Erik Voeten — Green Industrial Policy & Geopolitics of Investment in Critical Minerals and Batteries

Why It Matters

China’s control of critical‑mineral and battery supply chains threatens Western energy security and industrial competitiveness; effective, credible policy is essential to diversify sources and sustain the global clean‑energy transition.

Key Takeaways

• China dominates processing of 19 of 20 critical minerals globally.
• Chinese battery production controls over 80% of anodes and cells.
• U.S. Inflation Reduction Act ties EV credits to non‑Chinese supply chains.
• Policy credibility and beneficiary distribution challenge Western industrial strategies.
• Shifting supply to allied countries faces long timelines and political risk.

Summary

The video examines how China’s aggressive green industrial policy has secured dominance over critical‑mineral processing and battery manufacturing, raising strategic concerns for the United States and Europe. It outlines China’s control of 19 of the 20 most used critical minerals, its 82% share of global anode production, 84% of cell output, and roughly two‑thirds of EV battery assembly. Key data points include China’s near‑total grip on refining stages—especially graphite, rare earths, and lithium—and the weaponization risk demonstrated when Beijing imposed rare‑earth export bans. The speaker highlights the U.S. Inflation Reduction Act’s $7,500 EV tax credit, which mandates that a high‑percentage of the battery supply chain reside in the United States, North America, or countries with a free‑trade agreement, while excluding “foreign entities of concern,” chiefly Chinese firms. Illustrative anecdotes feature a Hyundai plant accused of funneling taxpayer benefits to Korean firms, a graphite producer’s “holding a wolf by the mouth” analogy, and congressional lobbying that steered IRA incentives toward Republican districts to secure political backing. These examples reveal how perceived foreign benefit erodes domestic support for industrial subsidies. The analysis concludes that Western attempts to replicate China’s model must overcome credibility—ensuring long‑term policy stability—and distribution challenges—selecting winners without alienating key constituencies. Successful re‑shoring will require coordinated incentives, reliable trade partners, and realistic timelines, lest the energy transition remain vulnerable to a single dominant supplier.

Original Description

The U.S. and Europe view China’s dominance in critical minerals and the battery supply chain as a security threat, which motivates increasingly aggressive coercive policies. Yet, can industrial policies help diversify global supply chains through incentives? We study this question in the context of the U.S. Inflation Reduction Act (IRA) of 2022, which offered incentives for battery manufacturers to reduce reliance on China and gave preferential treatment to countries with a Free Trade Agreement (FTA). We argue that industrial policies can be effective but that they face strong credibility and distributive challenges. We first use an event study to show that major Chinese battery manufacturers and critical mineral companies suffered significant negative abnormal returns compared to firms in FTA countries in the days following the surprise IRA announcement. A difference-in-differences analysis of data on greenfield and brownfield investments then shows that since the IRA took effect, FDI in countries with an IRA-compliant FTA have increased significantly compared to those geopolitical allies of the US without an FTA. This investment effect is statistically and substantively significant, and driven entirely by non-Chinese investors. However, the effect disappeared in the second half of 2024 when the election of President Trump, who vowed to dismantle the IRA, became more likely. These findings thus demonstrate both the potential and limits of industrial policy as a foreign policy tool.

Erik Voeten is the Peter F. Krogh Professor of Geopolitics and Justice in World Affairs at Georgetown University’s Edmund A. Walsh School of Foreign Service and Government Department. He is the director of the Mortara Center for International Studies. Professor Voeten’s research examines the role of international institutions and law in international affairs and, more recently, the political economy of the energy transition. He is a past editor of the academic journals International Organization and Research and Politics. He is one of the editors of the new site Good Authority and previously edited the Monkey Cage Washington Post blog. He teaches classes on international relations theory, international institutions, and statistical methods. His book, Ideology and International Institutions appeared with Princeton University Press in January 2021.