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Rare Earths Within Reach? Analysing the US-Mongolia Critical Minerals MOU

Camille Luchs | Indo-Pacific Fellow

Image credit: Munkh-Erdene Eenee via Unsplash.

In June, the United States and Mongolia signed a Memorandum of Understanding (MOU) to jointly strengthen critical mineral supply chains in the Indo-Pacific region. Amid growing US-China power competition and a race to achieve clean energy goals, Mongolia is facing an opportunity to bolster its socio-economic development through its natural endowment of critical minerals. The MOU signals to Indo-Pacific players of the economic opportunity for foreign investment in clean energy amid US-China rivalry. Yet the proposed benefits reaped by Mongolia raise questions about the practical reality of this agreement.

Mongolia pivots to “third neighbour”

Mongolia’s economy is landlocked between Russia and China. China is the major recipient of Mongolian minerals critical to a clean energy transition, including copper, which comprise nearly 90 percent of the country’s exports. With a limited market size and lack of technology and capital to undertake value-added processing, Mongolian critical minerals undergo processing and utilisation by Chinese manufacturers. Additionally, Mongolia has suffered under Russia’s invasion of Ukraine due to inflation of goods, including explosives used for mining. In an effort to reduce the dependence on its regional neighbours, Mongolia is seeking to engage with countries beyond its immediate borders. As a fledgling democracy and former member of the Communist bloc, Mongolia is historically well-positioned to maintain good relations with China and Russia, as well as “third neighbours”. Most notably, this includes the United States.

The MOU is framed to provide mutual benefits for both parties. On the one hand, Mongolia is strategically important to the United States. A critical minerals MOU assists the United States to tip the scales of regional power in their favour by diversifying supply chains for green manufacturing away from China. Moreover, Mongolia’s critical minerals have a variety of applications that meet US strategic interests, including in defence equipment and electric vehicle development. On the other hand, Mongolia is anticipated to reap the benefits of expanded diplomatic ties and potential US investment. In addition to the MOU, Mongolia and the US also signed an “Open Skies” aviation agreement. This agreement will provide easier cargo flights between Mongolia and the US, assisting Mongolia in its strategy of political independence by offering an alternative to land transportation of minerals through China.

Players look beyond China

The United States is seeking to challenge China’s monopoly within the critical minerals and rare earths supply chain, thereby reducing its ability to influence global supply chains. Both countries are not immune to economic coercion as a strategy of influence, employing chokepoint strategies on their respective monopolies to manipulate competition. China’s export controls of critical minerals, for example, are seen as a direct response to the United States and its partners using a dominant position in the semiconductor supply chain to project influence.

The desire to diversify away from China is not held by the United States alone. In September 2021, a ‘Quad’ meeting between the United States, Australia, India and Japan sought to improve the security of the rare earths supply chain in the Indo-Pacific. Quad countries agreed to use subsidies, incentives, and regulatory congruence to encourage the extraction and refinement of rare earths outside China. Across the Indo-Pacific, key players are shifting away from China for the supply of critical minerals, including New Zealand, India, Japan, Indonesia, Malaysia, the Philippines, and South Korea. Australia in particular has benefited from this shift, with both India and Japan turning to Australian companies to nurture their critical mineral supply chains.

However, Mongolia seeks to maintain good relations with both the United States and China. Sandwiched between Russia and China, Mongolia is likely to experience the brunt of the fallout from a wartime superpower competition. The contention between the need for diversification versus a reliance on China in the meantime is felt by all Indo-Pacific players, as China still controls the majority of global rare earths deposits in addition to holding natural advantage and economies of scale in manufacturing.

Stuck in the middle

A key challenge for Mongolia in building a secure and resilient critical mineral supply chain is creating incentive for investors. Prolonged tax negotiations over the development of the Oyu Tolgoi mine between Rio Tinto, the mine owner, and the Mongolian Government is one example of the institutional challenges faced by foreign investors in Mongolia. Whilst the MOU between the United States and Mongolia promises development of Mongolia’s mining sector to facilitate stronger global exports, a variety of inherent challenges leaves the MOU feeling symbolic rather than “economically pragmatic”. Firstly, Mongolia lacks necessary critical infrastructure, including reliable electricity and the requisite transport networks for machinery. China is currently best positioned to meet this need. Secondly, Mongolia holds a reputation of risk for foreign investors, having passed several laws that suspended or revoked exploration licenses and enabled the Mongolian government to acquire a 34 percent to 100 percent equity stake in major mining projects. Finally, domestic opposition has created further investment risk. Low-level protests against mining have been ongoing for the past two decades, and local demands for regulatory safeguards have led to the cancellation of mining licenses for river areas and exploration licenses. Consequently, diversifying away from China and Russia is seen as a response to broader regional competition for the resource rich yet financially poor country. If Mongolia is unable to attract US investors, the country may remain on the shelf in the race to sure-up supply chains.

As the US pursues Mongolia to secure regional supply chains, Mongolia will be a key player in US-China competition. With a rich endowment of key minerals needed to fuel the transition to clean energy, Mongolia will seek to appeal to third neighbours to bolster its socio-economic development and export market through agreements like the MOU. Yet whether these benefits can be realised for the country continues to raise questions, as Mongolia’s legal and investment architecture still poses risks to foreign investors.

Camille Luchs is the Indo-Pacific Fellow for Young Australians in International Affairs. She is currently completing a double degree in Justice and Business at Queensland University of Technology.

As a 2022 Westpac Asian Exchange Scholar and New Colombo Plan Scholar, Camille has completed studies in Japan and Singapore. Camille is passionate about exploring the region’s security challenges, with a specific focus on women’s leadership. She is currently completing an internship in leadership development in Fiji, before travelling to Taiwan to complete another internship in security policy.

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