Raw Materials in National R&D Policy
Industrial bases increasingly require local sources of raw materials.
The initial shortages in the supply chain were at the high end of the complexity range: semiconductors, pharmaceuticals, and industrial equipment. Especially for these products, the issue was largely supply. Now everything at the low end of the complexity range is highly in demand (or at least highly priced): oil, nickel, steel, lithium, aluminum, fertilizer, etc. The Ukraine war and accompanying sanctions play some role in this, but all were trending higher before the war started. In this case, the shortages may be a combination of supply constraints, sourcing constraints (sanctions), and higher demand to fulfill the lowered inventory at the base of the supply chain (high tech and consumer goods now have high inventories).
The shortages have highlighted severe fragility in the manufacturers and refiners of some of these products. For example, a few steel mills in Ukraine supplied 80-90% of the world’s neon (used in etching semiconductors) since it is a byproduct of steel refining. All such noble gases are now restricted from export from Ukraine and Russia. Likewise, Ukraine and Russia are major producers of agricultural nitrogen, phosphorus, and potash which are fundamental to fertilizer. Finally, U.S. policy makers have long acknowledged that for the U.S. and Europe to make a transition to green energy, we must end China’s monopoly on rare earth minerals for magnets and monopoly on lithium.
To a certain extent, the world is now restructuring supply chains based on geopolitical alliances which is sure to add redundancy where previously there was none. Furthermore, as oil prices climb, the costs of bringing raw materials across the pacific or from the middle east is increasingly costly. This gives China, Russia and India an edge in manufacturing where goods are sourced and refined locally. Indeed, even though the U.S. is oil independent, its refining capacity is insufficient, esp. for its national diesel consumption. In general most of the basic building blocks of industry have a supply chain with two levels: the miner/processor (e.g., ore to ingot) and the refiner/processor (e.g., alloy to industrial input - steel wire). While this can represent four levels, for various reasons the levels consolidate into these two levels in most cases. The United States used to be an exporter of all of these outputs (post-WWII) from various levels due in part to our past energy abundance (e.g., coal).
Nationally, for a strong industrial base, energy is fundamental. Fundamental to ore extraction, refining, metalworking, 24/7 manufacturing, semiconductor manufacturing, 3D printing, etc. That energy needs to be accessible in dense form (oil/LNG/coal) AND in dependable on-demand form (electricity). Industries (especially automated processes) struggle with brownouts. Each nation needs to support reliability in this area for its industry, which can be difficult without dense energy extraction inside the nation. China is building a belt-and-road to reduce its reliance on one sea lane to the middle east and to secure raw materials (including energy) for its industry. This is an infrastructure and network that capitalism alone or industry players (e.g., semiconductor manufacturers and steel manufacturers) cannot possibly build or coordinate on. It is squarely and totally within the national policy realm (as evidenced by the failure of the E.U. market-based approach and rejection of long-term national contracts - Germany vs. Hungary strategy). Even incentives (e.g., carbon credit schemes) are weak and do not constitute planning a “transition”.
Next, not all countries have the market capacity to support a full stack of the supply chain for all the basic building blocks. For example, concrete requires a completely separate stack from steel, but both start with mining and end with a finished industrial input. Nevertheless, for each stack, an efficient (low cost) manufacturing center somewhere on each continent is probably required for any nation to securely source these inputs. These inputs are needed in bulk and can be difficult and expensive to transport (e.g., helium, concrete, steel) due to their weight or storage requirements. Like with energy, sourcing the basic inputs can be difficult to ensure unless these are natural resources local to the nation (e.g., lithium ore). In this case though, wherever the resources are located, companies are likely sophisticated enough to make long term contracts feasible for stability. For example, Tesla’s long term contracts with a miner for lithium (such contracts provide stability for both parties in industries rife with instability). Nevertheless, national policy can help with bilateral tariff reductions for mutual exchanges of different inputs.
One country that has recently developed a great industrial stack from energy to finished industrial goods is Mexico. They are also no small player in trade agreements and bilateral ties with the U.S. So their government has not ignored their responsibility to plan the various aspects noted above. Mexico has not only developed excellent sources of oil and natural gas, but also plans to be a net exporter of refined products (gas/diesel) which is probably a decent strategy given the ongoing and planned US deficits in these refined products. (Any commentators I could link to hate the Mexican policies and suggest solar instead….useless for 24/7 industry - cough Brookings Inst. - cough) Likewise, Mexico mines, refines, and shapes many industrial materials. Furthermore, because its manufacturing-for-export market is so strong (e.g., vehicle manufacturing for U.S.A.), it imports in addition to its national sources. For many aspects of industrial policy, Mexico is a great example of what could be done in the United States, Brazil, Chile, and Canada.
So for the United States, in particular, what are the main hurdles we face in achieving more independence. The primary difficulty for the entire industrial stack producing the raw inputs to manufacturing is NIMBY - “not in my back yard”. The miner of the largest lithium deposit in north america speaks about this in an excellent presentation here. Unfortunately, that deposit is in California, land of NIMBY. Indeed, California has just instituted a tax on lithium mining in the state (which seems counter to their push for a green energy transition). But then NIMBY policy rarely makes economic sense. For example, as mentioned in the presentation, California recently rejected permits for a desalination plant to generate the fresh water from seawater - despite the state being in a continual water shortage. Instead, the elite minds in California want to buy out the agricultural water rights to source more water for Los Angeles and continue the charade - while killing local agriculture in the state. This NIMBYism creates problems for refining plants, pipelines, power stations, space launch sites, and even apartment complexes. In a democracy, especially one where property rights are largely handled by the states, industry has little power against NIMBYs nearby except in a few states where they control the entire economy (WEST VIRGINIA!) - which results in a swing too far in the other direction.
In essence, whether the USA is going for a quick green transition or a slower natural one, energy including pipelines and refiners, raw materials (e.g., steel and lithium), chemical development, and manufacturers will be needed! Some of these will have to be in someone’s back yard even if it is West Virginia, so the U.S. better build a policy to locally source many of these inputs or our entire industrial stack may end up being sourced out of Mexico.