· 7 min read
Setting the scene - supply chains in a complex world
Recent years have seen unprecedented turbulence in global supply chains. COVID-19, the war in Ukraine and the Israel-Hamas conflict have demonstrated the vulnerability of important supply chains, and how global events in faraway countries can have adverse local impacts.
Simultaneously, there is a rapid upscaling in global green technology and decarbonisation, with important raw materials for the green transition deriving from unstable and autocratic regimes. In particular, critical minerals and rare earths for Electric Vehicle (EV), photovoltaic and battery manufacturing derive from countries such as China, Latin America and Central Africa. This is particularly noteworthy when considering the role China plays in the important ‘value-added’ manufacturing and processing stages of these minerals. While China is responsible for 10% of the world's lithium output, it is responsible for 55% of its processing and holds a 75% share in battery production. At least 90% of substrates used in solar panels are also made in China.
While this has been known for a while, so far, the G7 countries have not had a clear and robust commitment to supply chain security for the green transition - until now.
Introducing the RISE initiative
At the G7 Summit in Hiroshima, leaders issued a communique calling for a derisking, not decoupling, of international critical mineral supply chains. The intention is to sustain economic ties with China even as dependencies on China for critical minerals need to be reduced. This works in tandem with the G7 Clean Energy Economy Action Plan.
This communique translated into ‘The Partnership for Resilient and Inclusive Supply-chain Enhancement’ (RISE); co-led by Japan and the World Bank. RISE financially and technologically capacitates emerging markets that produce critical minerals to develop processing and value-added competencies for such minerals. There is a specific focus on ‘midstream’ (mineral processing and refining) and ‘downstream’ (component manufacturing and assembly) in the supply chain of clean energy products. The G7 hopes this can ensure a steady supply of materials to mitigate geo-economic supply chain risks.
Partners in the scheme include the UK, South Korea, Canada and Italy, contributing $USD 40 million. However, Japan is the major financier, providing $USD 25 million alone. Other partners include the International Monetary Fund, the World Bank Group, the OECD and the Financial Stability Board.
The intention is to generate tens of millions of jobs along international mineral value chains. Suzuki Shunichi, the Japanese finance minister, posits “We will steadfastly advance this initiative in close cooperation with a diverse set of stakeholders”. Other G7 Finance Ministers, such as Canada’s Chrystia Freeland, remarked “our clean economies will be stronger when we work together. Canada is proud to contribute to the RISE partnership, which will help accelerate important economic growth in low- and middle-income countries—while also strengthening our essential shared clean energy and critical minerals supply chains”.
Japan’s coming of age in green supply chains?
Already, Japan has been very proactive in decoupling its critical mineral supply chains from China. In 2010, Japan imported 82% of its rare earth materials from China, but this dependence was reduced to 58% in 2019, with the aim of having less than 50% of rare earth minerals from China by 2025. Likewise, in March 2020, the Japanese government announced a new plan to increase the national stockpile of rare earth material from 60 to 180 days of domestic consumption.
However, across value-add markets, critical mineral supply chains remain heavily focused on China. Diversifying into value-add markets is an incremental process. Arguably, it is too slow and incremental to adequately respond to the escalating geo-economic risks it intends to mitigate. Regardless, for Japan, the ‘new normal’ for supply chains must focus on adaptability and resilience, particularly in critical minerals. This is not just for Japan’s sake but for the sake of like-minded countries, particularly those in the G7.
A common strategy already employed is the ‘China+1’ supply chain strategy, where supply chain actors use existing supply chains to China in addition to other nearby markets, such as Malaysia, Vietnam and India. For example, in 2019, imports of electronics from mainland China to the United States declined, while imports from suppliers in Vietnam, Malaysia, and Taiwan increased.
COVID-19 has made this approach more commonplace, including for Japanese importers. However, the current unpredictability of geopolitical and economic circumstances mean many Japanese companies have limited resources to make sudden, and possibly costly, changes in their supply chain practices in a short space of time.
This also comes at a time of increased scrutiny of the Environmental, Social and Governance (ESG) credentials of critical mineral supply chains from emerging markets.
To counteract this, digital trade methods, such as smart contracts and blockchain, could be seen as a means of transparency and accountability in the RISE initiative. Such digital methods could trace and verify the journey products go through, verifying their economic, social and environmental credentials. This can ensure best-practice supply chain and value-add activities are occurring in emerging markets. Prediction, response and recovery - three pillars of supply chain resilience - are also necessary in managing value-add activities in emerging markets as part of RISE. Once again, digital trade methods may enable this capability.
Digital supply chains allow different actors to share information in real time and cooperate effectively - from large to small actors. Risks across these partners can be detected early and pre-emptive action can be conducted through an ecosystem of partnerships. These include ESG risks.
In addition to the RISE initiative, Japan has also diversified its critical mineral supply chains beyond emerging markets. In its attempt to be a stronger player in EVs, it has signed a critical minerals deal with the United States, labeled the U.S.-Japan Critical Minerals Agreement. The Japanese Ministry of Foreign Affairs claims “The Agreement is envisaged to build robust supply chains through coordination between Japan and the U.S. and among like-minded countries with strengthened cooperation for ensuring sustainable and equitable supply chains for such critical minerals, including to promote the goals of the Inflation Reduction Act.
This is in addition to its critical minerals deal with Australia, which Australia’s Resources Minister has claimed that “This new partnership … will help Australia further develop its abundant reserves of critical minerals, which will ultimately help both countries achieve their emissions reductions targets”. Australia is home to enormous reserves of critical minerals, including cobalt, lithium, vanadium, manganese and zirconium.
Such initiatives correspond with the greater call for the Five Eye countries to develop critical mineral supply chains as part of their own security agenda. It is obvious this is not just an environmental or climate agenda, but a pressing matter of global security and geo-economic risk management.
Conclusion
Japan’s concerted push for bolstering its geopolitical influence is overt and clear and carries many different forms. Its traditional base as a manufacturer, trading nation and leader in infrastructure development places it in a strong position to facilitate global critical mineral supply chain trade. The imperative for doing so exists at the intersection of geoeconomics, geopolitics, climate change discourse and Indo-Pacific security.
RISE is a leading example of Japan’s engagement with such, but its growing geopolitical ambitions provide a platform for further expansion into supply chain risk management. This is especially in light of its growing acrimony with China and engagement with emerging markets, especially in ASEAN and the Pacific.
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