In recent weeks, the United States has extended an invitation to Indonesia to join the Mineral Security Partnership (MSP), a coalition of 14 countries and the European Union focused on securing critical mineral supply chains. This initiative follows discussions about establishing a critical minerals-specific free trade agreement (FTA) between the two nations.
Indonesia, recognizing the potential benefits of this partnership, is working to reduce its reliance on Chinese investments in its nickel smelting industry. This move is aimed at qualifying for U.S. subsidies under the Inflation Reduction Act (IRA), which will offer tax incentives for electric vehicles (EVs) starting in 2025 but exclude vehicles using critical minerals associated with “foreign entities of concern.” With Chinese companies, including Tsingshan Holding Group, Zhejiang Huayou Cobalt and Ningbo Lygend, controlling over 90% of Indonesia’s nickel smelters, this presents a challenge for Indonesia.
Both countries view reducing dependency on China in the critical minerals sector as strategically important. Indonesia seeks to avoid overreliance on any single power and is aware of the risks associated with concentrated foreign influence, despite the crucial role Chinese investment has played in developing its nickel industry. Diversifying investment sources, particularly through enhanced ties with the United States, aligns with Indonesia’s goals of economic sovereignty and geopolitical strength. Indonesia aims to ensure that this diversification brings not just capital, but also technology transfer, environmental sustainability and long-term economic benefits.
For the United States, reducing dependency on China is crucial for national security and domestic stability. As it advances its green energy goals under the IRA, there is pressure to secure reliable, non-Chinese sources of critical minerals like nickel. The dominance of Chinese firms in Indonesia’s nickel industry poses a risk of supply chain disruptions, which could impact EV production targets and heighten concerns about economic sovereignty. Strengthening ties with Indonesia and promoting diversification away from Chinese investments would address these concerns and support U.S. objectives in the green energy sector.
Deepening U.S.-Indonesia cooperation in the critical minerals sector presents a strategic opportunity to address vulnerabilities and align with long-term national goals. The timing aligns with the vision of Indonesia’s prospective leadership under Prabowo Subianto and Gibran Rakabuming Raka, who aspire to position Indonesia as a “green energy superpower.” Joining the MSP would demonstrate Indonesia’s commitment to sustainable development and responsible mining, setting the stage for future FTA negotiations with the United States.
Addressing existing disconnects
Currently, no country is fully prepared to replace China in the intermediate stages of critical minerals processing. “Friend-shoring” attempts to relocate these processes to allied nations are unlikely to reshape the industrial landscape in the short term and may increase costs, especially for developing countries. Additionally, the U.S.-Indonesia relationship has faced several challenges.
Despite recent efforts to strengthen ties through the Comprehensive Strategic Partnership (CSP), the bilateral relationship is often seen as more symbolic than substantive. There are concerns on both sides, including the United States’ apprehensions about Indonesia’s labor and environmental standards and the dominance of Chinese investment in its critical minerals sector. Indonesia, in turn, views U.S. commitments as inconsistent and has expressed skepticism about initiatives like the Indo-Pacific Economic Framework (IPEF) and delays in the $20 billion Just Energy Transition Partnership (JETP).
To bridge this gap, the United States should adopt a more consistent approach to enhance its strategic interests and reliability as a partner. Expanding and modernizing Indonesia’s refining capabilities, ensuring they are economically viable and environmentally sustainable, would be a step in the right direction. Targeted investments, technical expertise, and advanced green technologies could help achieve this. Additionally, broadening JETP to include initiatives aimed at transitioning Indonesia’s nickel processing plants to renewable energy sources could accelerate this critical shift.
Involving Indonesia in international discussions on deep-sea mining is another promising avenue. As countries explore the potential of ocean resources for diversifying supply chains, the United States could help shape sustainable practices by including Indonesia in these discussions.
Looking ahead
The strategic and economic case for U.S.-Indonesia cooperation in critical minerals is strong. To avoid overdependence on nickel exports and ensure long-term prosperity, Indonesia must diversify its economy beyond raw material extraction. Investments in value-added industries like solar energy, battery manufacturing, and sustainable infrastructure are crucial. For the United States, partnering with Indonesia on these fronts offers a chance to secure a stable supply of critical minerals and promote regional stability. Failure to engage meaningfully could push Indonesia closer to China, exacerbating global environmental issues and limiting U.S. access to essential minerals. A strategic partnership focused on expanding collaboration, adhering to high standards, and fostering sustainable development will benefit both nations and support their green energy goals.
