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Bleak Prospects for an Indonesia-US FTA on Vital Minerals – The Diplomat


Nov 9, 2023


In April 2023, the USA authorities launched steerage for the $7,500 tax credit score for the acquisition of every electrical car (EV) beneath the Inflation Discount Act (IRA) 2022. To be eligible for half of the credit score, a portion of the “vital minerals” used within the EV’s battery should come from a rustic with which the U.S. has a free commerce settlement (FTA). The remaining half of the credit score necessitates a particular share of battery elements to be manufactured or assembled in North America.

Indonesia, the world’s largest nickel producer, has been pursuing an FTA with the USA on vital minerals, particularly nickel. Japan signed an analogous settlement with the USA in March 2023, permitting its automotive trade to profit from the EV tax credit score. Such an FTA might give Indonesian corporations within the EV battery provide chain entry to the rising EV market within the U.S., benefiting from the IRA’s tax credit.

These hopes acquired a blow on October 24, when a bipartisan group of 9 U.S. senators despatched a letter to the U.S. Commerce Consultant and properly because the secretaries of Treasury, Vitality, and Commerce. The senators expressed reservations about hanging a restricted FTA with Indonesia, which might permit Indonesian vital minerals to profit not directly from the subsidies scheme beneath the IRA. 

The senators’ main argument is that granting Indonesia an FTA would offer a backdoor for Chinese language firms, and U.S. taxpayers shouldn’t be subsidizing Chinese language miners in Indonesia. Their issues additionally lengthen to Indonesia’s labor rights, environmental safety, security, and human rights requirements. 

The senatorial views might affect the stance of the U.S. Congress and authorities concerning an Indonesia-U.S. restricted FTA on vital minerals. Probably, their views will probably be included among the many contentious points raised by the USA throughout FTA negotiations. 

The IRA standards stop EVs with elements from “international entities of concern,” together with China, from receiving the EV tax credit. It is a barrier for Indonesia as a result of Chinese language investments have dominated the nation’s nickel downstreaming via joint ventures and co-ownership. 

The senators’ letter famous that Indonesia has three vegetation in a position to produce 164,000 metric tons/yr of Combined Hydroxide Precipitate (MHP), a nickel intermediate for EVs batteries, with plans for over 25 extra such vegetation. “All however three” of these initiatives contain Chinese language firms, the letter mentioned.

In the meantime, the senators expressed concern for labor rights, environmental safety, security, and human rights requirements in Indonesia’s mining trade. Certainly, poor working circumstances, as an example, are suffered by each Indonesian and Chinese language staff, as uncovered in a latest ABC Information report. Unions, a mining watchdog, and different non-government organizations in Indonesia have been sounding the alarm on employee rights and questions of safety for a number of years. 

One other concern is Indonesia’s mineral commerce restrictions, which embrace export bans on nickel ore since 2020, after which bauxite ore this yr. These restrictions run counter to the free commerce rules and the U.S. requirements of restricted FTAs as represented in the U.S.-Japan Vital Minerals Settlement.

The settlement presents Japanese firms potential entry to the USA’ EV tax credit score by guaranteeing eligibility and easing restrictions on the import of vital minerals – lithium, graphite, manganese, cobalt, and nickel – between the 2 international locations. Each international locations decide to uphold their World Commerce Group (WTO) obligations, stop import and export restrictions on vital minerals, chorus from imposing export duties on such minerals, and accord nationwide therapy to one another’s vital minerals. 

Indonesia might defend its export bans by arguing that it’s awaiting the WTO’s closing ruling in its dispute with the European Union regarding these bans. A compromise on Indonesia’s uncooked minerals exports to the USA must be on the desk of the FTA talks. Contemplating Indonesia’s persistence on preserving export bans as one in every of its core industrialization insurance policies, nonetheless, such a compromise could be troublesome for Jakarta to take.

The Indonesian proposal for an OPEC-like cartel for vital minerals can also be troublesome. Free commerce implies doing commerce with the least obstacles, whereas a cartel is a bunch of producers colluding to create obstacles by controlling provide or costs. The proposal has impaired Indonesia’s commerce coverage status earlier than its buying and selling companions, together with the USA, and therefore have to be withdrawn.

The senators’ letter additionally emphasizes that the USA and its allies, like Australia and Canada, are scaling home nickel manufacturing. These international locations are specializing in excessive environmental and labor requirements, environment friendly waste administration, decrease carbon emissions, and intensive stakeholder engagement, guaranteeing neighborhood engagement. 

The senators are clear that international locations with higher environmental, social, and governance (ESG) practices in nickel manufacturing are the preferable sources. They shut their letter by arguing that “eligibility for the vital minerals credit score should prioritize home producers and present free commerce settlement companions. If enlargement is deemed vital, it must be directed towards international locations with sturdy labor, human rights, and environmental requirements.”

The senators’ letter is a wake-up name for Indonesia. Being the world’s main nickel producer will not be sufficient to safe an FTA with the USA. This underlines the urgency to indicate concrete actions with sturdy proof of upgrading ESG mining practices in Indonesia. A cautious evaluate of Indonesia’s minerals commerce restriction may also be vital. Higher ESG practices and an improved funding local weather in mining would lure funding from international locations apart from China. 


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