U.S. lawmakers have expressed concern about signing a limited free trade agreement with Indonesia, seeking to block the Southeast Asian nation's critical minerals from benefitting indirectly from subsidies created under the Inflation Reduction Act (IRA).

In a letter sent last week to U.S. Trade Representative Katherine Tai, Treasury Secretary Janet Yellen, Energy Secretary Jennifer Granholm and Commerce Secretary Gina Raimondo, a bipartisan group of senators argued that the country's mining and refining industry is dominated by companies from China.

"Given the extraordinary taxpayer resources at play, we strongly believe that eligibility for the critical minerals credit must prioritize domestic producers and existing free trade agreement partners," such as Canada and Australia, the lawmakers wrote.

The senators acknowledged that Indonesia plays a strategic role in the Indo-Pacific region and has the potential to become a partner through the Indo-Pacific Economic Framework for Prosperity, but wrote "if expansion is deemed necessary, it should be directed toward countries with strong labor, human rights and environmental standard."

The bipartisan authors of the letter include Sens. Kevin Cramer (R-North Dakota), Joe Manchin (D-West Virginia), Amy Klobuchar (D-Minnesota) and Lisa Murkowski (R-Alaska).

Influential U.S. senator Joe Manchin (D-WV) is one of the signatories to the letter opposing a limited free trade agreement with Indonesia. 

The opposition throws a wrench in the Biden administration's plans to host President Joko Widodo at the White House this month, to coincide with the Indonesian leader's attendance at the Asia-Pacific Economic Cooperation summit in San Francisco.

It also stands as a major obstacle for Indonesia's ambitions to leverage its position as the world's largest producer of nickel to be a major hub in the electric-vehicle supply chain. Nickel, along with lithium, and cobalt is a key component in EV batteries. Unlike lithium, which can mostly be sourced domestically, the U.S. will need to import nickel to meet demand.

When U.S. Vice President Kamala Harris visited Indonesia in September 2022, she promised Jokowi that Washington will work with Jakarta to build resilient supply chains, including for the critical minerals.

Her visit came just after the passage of the USD 430 billion U.S. Inflation Reduction Act, which included a USD 7,500 credit for the purchase of each new clean energy vehicle. Part of a strategy to get more EVs on the road, the credit is conditioned on the critical minerals used being sourced from within the U.S. or a country with which it has a free-trade agreement.

"It's a demand side incentive that all of the auto companies are lobbying furiously about, at a time when EV sales are slowing," an industry source said.

Negotiations are reportedly underway between Washington and Jakarta to sign a limited FTA which would allow Indonesian critical minerals, primarily nickel, to be covered by the subsidies.

"The idea behind the IRA was that free trade agreement countries have high standards and was a proxy for saying 'let's build up a supply chain outside of China and to do it with allies that have free-trade agreements,'" said Todd Malan, chief external affairs officer at Talon Metals, a Toronto Stock Exchange-listed mining company that focuses on the development of high-grade nickel mines in the U.S.

"The point of the letter is to say that giving a free trade agreement to Indonesia is just a backdoor for Chinese companies and that U.S. taxpayers should not be giving a subsidy to Chinese miners in Indonesia," he added.

Canada and Australia are investing to expand production. Last month, Australian Prime Minister Anthony Albanese said Canberra will double financing for the critical minerals sector with a boost of USD 1.26 billion, as the country looks to reduce reliance on China.

Cheap supply from Indonesia may undercut such investments.

Luca Giacovazzi, CEO of Australian mining company Wyloo, told Nikkei, "A U.S. free-trade agreement on nickel with Indonesia, would significantly reduce the attractiveness of investing in countries with higher ESG (environmental, social, and corporate governance) standards and leave consumers with no choice but to use dirty nickel."

Australian nickel is at a cost disadvantage compared to other jurisdictions like Indonesia, Giacovazzi said, "But it has the world's best environmental standards and, as a U.S. free-trade partner, is an IRA-compliant supplier. If the world wants batteries and EVs to be both affordable and environmentally sustainable, investment in Australian and Canadian production must be encouraged."

Image source: Reuters

Source: www.asia.nikkei.com/U.S. senators oppose Indonesia FTA that paves way for nickel subsidies