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US-Indonesia Critical Minerals Deal Faces Uphill Battle

ASEAN Indonesia

Indonesia's push for a critical minerals deal with the United States to qualify for electric vehicle tax credits under the Inflation Reduction Act faces formidable obstacles ranging from policy challenges to environmental concerns.

Indonesia’s Coordinating Minister of Maritime and Investment Affairs, Luhut Binsar Pandjaitan, has been a vocal advocate for a limited free trade agreement (FTA) between Indonesia and the United States, a move aimed at qualifying Indonesian exports for electric vehicle (EV) tax credits under the US Inflation Reduction Act (IRA). Pandjaitan asserts that such an arrangement would bolster both countries supply chains, supporting their respective green energy transitions. However, the pathway to realizing this deal is fraught with significant challenges and complexities.

One of the primary obstacles to this proposed agreement is Indonesia's policy on nickel exports. Since 2020, Indonesia has enforced a ban on the export of unprocessed nickel ore. This policy is designed to encourage domestic smelting and processing, thereby adding value to the domestic economy. However, this export ban has faced international criticism for violating World Trade Organization (WTO) rules, and Indonesia is currently appealing these rulings. For a critical minerals deal to be considered, Indonesia would likely need to ease or entirely lift these export restrictions, a move that could prove politically contentious and economically infeasible for the country.

In the United States, any agreement on critical minerals with Indonesia would necessitate Congressional approval, posing another formidable challenge. There is considerable concern among US lawmakers about the potential undermining of domestic production capabilities and the broader economic implications of increased reliance on foreign sources for critical minerals. Under the IRA, in order to qualify for the full IRA tax credit, any critical minerals used in EV battery production must be sourced, extracted, or processed in the United States or in a country with which the United States is engaged in a Free Trade Agreement (FTA). Special considerations involving “limited FTAs,” such as with Japan, have allowed the country’s inclusion under the IRA without the requirement of congressional approval, effectively bypassing Congress. Indonesia first expressed an interest in a similar limited FTA agreement back in September of 2023. In October 2023, a group of nine US senators drafted a letter addressed to the United States Senate outlining their concerns over a potential limited FTA with Indonesia, which include, but are not limited to the following: Chinese dominance in the Indonesian mining sector, environmental impacts, and weak labor protections.

The significant involvement of Chinese companies in Indonesia's nickel industry adds an additional layer of complexity. Refinement facilities producing Mixed Hydroxide Precipitate (MHP), a nickel intermediate suitable for EV battery production, are heavily tied to investment from Chinese entities. Major Chinese firms injected $3.6 billion into Indonesia’s nickel industry in the first half of 2022 alone. Considering that one of the goals of the IRA is to diversify the critical minerals supply chain away from China, Indonesia’s supply chain dependencies on China carry numerous implications for US interests. Currently, Indonesia has three plants capable of producing MHP, with 25 more in development. Chinese investments are tied to 25 of the overall 28 MHP refinement projects. To prevent indirect funding to Chinese entities, any US-Indonesia Critical Minerals Agreement (CMA) covered under the IRA would necessitate stipulation that MHP suppliers devoid of Chinese investment be the only suppliers in the agreement. This condition could be a contentious issue for Indonesia, but also appear unfavorable for the United States given the limited number of non-affiliated MHP refinement facilities.

Environmental and labor issues further complicate a potential US-Indonesia CMA. Indonesia's nickel processing industry relies heavily on coal-powered smelters, which pose significant environmental concerns, particularly in light of the US emphasis on sustainable practices and the transition to green energy. Nickel mining in Indonesia is also done through open pit mining of low-grade laterite nickel deposits, which contributes to deforestation, has led to landslides and contributed towards the pollution of drinking water supplies and coastal waters. Moreover, reports of lax labor regulations and poor working conditions in Indonesian mining operations have prompted US senators to raise ethical concerns about deepening trade ties with Indonesia under these circumstances. The IRA stipulates that FTA countries need pre-established high standards in key areas affecting trade, such as core labor and environmental protections, both of which Indonesia is lacking. All eight US senators have noted that these issues highlight the broader risks and ethical considerations of engaging in such a trade agreement and that priority must be given to existing FTA partners and domestic producers. Senators that signed the letter, like Senator Tina Smith of Minnesota and Lisa Murkowski of Alaska, represent some of the top critical mineral-producing states in the United States.

Given these substantial political, legal, and ethical hurdles, any potential US-Indonesia critical minerals deal faces a steep and challenging path forward. While there are clear mutual interests in securing critical mineral supplies and supporting the global green energy transition, significant concessions from Indonesia would likely be necessary to address US concerns, which may prove infeasible and economically impractical domestically given Indonesia’s policy decisions. That said, diplomatic dialogue and creative problem-solving can still pave the way for mutually beneficial solutions that support both nations’ goals for the global green energy transition and supply chains.

Rocco Cartusciello is a participant in the Young Professionals Program at the East-West Center in Washington, DC. and a recent graduate of Georgetown University Walsh School of Foreign Service, with a Master of Arts in the Asian Studies program focused on Southeast Asian Affairs