China Dominates Critical Metals Trade, Impacting Global Supply Chains

China's dominance in the processing of critical metals, such as lithium and cobalt, has significant implications for inflation in the US and EU, with supply shocks from these metals leading to a more pronounced inflationary effect than similar disruptions in oil and gas. The EU's Critical Raw Materials Act, effective 2024, seeks to enhance domestic production and recycling, addressing the strategic dependence on China.

While the EU possesses mineral reserves, it lacks processing capacity; hence, building such capacity is crucial for supply security. Additionally, Korean defense firms are rerouting rare earth shipments through third countries to bypass Chinese restrictions, highlighting the complex geopolitical landscape affecting supply chains. The shift towards electrification may reinforce rather than reduce strategic dependencies, necessitating robust policy responses.