minerals, and desire to diversify its sources of investment, it is some ways a natural partner.

Despite this shared interests, however, the IRA has hampered U.S.-Indonesia cooperation in this crucial sector. Under the IRA, the U.S. government will issue $370 billion in tax credits for battery and EV manufacturers, as well as subsidies $370 billion, including subsidies to EV consumers and solar facilities. However, Indonesia faces a number of obstacles in benefiting from the IRA. First, there is specific condition that subsidies can only be used by countries which has a FTA status with US.

Second, the IRA also includes stringent environmental, social, and governance (ESG) requirements that Indonesia may struggle to surmount. On October 24, a bipartisan group of senators wrote to U.S. Trade Representative Katherine Tai, Treasury Secretary Janet Yellen, Energy Secretary Jennifer Granholm, and Commerce Secretary Gina Raimondo to question whether Indonesia nickel should be included in the IRA deals. The representatives expressed their concerns about the domination of Chinese-backed operations in Indonesia’s nickel processing sector that are characterized by low environment, human rights, and labor standards. The environmental issue concerns not only the mining and processing itself, but also the reliance of the nickel processing industry on captive coal power plants that add to the greenhouse emissions associated with battery production.

One of Indonesia’s proposed solutions to the above problems is to broker a Limited Free Trade Agreement (FTA) covering critical minerals that would get it around the first condition of the IRA. However,

Indonesia’s lack of ESG compliance is likely to pose a more challenging obstacle to further cooperation with the U.S. Many of the country’s nickel mining and processing operations are notorious for their low ESG standards, and are documented to have caused suffering for local communities and threatened their well-being. Some nickel mining and smelting operations have also been involved in illegal exports.

Indonesia-based mining companies have also seen various negative incidents, ranging from worker riots, work accidents, and union busting to unbalanced wages. ESG standards also oblige companies to safeguard the human rights of workers and local communities.

Complicating the situation is the fact that the nickel refining sector in Indonesia is largely controlled by foreign companies from China, which face little pressure to improve ESG standards. Apart from its goal that critical minerals be sourced domestically where possible, the IRA also aim to distance U.S. manufacturers from Chinese critical minerals dependency. The magnitude of China’s influence in Indonesia’s nickel business cannot be separated from the close relationship between Beijing and Jakarta that has been built up since Jokowi took office.

Chinese domination of the nickel mining and processing sector and poor corporate governance are likely to make the U.S. hesitant to broker a deal on critical minerals. As a result, it is incumbent on both countries to discuss solutions and agreements to work together to improve critical minerals practices. The upcoming summit between Jokowi and Biden is a good place to start.

During his meeting with Jokowi, Biden should emphasize the importance of creating a new equilibrium in the critical minerals supply chain. Producing countries need to encourage local companies that are ready to supply critical minerals with the standardization that the IRA wants. Nickel products with better governance will get better prices in developed country markets.

The standardization implemented by the U.S. via the IRA could prompt Indonesia to improve the standards at its mining and processing facilities, which will also help it secure entry into the European supply chain; if and when the EU Critical Raw Materials Act that was proposed in March 2023 is officially implemented. This could lead to a situation in which Indonesia provides nickel produced to higher ESG standards to the U.S. and EU markets, while lower ESG standard nickel goes to China.

Apart from that, Biden should remind the Indonesian government that the process of developed countries’ dependence on critical minerals will not last long. For instance, the IRA aims to expand manufacturing and sourcing of vehicle components and critical minerals in the United States, while the EU’s proposed Critical Raw Materials Act contains limitations on the import of critical minerals from third countries.

Developed countries are also encouraging battery and electric vehicle manufacturing companies to invest in battery recycling so that the need to exploit critical minerals will be reduced over the long term. A report from the Indonesia Mining Expert Association also states that Indonesia’s nickel reserves are only sufficient for six years of battery production. The combination of future nickel supply shortages and the developed countries’ growing self-sufficiency in the supply of critical minerals makes it urgent for Indonesia to improve over-exploitative mining practices.

There are at least three fundamental things that Indonesia must do in order to fulfil the conditions of the IRA.

Firstly, it needs to improve the governance of Indonesia’s critical minerals sector in order to meet its ESG standards.

Second, Indonesia must also make a serious attempt to decarbonize the coal-powered plants that supply the minerals processing industry. In so doing, it will make significant advances in its energy transition and gain more bargaining power for IRA deals. There are 14.4 GW captive coal power plants in industrial areas that are being planned for construction. At the very least, the Indonesian government could announce a bolder policy to stop captive coal power plants that are still at the planning stage.

Finally, Indonesia needs to invite more international firms, from Japan, South Korea, and the Middle East, to invest in its sustainable mining industries in order to prevent China from dominating the sector.

These efforts will help Indonesia to create a more diversified and sustainable supply chain for critical minerals, addressing the current U.S. hesitation in making a deal with Indonesia.