Critical Minerals Supply Chains: The Minerals Security Partnership and Trade-Related Challenges

White & Case Sovereign Focus

Critical minerals have become one of the most sought-after commodities in recent years. Since critical minerals are essential for the development of clean energy and other modern technologies, demand for those minerals is expected to further increase in the future. The establishment of resilient and sustainable critical minerals supply chains is of strong geopolitical interest to many governments. However, establishing such supply chains poses trade-related challenges, which governments and stakeholders along the critical minerals value chain may have to consider.

Introduction

The World Trade Organization (WTO) will host the fifth edition of its Trade and Environment Week 2024 next week, which will focus on “Trade for Clean Energy Transition for All”. The event aims to foster exchange around trade-related environmental issues between the WTO and trade and environment stakeholders.

Among the topics for discussion is the building of resilient critical minerals supply chains. Demand for critical minerals is projected to increase significantly in the coming years, as critical minerals are essential for the establishment of clean energy and other modern technologies. At the same time, supply chains for critical minerals are susceptible to disruptions. Critical minerals are often sourced far from the country where they are consumed, making them vulnerable to external shocks along the value chain. Environmental, social and governance ("ESG") concerns render the building of resilient and sustainable critical minerals supply chains even more complex. States involved in the extraction and processing of critical minerals must also adhere to their responsibilities under international trade and environmental law, which adds another layer to the critical minerals picture.

Against the backdrop of these challenges, some of which will be addressed at the WTO's Trade and Environment Week,¹ several governments launched the Minerals Security Partnership ("MSP") in June 2022. The MSP is a US-led plurilateral partnership, which, according to its guiding principles, "strives to promote responsible growth across the critical minerals sector via a shared commitment to high environmental, social, and governance (ESG) standards; sustainability; and shared prosperity."² The MSP currently consists of 23 partners, including Argentina, Australia, Canada, Estonia, Finland, France, Germany, Greenland, India, Italy, Japan, Kazakhstan, Mexico, Namibia, Norway, Peru, the Republic of Korea, Sweden, Ukraine, the UK, the US, Uzbekistan, and the EU (represented by the European Commission).

Most recently, on 23 September 2024, partners of the MSP launched the MSP Finance Network on the sidelines of the 79^th UN General Assembly.³ This network involves development finance institutions ("DFIs") and export credit agencies ("ECAs") of MSP partners to strengthen cooperation, information exchange and co-financing among participating institutions in the implementation of MSP projects.⁴

In view of an ever-growing demand for critical minerals, the MSP and its Finance Network may become increasingly relevant in the trade relations between its partners and third countries.

Objectives of the MSP

The MSP was established with the proclaimed goal of bolstering responsible critical mineral supply chains. According to the US, one of the MSP's founding partners, the MSP's purpose is to ensure that critical minerals "are produced, processed and recycled in a manner that supports the ability of countries to realize the full economic development benefit of their geological endowments."⁵

Implementation of high ESG standards has been stated as one of the main driving forces behind the establishment of the MSP. Partners of the MSP have stated their shared understanding that compliance with ESG standards is "imperative"⁶  for the development of responsible supply chains.

The MSP has developed its own Principles for Responsible Critical Mineral Supply Chains (the "Principles"), which provide guidance for the support of projects under its umbrella. Among other ideas, the Principles state that activities must be consistent with the Organization for Economic Cooperation and Development ("OECD") guidelines and the UN Guiding Principles on Business and Human Rights.⁷

The Principles do not lay down the details concerning the way in which support will be granted to individual projects. They do suggest, however, that the MSP imposes review obligations on its partners for the financing of projects along the critical minerals supply chain. According to the Principles, MSP projects receiving financing from government agencies will be benchmarked against internationally applicable ESG standards in accordance with agencies' existing project review and due diligence procedures. At the same time, MSP partners' decisions remain subject to the relevant government laws and regulations for that jurisdiction.⁸

The Principles also lay down conditions for projects receiving support from the MSP, including the following:

• Demonstrate responsible stewardship of the natural environment by accounting for water resources, land use, air quality, greenhouse gas emissions, pollutants and waste, biodiversity, ecosystem services, site reclamation, and other environmental considerations.
• Access and acquire land through consultative and participatory processes that result in broad-based consent of affected communities.
• Commit to meaningful engagement and transparent communication with communities, including indigenous communities, that host or may be affected by minerals projects.
• Ensure safe, fair, inclusive and ethical conditions in the workplace and promote the same in communities.
• Provide economic benefit for local communities, including through local employment, local sourcing and corporate social responsibility measures.
• Ensure transparent, ethical business operations, including in engagement with local and national governments, civil society and private-sector actors.

According to the Principles, projects must meet internationally recognized ESG standards, which will be demonstrated, e.g. by accreditation frameworks. The MSP further foresees periodic reviews of projects towards ESG performance improvements over the project lifetime.

Lastly, the MSP seeks to establish "collaboration on mutually strategic critical minerals projects"⁹ with countries and the private sector. To do so, it seeks to partner with governments that are committed to ensuring a good governance framework, host government participation and community development, meaningful consultations between local communities, and ethical engagement in respect of the promotion of a responsible minerals industry.¹⁰

As we noted in a prior alert,¹¹ considerable amounts of political capital are being spent on efforts to spur investment that comports with climate concerns and more rigorous ESG standards as a matter of geopolitical competition and security, not only return on investment or risk management. At the same time, Chinese investors are racing to secure critical mineral supply chains, generally having a higher risk tolerance, as well as the financial and technical capacity to advance projects quickly. Governments of natural resources-rich countries are also looking to leverage their existing relationships with Chinese firms. Critical minerals are thus at the heart of the newly developing system of clubs and fences.

MSP Projects

The MSP considers projects along the full production chain, including mining, extraction, secondary recovery, processing, refining and recycling, as long as these projects comply with ESG and other principles set out above.

Importantly, MSP projects do not have to be located within an MSP partner's jurisdiction to be considered but can be located anywhere around the world.

It is reported that 10 projects have been launched under the MSP, with 30 more currently being evaluated by the MSP.¹²

Projects launched under the MSP include debt and project financing, granting of technical assistance and financial support, and the award of public contracts. The projects currently launched under the umbrella of the MSP include, for example:

• Potential debt financing in the amount of USD 600 million by the Export-Import Bank of the United States ("EXIM") for the implementation of the rare earths and critical minerals Dubbo Project pursued by Australian Strategic Minerals ("ASM").
• Granting of a USD 20 million award by the Defense Production Act Investments ("DPAI") office of the US Department of Defense to Canadian-based Electra Battery Materials to support the construction and commissioning of North America's first cobalt sulfate refinery. The refinery would be capable of producing battery-grade materials for lithium-ion batteries and, once fully commissioned, is expected to produce 6,500 tonnes of cobalt per year.
• USD 50 million financing by EXIM of ESS Inc. for its Wilsonville, Oregon facility, for the construction of several new long-duration iron flow battery storage production lines. EXIM's financing package consists of a commitment to finance two production lines in the immediate term, plus a preliminary commitment to finance several additional production lines, which would enable ESS Inc. to triple annual production and increase exports to Europe, Australia and Africa.
• USD 40 million share purchase agreement between POSCO International and Black Rock Mining Ltd. The Agreement is expected to pave the way for the development of the Mahenge mine in Tanzania, owned by Black Rock Mining, with POSCO Group receiving 30,000 tons of graphite annually starting in 2026. The volume is expected to reach up to 60,000 tons by 2028, which can be used in the production of 1.26 million electric vehicles. The Mahenge Graphite Project Tanzania is said to significantly diversify Korea's supply chain for graphite.
• Approval of technical assistance in the amount of USD 3.4 million by the US International Development Finance Corporation ("DFC") for the Pensana Rare Earths project in Angola to support feasibility studies and testing for expansion of a rare-earth elements ("REE") mine, as well as feasibility studies for REE refining facilities in Angola along the Lobito Corridor.
• Award of an AUD 8 million (USD 5.4 million) grant by the Australian Government to Queensland Pacific Metals ("QPM") to bolster domestic nickel and cobalt production at QPM's Townsville Energy Chemicals Hub. The Queensland State Government also announced up to AUD 8 million (USD 5.4 million) of funding to prepare the Project for investment readiness.

Potential Issues for MSP Partners to Consider

As stated before, where the past 50 years of geopolitical competition over energy security was dominated by oil & gas, the next 50 years will most likely be dominated by critical minerals and industrial supply chains.¹³ It is thus all the more important that projects undertaken by MSP partner governments or their public bodies must comply with relevant provisions of international trade law, especially the law of the WTO. In the context of the activities pursued by the MSP, this relevantly includes the disciplines imposed on subsidies and on public procurement.

First, measures undertaken by MSP partners may need to be considered under the disciplines of the WTO Agreement on Subsidies and Countervailing Measures ("SCM Agreement"). According to Article 1.1(a)(1) of the SCM Agreement, a subsidy shall be deemed to exist if there is a financial contribution by a government or any public body within the territory of a Member, i.e. where:

(i) a government practice involves a direct transfer of funds (e.g. grants, loans and equity infusion), potential direct transfers of funds or liabilities (e.g. loan guarantees);
(ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits);
(iii) a government provides goods or services other than general infrastructure, or purchases goods;
(iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments.

Grants provided in the context of MSP-related projects arguably qualify as financial contributions under the SCM Agreement and are subject to its disciplines.

The situation is more complex in situations where grants, tax credits or preferential interest rate loans or loan guarantees are not transferred by a government to a domestic enterprise for a project located in its territory, but to an enterprise or project outside of its territory (e.g. to a mining project in Africa). While it has been argued that these so-called cross-border or transnational subsidies are not covered by the SCM Agreement, this issue is hotly debated among Members and a ruling of the WTO dispute settlement body ("DSB") is yet to emerge on that issue. It is interesting that the question of transnational subsidies has gained attention mainly as some WTO Members such as the EU seek to take action to protect their domestic industries from alleged subsidies conferred by China in the context of its Belt and Road Initiative.¹⁴ In the context of the MSP, and depending on the project, other Members may develop a similar argument to address potential MSP project related subsidies. 

Considering the involvement of numerous DFIs and ECAs in the MSP and its newly launched Finance Network, the definition of the term "public body" in Article 1.1(a)(1) of the SCM Agreement also gains relevance. The WTO Appellate Body held in US – Anti-Dumping and Countervailing Duties (China) that the term "public body" covers only those entities that possess, exercise or are vested with governmental authority.¹⁵ However, the proper understanding of the term has since developed into another area of strong debate among the WTO Membership.

Subsidies covered by the SCM Agreement must not be contingent, in law or in fact, upon export performance or the use of domestic over imported goods, pursuant to Article 3 of the SCM Agreement. Article 5 of the SCM Agreement further determines that subsidies may not cause injury to the domestic industry of another Member, nullify or impair benefits accruing directly or indirectly to other Members under the General Agreement on Tariffs and Trade 1994 ("GATT"), or cause serious prejudice to the interests of another Member.

Second, to the extent that MSP projects are awarded by way of public procurement, such as, e.g., the award of a contract to build production facilities or refineries, the provisions of the Agreement on Government Procurement ("GPA") must be observed for those countries that are party to the GPA. Article IV(1), (2) of the GPA require that procurement is conducted on a non-discriminatory basis both in regards of national treatment and most favored nation (MFN) treatment and with a view to foreign affiliation and ownership of the supplier and the origin of the supplied products.

Depending on the specific project undertaken, these or similar legal issues could arise for the parties involved.

Other issues that will arise relate to fundamental principles such as MFN treatment, national treatment (non-discrimination) and the prohibition on quantitative restrictions under GATT Article I, III, and XI respectively. Resource-rich countries will need to carefully consider these challenges in developing a network of measures and partnerships that furthers their interests in accordance with their international trade obligations. Extraction restrictions, export duties, comprehensive free trade agreements, and sound environmental restrictions applied in an even-handed manner to domestic and imported products may play an important role in this context.

In respect of all of these disciplines, it is not unlikely that WTO Members, including MSP partners, will raise the "security exceptions" of GATT Article XXI as a defense. Whether such exceptions are available for economic security measures is currently also a matter of debate. The current state of the WTO "jurisprudence" is such that it will be difficult to prevail on that defense outside a war-like situation or in the absence of a direct link with the military establishment. The panel in Russia – Traffic in Transit held that the national security exception based on an emergency in international relations under GATT Article XXI(b)(iii) must "refer generally to a situation of armed conflict, or of latent armed conflict, or of heightened tension or crisis, or of general instability engulfing or surrounding a state. Such situations give rise to particular types of interests for the Member in question, i.e. defense or military interests, or maintenance of law and public order interests."¹⁶ According to the panel, the reference to "war" in conjunction with "or other emergency in international relations" in subparagraph (iii) suggests that political or economic differences between Members are not sufficient, of themselves, to constitute an emergency in international relations for purposes of subparagraph (iii).¹⁷ Similarly, the Panel in US – Origin Marking (Hong Kong, China) considered that "the phrase ‘emergency in international relations' refers to a state of affairs, of the utmost gravity, that represents a breakdown or near-breakdown in the relations between states or other participants in international relations."¹⁸

This being said, there is the potentially more direct link between critical minerals and security. A recent report by a US think tank referred to a small group of "strategic defense critical minerals", identifying "12 minerals that pose the greatest risk to U.S. national security"¹⁹, including antimony, arsenic, bismuth, gallium, germanium, indium, natural graphite, rare earth elements, scandium, tantalum, tungsten and yttrium. It explained that "these minerals are essential to defense applications, with the U.S. dangerously dependent on FEOCs [foreign entities of concern] for supply of both the raw and processed form of the mineral."²⁰ Any projects undertaken with respect to these strategic defense materials will likely be argued to be covered by the security exceptions of GATT Article XXI. Notably, GATT Article XXI(b)(ii) allows for otherwise GATT-inconsistent measures relating to "such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment". This would cover critical minerals trade as far as it relates to the supply of military establishments.

Conclusion

Trade in critical minerals is considered of high geostrategic importance by many governments. The MSP demonstrates the desire of certain governments to establish alternative supply chains in order to ensure a coherent approach to energy supply and supporting the green transition in accordance with ESG principles while clearly also pursuing economic and political objectives.

Currently, Chinese companies are estimated to control 90% of the global processing capacity for rare earths and more than half of the processing capacity for cobalt, nickel and lithium minerals, which are used to produce batteries for electric vehicles.²¹ This is a major concern to the United States and other countries.²²

While the MSP is presented as a framework for sustainably developing supply chains of critical minerals, it has been argued to also be an attempt to establish a counterweight to China in the critical minerals sector (and a "friend shoring" initiative by the US).²³ It seeks to provide an alternative especially for lower income countries for project financing. Resource-rich countries entering into discussions with MSP partners or China for that matter may want to make sure they include the trade risks and potential measures they may face when deciding which club to support or join.

_{1 The program of the WTO Trade and Environment Week is available here.
2 MSP Principles for Responsible Critical Mineral Supply Chains, available here.
3 US Department of State, Joint Statement on Establishment of the Minerals Security Partnership Finance Network, 23 September 2024, available here.
4 Participating institutions include the U.S. International Development Finance Corporation ("DFC"), Export Finance Australia ("EFA"), Export Development Canada ("EDC"), Estonian Investment Agency, European Investment Bank ("EIB"), European Battery Alliance, Euler Hermes, Export-Import Bank of the United States ("EXIM"), Finnvera, Finnfund, Nordic Investment Bank ("NIB"), InfraVia Capital, Banque publique d’investissement, Agence Française de Développement ("AFD"), Proparco, KfW Group, CDP ("Cassa Depositi e Prestiti"), SACE, SIMEST, Japan Bank for International Cooperation ("JBIC"), Japan International Cooperation Agency ("JICA"), Japan Organization for Metals and Energy Security ("JOGMEC"), NEXI ("Nippon Export and Investment Insurance"), Export Finance Norway ("Eksfin"), Innovasjon Norge, Export-Import Bank of Korea ("KEXIM"), Korea Mine Rehabilitation and Mineral Resources Corporation ("KOMIR"), Korea Trade Insurance Corporation ("K-Sure"), Korea Institute of Geoscience and Mineral Resources ("KIGAM"), Exportkreditnämnden ("EKN"), UK Export Finance ("UKEF"), and British International Investment ("BII"), plus the European Bank for Reconstruction and Development ("EBRD") and the Africa Finance Corporation ("AFC").
5 US Department of State, Minerals Security Partnership, Media Note, 14 June 2022, available here.
6 MSP Principles for Responsible Critical Mineral Supply Chains, available here.
7 MSP Principles for Responsible Critical Mineral Supply Chains, available here.
8 MSP Principles for Responsible Critical Mineral Supply Chains, available here.
9 MSP Principles for Responsible Critical Mineral Supply Chains, available here.
10 MSP Principles for Responsible Critical Mineral Supply Chains, available here.
11 See, Don't let a crisis go to waste: Financing mining & metals projects in Africa in 2023 | White & Case LLP (whitecase.com).
12 Financial Times, Western nations join forces to break China’s grip on critical minerals, 22 September 2024.
13 See, Geopolitics and decarbonization in the mining & metals sector | White & Case LLP (whitecase.com)
14 See, e.g. Commission Implementing Regulation (EU) 2020/870 of 24 June 2020 imposing a definitive countervailing duty and definitively collecting the provisional countervailing duty imposed on imports of continuous filament glass fibre products originating in Egypt, and levying the definitive countervailing duty on the registered imports of continuous filament glass fibre products originating in Egypt, C/2020/4060; and Judgment of the General Court (First Chamber, Extended Composition), 1 March 2023, Case T‑540/20.
15 Appellate Body Report, US – Anti-Dumping and Countervailing Duties (China), para. 317.
16 Panel Report, Russia – Traffic in Transit, para. 7.76.
17 Panel Report, Russia – Traffic in Transit, para. 7.75.
18 Panel Report, US – Origin Marking (Hong Kong, China), para. 7.304. 
19 See, https://silverado.org/reports-and-publications/strategic-defense-critical-minerals/ 
20 See, https://silverado.org/reports-and-publications/strategic-defense-critical-minerals/ 
21 Financial Times, Western nations join forces to break China’s grip on critical minerals, 22 September 2024.
22 Financial Times, Western nations join forces to break China’s grip on critical minerals, 22 September 2024.
23 See also Fulcrum, Mineral Security Partnership and Southeast Asia: Forcing Countries to Choose?, 30 April 2024, available here.}

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