The United States’ dependency on Chinese-sourced critical minerals poses a threat to national security, but without aligning national security imperatives with corporate motives U.S. supply chains will remain vulnerable. Policymakers should consider tax incentives for mining companies and expedited permitting vouchers for companies that produce minerals needed for national security.
One approach could draw on legislation that was designed to induce pharmaceutical companies to engage in research and development for less-profitable drugs in exchange for tax breaks and vouchers for expedited review of other drugs.
The latest rare earth elements (REEs) row between the United States and China revealed a missing link in American national security. Over the last 20 years, China has exploited U.S. dependency on REEs and other critical minerals by leveraging its near-total processing capacity monopoly to weaken the economies and militaries of geopolitical adversaries, namely the United States and its allies.
In 2010, the Chinese government began using mineral export bans by halting the flow of REE exports to Japan in the wake of a maritime dispute, leaving Japanese electronics, automotive, and superconductor industries scrambling to replace half of the nation’s supply of critical minerals.
Mining companies both big and small have no clear incentive to mine and refine critical minerals due to high capital costs, permitting uncertainty, and anticompetitive market conditions.
Over the years, China became more emboldened and austere with its export restrictions, imposing licensing requirements, export quotas, export taxes, and outright bans on exports of minerals such as antimony, gallium, germanium, natural graphite, and REEs—all of which are indispensable for America’s national security. To that end, China’s recent decision to modify its dual-use export restrictions on minerals as a lever in trade negotiations demonstrates the market power China wields over critical minerals.
Despite the military’s dependency on critical minerals for satellites, bullets, missiles, and a myriad of other defense applications, few critical minerals are mined and refined domestically for two key reasons: competitive disadvantage and small markets. Mining companies both big and small have no clear incentive to mine and refine critical minerals due to high capital costs, permitting uncertainty, and anticompetitive market conditions.
Additionally, market sizes for many critical minerals are orders of magnitude smaller than those of copper and gold. As a result, investors and corporations have no economic incentive to strengthen U.S. supply chains. Devoid of clear signals to the market that these minerals are important, America’s mining industry is not incentivized to meet national security needs. So how can the United States stimulate critical mineral production if miners are unwilling to invest? The Orphan Drug Act of 1983, the 2007 FDA Act, and the 2012 FDA Safety and Innovation Act may hold the answers.
Under the Orphan Drug Act, Title XI of the 2007 FDA Act, and the 2012 FDA Safety and Innovation Act, Congress fixed the problems associated with small markets by creating incentives for pharmaceutical companies to develop drugs for rare diseases that only affect a small percentage of the population. Pharmaceutical companies that took on the financial risk associated with the R&D and regulatory approval process for the uncommercially viable orphaned drugs received tax incentives in the case of the Orphan Drug Act. In addition, the 2007 FDA Act and the 2012 FDA Safety and Innovation Act launched a voucher program that enabled pharmaceutical companies to obtain a voucher for an expedited review of a drug of their choice, should they bring to market a drug for rare or neglected diseases.
Drawing inspiration from the Orphan Drug Act, the 2007 FDA Act, and the 2012 FDA Safety and Innovation Act, policymakers should consider how they could incentivize mining and refining of critical minerals. One option is to offer tax breaks for companies that invest in critical mineral projects deemed pertinent to national security. This could support the funding of exploration, permitting, and greenfield or brownfield investments.
In addition, policymakers could consider a critical minerals expediting permitting voucher modeled on Title XI of the 2007 FDA Act redeemable by the mining industry. Companies that bring a qualifying mine, tailings reprocessing, and/or refinery to feasibility study level (meaning it is bankable) could receive a voucher that would expedite the permitting process for another project of their choice. This would incentivize the allocation of capital by investors and mining companies to target projects to produce or refine critical minerals that may have lower returns when compared to large gold or copper projects.
Much like the pharmaceutical industry, the mining industry has high capital costs associated with exploration for minerals and construction of a mine.
Adopting policies from the pharmaceutical industry to the mining sector could work because of the similarity between the two. Much like the pharmaceutical industry, the mining industry has high capital costs associated with exploration for minerals and construction of a mine. Both endure long financing and permitting periods, with the average drug taking seven to 10 years, and the typical mine, up to 20 years or more.
Historically, the pharmaceutical industry overlooked drugs for rare diseases because of their low profitability, which resulted in fewer drugs being developed for small portions of the population. Today, mining companies focus on district-scale projects, rather than those with lower rates of internal return. Legislators recognized the reluctance of pharmaceutical companies and their views on investing in potentially risky ventures with long payback periods—the exact conditions many mining firms face today.
Reducing critical mineral vulnerabilities cannot be done overnight, and market failure should not determine the fate of American national security. Creating the right signals for the mining industry to fill the gaps in mineral supply chains should be a key priority.
Gabriel Collins, Trevor Lewis, Ian Lange
source: RAND
