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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Abigail Greene ([log in to unmask])

*The Columbia FDI Perspectives are a forum for public debate. The views
expressed by the authors do not reflect the opinions of CCSI or our
partners and supporters.*

No. 338   August 22, 2022
*Got “critical minerals”? Hooray! But be careful!*
Louis T. Wells* <#m_-7271951376035148379__edn1>

Although no one may have told you, you could have “critical minerals,”
especially if you are a country with current mining activity. Those
minerals may be disregarded by-products of existing mines or lie in
stand-alone deposits or in abandoned tailings. Maximizing income from them
raises important issues.

The US government defines
a “critical mineral” as a non-fuel mineral or mineral material essential to
the economic or national security of the country and which has a supply
chain vulnerable to disruption. It names fifty
The Japanese government considers 34
as critical. Other rich countries have similar lists.

Projections of a rapid transition to electric vehicles have led companies
and governments of major automobile producing countries to compete to
control supplies of minerals that will—or might—be used in batteries and
electric motors. The transition to solar and wind power is expected to
require critical minerals for turbines and storage. Some minerals are
critical for defense and aerospace industries. But no one knows exactly how
much of which minerals will be demanded as technology evolves
In this environment, firms and their home country governments are driven by
a deep fear of competitors’ (especially Chinese) control of whatever
minerals those might be.

This competition has implications for mining countries:

   - When home country governments see support for their private companies
   as a security issue, host countries with critical minerals may face
   threats. The US has warned a country of decreased aid if it failed to grant
   a US company access to minerals. The German federal and regional
   governments pressed Bolivia in support of a German company, rather than a
   Chinese competitor, to mine a lithium deposit. The task for host countries
   is to turn the pressure around: “if you want access to the mineral, you
   have to do things for us, or rights go to someone else.” Host countries’
   foreign ministries should be involved in ways rare in previous mining
   negotiations, increasing the difficulty of the always tough task of
   coordinating internal parties domestic in negotiations with foreign firms.
   - There is a real risk of granting mining rights to firms—but seeing
   nothing happen. Competition leads firms to tie up deposits to ensure
   supplies if they eventually need them. But no one is certain how much, if
   any, of a particular mineral will be needed. The result can be potential
   revenue sources that remain undeveloped. In response, host country
   governments must include tight working provisions (“use it or lose it”) in
   contracts or in mining legislation: commercial production must begin by a
   certain date; production must remain above a certain level; and
   suspensions, limited in time. Otherwise, investors should lose their
   rights, and host countries can seek other investors.
   - When a critical mineral is a by-product of the extraction of another
   mineral, mining agreements or relevant legislation may have to be modified
   to account for the new source of revenue. For example, royalties on
   minerals that may have gone into tailings may have to be adjusted to
   reflect their new value.
   - When by-products become “critical” and newly valuable, companies
   currently holding mining rights may sell those rights to other firms that
   are eager for the byproduct. This happened in the Democratic Republic of
   the Congo, when Freeport-McMoRan, interested in copper, sold rights to two
   deposits to China Molybdenum, which wanted the associated cobalt.
   Similarly, ownership of a rutile deposit in Sierra Leone moved, over the
   years, from firms interested in rutile for paint pigment to firms
   interested primarily in the previously unwanted zircon and rare earth
   sands. In such transactions, buyers and sellers may try to escape tax on
   gains by selling to holding companies in tax havens, rather than
   subsidiaries in the countries where mining takes place. Host countries’
   ability to collect tax on such transactions will depend on their
   legislation and contract terms. Host country governments should address
   this issue before disputes develop that could go to costly international
   - The renewed interest by end users in securing sources of materials
   means that some will increasingly seek control through long-term contracts
   or outright ownership of mines. When minerals are sold inside firms or
   under long-term contracts, tax authorities will have to determine
   meaningful prices, but reliable arms-length published prices do not exist
   for all critical minerals. Legislation or agreements will have to provide
   methods (such as Advance Pricing Agreements) for valuing output.

These issues are not completely new. The Chinese government has long viewed
access to minerals as essential to its development, and therefore supported
its firms abroad. The Japanese government behaved similarly in the 1970s.
And the drive to keep deposits out of the hands of competitors was common
in the old days of vertically-integrated oligopolies in industries such as
aluminum. Disputes over capital gains tax have arisen as petroleum
exploration companies have sold rights to producing companies. But now all
these issues come together. Governments with critical minerals need to
learn from past solutions (and failures) to revise mining and tax
legislation, negotiate appropriate contracts and harness foreign offices’
skills if they are to maximize their benefits from the struggle by rich
countries to control these minerals.

* <#m_-7271951376035148379__ednref1> Louis T. Wells ([log in to unmask]) is the
Herbert F. Johnson Professor of International Management, Emeritus, at
Harvard Business School, and a member of the Advisory Committee of CONNEX
which provides assistance to countries negotiating mining and
infrastructure agreements. The author wishes to thank Theodore Moran, James
Otto and Mohan Yellishetti for their helpful peer reviews.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Louis T. Wells**, ‘**Got “critical minerals”?
Hooray! But be careful!,**’ Columbia FDI Perspectives No. 338, August 22,
2022. Reprinted with permission from the Columbia Center on
Sustainable **Investment
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Abigail Greene, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No 337, Charles-Emmanuel Côté, “The new Canadian Model investment
   treaty: A quiet evolution,” *Columbia FDi Perspectives*, August 8, 2022
   - No. 336, Phil Baumann, “How host country governments can ensure
   competitive neutrality in cross-border M&As,” *Columbia FDI Perspectives*,
   July 25, 2022
   - No. 335, Karl P. Sauvant and Federico Ortino, “The WTO Investment
   Facilitation for Development Agreement needs a strong provision on
   responsible business conduct,” *Columbia FDI Perspectives*, July 11, 2022

*All previous FDI Perspectives are available at

*Other relevant CCSI news and announcements*

   - The next free *Massive Open Online Course (MOOC) on “Natural Resources
   for Sustainable Development: The Fundamentals of Oil, Gas and Mining
   Governance”* will be available starting September 1, 2022 (at midnight
   UTC). This joint course was developed by CCSI, the Natural Resource
   Governance Institute, the World Bank, and the United Nations Sustainable
   Development Solutions Network (SDSN) and has enrolled thousands of
   participants from all over the world. Enroll now
   and watch the trailer here
   - CCSI, in partnership with E3G, an independent climate change think
   tank based in London, UK, *is conducting a survey *to better understand
   the economic, financial and regulatory factors that drive and/or limit the
   necessary domestic and foreign investments in renewable energy sectors. We
   hope to use the results of this survey combined with desk research to
   determine the fundamental determinants (and constraints) of renewable
   energy investments, and the corresponding ways in which economic, policy
   and regulatory frameworks can be strengthened to accelerate renewable
   energy investments. *If you are in the renewable energy industry, and
   are interested in participating in this survey or would like to receive
   more information about this project, please contact Ladan
   <[log in to unmask]>.*

Karl P. Sauvant, Ph.D.
Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
*Copyright © 2022 Columbia Center on Sustainable Investment (CCSI), All
rights reserved.*
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*Karl P. Sauvant, PhD*

*Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
| p: (212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
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"The WTO Investment Facilitation for Development Agreement Needs a Strong
Provision on Responsible Business Conduct", *Investment Facilitation for
Development: A Toolkit for Policy Makers. Second Edition,* "Agenda for
Practice-oriented Research", "WTO Processes Would Benefit from the Input of
Civil Society", "How Would a Future WTO Agreement on Investment
Facilitation for Development Encourage Sustainable FDI Flows, and How Could
it be Further Strengthened?”, "What Foreign Investors Want: Findings from
an Investor Survey", "Incentivising Sustainable FDI", "Green FDI:
Encouraging Carbon-neutral Investment", "Extending International Legal Aid
from Trade to Investment: An Advisory Centre on International Investment
Law", "More Attention to Policies! Improving the Distribution of FDI
Benefits", "Facilitating Sustainable FDI in a WTO Investment Facilitation
Framework: Four Concrete Proposals", "An Inventory of Concrete Measures to
Facilitate the Flow of Sustainable FDI: What? Why? How?", are available at .

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