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Will US-China Rivalry Spur the Transformation of Indonesia’s Critical Minerals Sector?

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Will US-China Rivalry Spur the Transformation of Indonesia’s Critical Minerals Sector?

Compliance with the Biden administration’s Inflation Reduction Act will be difficult. But it could bring Jakarta considerable long-term benefits.

Will US-China Rivalry Spur the Transformation of Indonesia’s Critical Minerals Sector?

President Joe Biden signs H.R. 5376, the Inflation Reduction Act of 2022, in the State Dining Room of the White House, August 16, 2022.

Credit: Official White House Photo by Cameron Smith

November 14 was a pivotal moment in the annals of Indo-Pacific geopolitics, as leaders from 14 nations came together to endorse the Indo-Pacific Economic Framework (IPEF)’s Supply Chain Agreement. This U.S. initiative is the bedrock of an ambitious initiative that seeks to transcend the traditional boundaries of trade and supply chain resilience to embrace clean energy and greater transparency of labor practices.

The genesis of the IPEF, under the aegis of the Biden administration in October 2021, represented a recalibration of U.S. geostrategic ambitions, devised to counteract the burgeoning clout of China, as epitomized by the Belt and Road Initiative. The Framework reflects America’s renewed commitment to the collaborative principles once championed by the U.S.-led Trans-Pacific Partnership, which President Donald Trump abandoned in 2017. The IPEF aims to build an economic alliance that offers an alternative to China and to lay down the blueprint for a novel paradigm of regional partnership.

The IPEF’s agenda has propelled the issue of critical minerals to the forefront of Indo-Pacific economic discourse. Recognizing the pivotal role these resources play in the burgeoning industries of the future, particularly the production of electric vehicles, the Biden administration’s national security strategy identifies the rare earth supply chain as a strategic inflection point. A Defense Department review in 2021 underscored the inherent risks of an overreliance on Chinese minerals, risks that span economic dependencies and the potential for trade to be used as a geopolitical weapon. The U.S. response is to reduce its reliance on China, and to curtail the sweeping leverage that China wields over these essential resources – resources that are indispensable for the automotive revolution that is already underway.

In this geopolitical chess game, Indonesia has positioned itself as a knight, ready to leap forward. Its vast reserves of nickel and a plethora of critical minerals have placed it in the spotlight as the IPEF unfolds. From the onset, Indonesia has been an enthusiastic advocate of the Framework, seeking to leverage its provisions and assert its role in the U.S.-China rivalry that increasingly defines the region’s economic landscape.

Indonesia’s strategic gambit is not merely about enhancing trade; it reflects its aspiration to balance the overwhelming preponderance of Chinese investment and towards a more balanced and diversified partnership with the U.S. and other resource-rich nations, such as Australia and Canada. The potential realignment signals Indonesia’s intention to maintain its agency, affirming its status as a credible middle power adept at negotiating global economic relations.

However, the road ahead for Indonesia is not without its obstacles. The global market for electric vehicles is expanding rapidly, fueled by a collective push towards sustainable energy and green technology. The Indonesian government’s previous restrictions on the export of critical minerals have catalyzed the development of domestic processing industries, attracting the necessary capital to bolster its nickel processing infrastructure.

However, to launch its nickel products onto the global stage, particularly into the U.S. market, Indonesia confronts the complexities of the Inflation Reduction Act (IRA) of August 2022, which predicates significant tax credits for new clean energy vehicles on the sourcing of critical minerals from the U.S. or countries with which it has a free trade agreement (FTA). This stipulation places Indonesia in a tricky situation, compelling it to secure a limited FTA with the U.S., similar to what Japan has been able to establish.

At the 11th ASEAN-U.S. Summit in September, President Joko “Jokowi” Widodo called for the IPEF to enshrine a limited FTA specifically centered on critical minerals. This model, diverging from broader free trade agreements, would focus on fostering trade specifically in essential minerals such as nickel, aluminum, cobalt, and copper, and would include stipulations on their processing. A limited FTA would be a crucial step in amplifying the competitiveness of Indonesian nickel, enabling it to tap into the substantial subsidies promised by the IRA, and by extension, into the broader U.S. market.

Beyond the realm of international trade, such an agreement could reshape Indonesia’s social and economic fabric. The influx of investment into Indonesia’s critical mineral sector, though robust, has so far disproportionately favored one segment of the economy – smelting operations that thrive on the availability of low-cost nickel ore – and have primarily benefited Chinese investors.

The IPEF presents an opportunity to correct this imbalance. By endorsing regulations that advance labor standards and sustainable development, the Framework could catalyze a more inclusive economic model within Indonesia, one that empowers the wider population and not just the industrial elite and foreign investors. The IPEF has the potential to propel Indonesia towards a greener economy and to support its ambitions for net-zero emissions. Its effect could be transformative.

Despite the potential, the path forward is strewn with obstacles. A coterie of U.S. senators has cast a skeptical eye on Indonesia’s commitments to labor rights, environmental protection, and human rights, posing a significant hurdle to any prospective FTA. Their concerns, coupled with the glaring Chinese dominance in Indonesian mining and refining – a dominance exemplified by a staggering $3.6 billion investment in the first half of 2022 alone – highlight the extent of the diplomacy and domestic reform required to overcome these obstacles.

For Indonesia, the ongoing U.S.-China strategic rivalry over critical minerals underscores the need for a nuanced and robust strategy that capitalizes on the shifting dynamics of U.S. policy. Washington’s overtures present a window of opportunity, yet the onus falls on Indonesia to undertake sweeping reforms to the governance of its mining sector. This endeavor is as much about embracing the exigencies of international diplomacy as it is about driving domestic transformation. It demands of Indonesia a level of strategic foresight and policy acumen that will determine its place in the geoeconomic order of tomorrow.

Navigating this terrain requires Indonesia not only to assert its economic interests but also to address the broader implications of its growth strategy for society at large. The strategic decisions made today will have long-lasting effects on the archipelago’s economy and environment. It may also potentially set a precedent for how emerging economies can assert themselves on the global stage while promoting sustainable growth and equitable development at home.

The road ahead will be challenging, marked by negotiations that will test Indonesia’s diplomatic mettle, but it is a road that could lead to a future where Indonesia stands as a pivotal node in the clean energy revolution, charting its course with confidence and clarity.