The unintended consequences of investment policy on critical minerals investment

The clean energy transition is driving soaring demand for energy transition minerals (ETMs), such as lithium, cobalt, nickel, and copper, which are essential for manufacturing solar panels, wind turbines, batteries, and electric vehicles. This unprecedented demand surge is opening new opportunities for mineral-rich developing countries, particularly in Africa, to attract foreign investment, create jobs and boost economic growth. 

However, new evidence indicates that domestic policies in major economies, like the US Inflation Reduction Act (IRA), are significantly influencing where that foreign direct investment (FDI) is flowing. The IRA, passed in 2022, provides tax incentives for clean energy vehicles manufacturers using minerals sourced from countries with a free trade agreement (FTA) with the US.  

Our analysis shows that in the year after the IRA was passed, countries with a US FTA saw greenfield FDI inflows into ETM value chains increase ten-fold on average, compared to a five-fold increase in non-FTA countries (see chart). The top FTA country recipients were Canada (50 percent of FDI), Chile (18 percent) and Morocco (16 percent). Notably, China's average share of total FDI into US FTA countries also jumped from 4 percent pre-IRA to 31 percent post-IRA. This was likely an effort to avoid IRA restrictions on Chinese-affiliated suppliers (see chart).

The IRA also appears to have boosted US imports of green technology products from its FTA partners, especially Mexico, Canada, and South Korea. For example, Mexico's exports to the US of parts for clean energy vehicles and solar panels rose from $55 billion pre-IRA to $75 billion post-IRA.

Developing countries, including some of the poorest economies, have significant critical mineral reserves but lack preferential US market access through free trade agreements, excluding them from the IRA's benefits. For instance, the DRC holds over 40% of global cobalt reserves. Zambia and the DRC are major copper suppliers. Tanzania, Mozambique, and Madagascar have substantial graphite resources, while South Africa and Zimbabwe account for over 90% of platinum group metals. Botswana and Namibia share the promising Kalahari Copper Belt.

These findings underscore the powerful effect that policies in major economies can have on steering investment and trade flows. While the IRA aims to incentivize supply chain resilience, it also risks diverting investment away from the mineral-rich developing countries that could be vital suppliers in the energy transition.

Supporting the economic transformation of resource-rich developing countries and facilitating their participation in ETM supply chains will be crucial for diversifying global supply, enhancing resilience, and promoting inclusive and sustainable development. The G7 can play an important role by broadening market access, aligning standards, mobilizing finance, and providing technical assistance to help developing countries convert their mineral wealth into shared prosperity.