Image credit: Investopia
by Amanda Doyle
September 2023
This piece is part of series funded by the Korea Foundation. This project aims to highlight Korean security challenges in which Canada can be a valuable partner, and to showcase the work of the next generation of security scholars. To access the full series and listen to the podcast episodes, go to: https://www.cgai.ca/2023_canada_korea_series
Table of Contents
- Introduction
- Supply Chain Fragility
- Why South Korea?
- The China Factor
- Canada’s Position in the Race
- Why Canada and South Korea Ought to be Best Friends
- Securing our Friendships and Supply Chains
- About the Author
- Canadian Global Affairs Institute
Introduction
Canada and South Korea recently celebrated their 60-year diplomatic anniversary, with the Trudeau government focused on deepening their ties. Prime Minister Justin Trudeau recently travelled to South Korea, marking the first visit in nine years by a Canadian leader. It came on the heels of President Yoon Suk Yeol’s fall tour of Canada, when he made a commitment to enhance the bilateral relationship. This momentum saw both Trudeau and Foreign Affairs Minister Mélanie Joly express a dire need for Canada to become best friends with South Korea.
The increased engagements between the two coincided with the release of the Indo-Pacific Strategy (IPS) – signalling a massive shift in Canadian foreign policy. A key focus of the IPS is ensuring supply chain resilience, and for that reason, Canada cannot afford to be anything less than best friends with South Korea. The COVID-19 pandemic, the war in Ukraine and other geopolitical shifts have revealed significant cracks in global supply chains and a need to deepen ties with other like-minded democracies in the Indo-Pacific.
With climate change presenting profound challenges and opportunities worldwide, countries are racing to secure supply chains and position themselves as leaders in the clean energy transition. The electric vehicle (EV) supply chain in particular presents a once-in-a-generation opportunity for Canada as a producer of critical minerals. It also presents economic, environmental and security risks due to China’s domination of the entire electric vehicle value chain.
While the federal government has awakened to the reality that it needs new friends (and fast), South Korea is critical to reducing dependence on China and positioning Canada as a strategic investment partner. While Canada could be a global investment destination and supplier for its many sought after critical minerals in the EV supply chain, we lag behind South Korea’s strengths in innovation and manufacturing. We must speed up getting product from the ground to market to secure that coveted best-friend status with the Korean government.
Supply Chain Fragility
The pandemic and geopolitical conflicts have shone a light on the fragility and the importance of our global supply chains. Also, a global shift to clean technology has resulted in a skyrocketing demand for critical minerals and will continue to do so. It is estimated that by 2030, one million electric vehicles will be sold each week, with EVs requiring six times more minerals than conventional vehicles. Given the steady rise in climate-related crises and the economic opportunity in clean tech, governments and the automotive industry are scrambling to solidify stable and sustainable global supply chains.
Why South Korea?
Canada and South Korea have strong ties that date back to Canada’s involvement in the Korean War. They had the first and only bilateral free trade agreement in the Indo-Pacific region, and they signed the Canada-Korea Comprehensive Strategic Partnership (CKCSP) in September 2022. Canada has the world’s fourth largest Korean diaspora, and South Korea is Canada’s seventh largest trading partner, sixth largest merchandise export market and sixth largest source of merchandise import. In 2022 alone, Canada imported $13.2 billion and exported $8.6 billion worth of merchandise to Korea. Also, it was Trudeau’s father, Pierre, who opened the first Canadian embassy in Seoul in 1973.
Canada is not alone in vying to become South Korea’s best friend. South Korea’s reputation as a global innovation leader and ally for the West is not going unnoticed. South Korea’s economy has grown rapidly since the 1980s and its culture of innovation, openness to investment and predominantly friendly relationships have helped it to become the highly industrialized country that it is today. Manufacturing has driven its economic growth, but its domestic metals and minerals have been unable to keep up with the industrial sector’s demand. As a result, Australian rare earth producers signed a deal with the Korean Mine Rehabilitation and Resource Corporation (KOMIR) in 2021, followed by Australia and South Korea signing a strategic co-operation agreement covering rare earths like lithium, graphite, cobalt and nickel. The U.S. and South Korea also signed an MoU to onshore more battery manufacturing in April, and in August announced a historic agreement between the U.S., Japan, and South Korea to strengthen their trilateral cooperation – including strengthening critical mineral supply chains. South Korea has also signed an agreement with Mongolia, a big player in supplying copper and rare earth materials. Canada has some competition.
Given the obvious ties from a trade and economic perspective, why has it taken so long for Canada to pursue expanded relations with the Korean government? Two strategic priorities have emerged in recent years that can no longer be ignored: the global (and local) impacts of climate change and the threat of China.
The China Factor
As a mineral-rich country with ambitious climate change goals, Canada should be a leader in this space, but China is leaps and bounds ahead, dominating the EV sector on the supply chain side. Its dominance begins with mining of rare earth elements (REEs), key components of electric vehicle motors. Despite having only 35 per cent of the world’s REE reserves, China accounted for 85 per cent of the global production of REEs in 2016. In 2019, China was responsible for 60 per cent of the global production of cobalt and REEs. China really shines in delivering the end product ready for industrial use. It refines 35 per cent of the world’s nickel, 50-70 per cent of lithium and cobalt and nearly 90 per cent of REEs. China is also dominant in EV battery production. Estimates are that by 2030, China will make twice as many batteries as every country combined, with CATL, a Chinese battery manufacturing company, being the number one EV battery producer globally.
China has maintained its lead largely because it has consistent long-term dedicated support from the state to secure mineral resources and build processing capacity, and it lacks strict environmental regulations allowing its low-cost, pollution-intensive mining methods to continue. These methods have devastating impacts on workers and nearby communities. For example, the largest REE mine in the world is Bayan-Obo in China, which has left over 70,000 tonnes of radioactive thorium in the area, causing toxic material to seep into the groundwater and eventually the drinking water. The Chinese government has also acknowledged the existence of “cancer villages” where large numbers of the community have developed cancer from mining-related pollution.
China’s global dominance should concern Canada and other Western democracies, as it expands its strategic interests and investments to African countries. This expansion is exposing communities to the same levels of toxic contamination while China pillages local economies of critical resources. Through infrastructure deals, China has secured the rights to REE deposits in the Democratic Republic of the Congo and Kenya, with more expected in Cameroon, Angola and Tanzania. Chinese companies have acquired stakes in mining companies on five continents, making the risks widespread. Chinese state-owned enterprises have 10-26 per cent ownership stakes in several of Canada’s largest mining companies.
China is a powerhouse and it is not afraid to restrict global supply as a diplomatic cudgel. In 2010, China blocked critical mineral exports to Japan in retaliation for Japan detaining a Chinese fishing trawler captain after the vessel collided with Japanese coast guard vessels. More recently, China threatened to limit REE exports to the United States in response to tariffs put in place by then-president Donald Trump. China also implemented an unprecedented wave of trade restrictions against Australia and instructed Chinese importers and utilities to stop purchasing Australian coal or liquefied natural gas. With Canada and China’s relationship currently on shaky ground because of foreign interference allegations and diplomatic expulsions, these risks should be even more motivation for Canada to act.
Canada’s Position in the Race
Canada has committed to achieving net-zero emissions by 2050 and is home to 31 critical minerals, making it both motivated and uniquely positioned in the EV supply chain. In recent years Canada has not been asleep at the wheel during this race. In 2022, the federal government launched the Critical Minerals Strategy (CMS) and committed $3.8 billion in investment to support it. Ottawa also launched the Critical Mineral Exploration Tax Credit (CMETC) to incentivize investment in exploration for certain critical minerals. These efforts are not going unnoticed – in BloombergNEF’s latest global lithium-ion battery supply chain ranking, Canada jumped to second place from fifth (notably behind China in first, and ahead of the U.S. in third place). Despite this improvement, Bloomberg highlighted that most of Canada’s resource value is realized out of country due to a lack of cell and component manufacturing capacity.
Canada has focused on attracting investments to ramp up this capacity, including domestic battery production investments from BASF, GM and South Korean company Posco. Volkswagen has committed to building its first battery plant outside of Europe, in Ontario, and recently, Canadian federal and provincial governments landed a $500 million deal with South Korean Solus Advanced Materials Co. to revive an old plant in Quebec. The plant is said to eventually produce enough copper foil for as many as 2.5 million EVs in North America. But the passage of the U.S.’s Inflation Reduction Act poses immediate challenges for the federal government due to its massive clean-tech incentives. These incentives south of the border recently stalled an agreement between the federal and Ontario governments and Stellantis and LG to build an electric vehicle battery plant in Windsor, Ontario.
Despite the Stellantis stalemate, the federal government can point to recent success. The first Canadian rare earth mine started shipping concentrate from the Nechalacho Mine in the Northwest Territories last year, after a decade-long regulatory approval process. This mine is the only rare earth mine in North America that doesn’t supply China. Unfortunately, Vital Metals, the same company that operates the Nechalacho Mine, halted construction on a rare earth processing facility in Saskatoon due to “no economic imperative” with higher costs and lower prices. This is no doubt a setback as domestic processing of critical minerals remains under-developed because Canada lacks the necessary companies and machinery. The federal government has also been putting policies in place to keep China’s stronghold out of its domestic sector, specifically with changes to the Investment Canada Act. This led to three Chinese firms being forced to divest from Canada’s mining sector.
Why Canada and South Korea Ought to be Best Friends
Canada and South Korea have recently been enjoying the mutual benefits of their expanded ties. The two countries have a strategic partnership, a free trade agreement and a science, technology and innovation co-operation agreement. Earlier this year, Korean and Canadian entities signed several MOUs to expand bilateral critical minerals co-operation, allowing Korean companies to establish supply chains across North America for materials, parts and finished products for secondary batteries and EVs. Trudeau and Yoon also agreed to step up co-operation on critical minerals. These are all positive steps as Canada needs South Korea to relieve our dependence on China, and to help us lead in the global EV race.
South Korea is uniquely positioned to be a massive player in the EV supply chain as it is home to three of five of the world’s biggest EV battery makers – LG, Samsung and SK On. These three companies control more than 25 per cent of the global EV battery market and supply major auto manufacturers like Tesla, Volkswagen, GM and Ford. South Korea is investing $15 billion in new EV battery technology, enabling the delivery of the world’s first solid-state batteries, making electric storage lighter while driving down prices. South Korea will begin production of cobalt-free batteries while quadrupling its cathode-material production capacity in the next five years.
The need to become best friends certainly isn’t one-sided. According to Lim Woongsoon, South Korea’s ambassador to Canada, the country has significant business interests in Canada’s critical minerals. As China is South Korea’s largest trading partner, it is racing to increase its own supply chain resilience. In April, tensions rose between South Korea and China over comments Yoon made about Taiwan, leading South Korea to summon the Chinese ambassador. The Chinese ambassador was again summoned by South Korea after China criticized Seoul’s alignment with the U.S.
Prior to these escalations, South Korea had been eyeing diversification for some time. In November 2022, it released a supply chain diversification strategy to reduce supply chain risks and focus reliance away from China. Recently, the Ministry of Trade, Industry and Energy launched its own strategy for securing critical minerals and stabilizing its supply chain. The strategy will grow Korea into a “high-tech industrial powerhouse,” expanding critical mineral recycling and developing sustainable smelting technology – two areas of need for Canada.
While Canada’s social and environmental mining standards are superior to China’s, we lack cell and component manufacturing capacity, and continue to rely heavily on the Chinese for mineral processing like smelting. Despite South Korea’s efforts with its mineral deposits, it lacks the supply to meet demand. This creates a perfect opportunity for Canada and South Korea to build a more resilient and sustainable EV supply chain, unlocking significant economic benefits for both.
Securing our Friendships and Supply Chains
The economic and geopolitical opportunities for both Canada and South Korea are significant. If Canada wants to lead, we need to match our critical mineral supply with the best available EV technology and innovation, which South Korea can provide. We need South Korea as an integral part of the Canadian EV supply chain – we need it as a best friend. The United States has made significant investments since 2012 to revitalize older mining operations like Mountain Pass to counter Chinese influence and create an American champion in this space.
Canada’s reality is that new mines are not being built fast enough, averaging 12-15 years to open. Canada’s CMS acknowledges that we must speed up regulatory decisions on domestic critical minerals projects to meet demand. If we want to partner with an innovation powerhouse like South Korea, we need to keep up. We cannot afford to let this once-in-a generation opportunity pass us by because we were simply too slow.
Canada must ensure that policy changes (like those to the Investment Canada Act) don’t hinder opportunities with our allies. We also need sustained, targeted investment throughout the entire EV supply chain from extraction, processing and production to R&D. Canada also needs consistency in governance. Mining development projects are long term but are often impacted by short-term election cycles and inconsistent regulatory processes that deter much-needed foreign direct investment. The federal government needs to balance speed and efficiency with strong environmental protections and engagement with Indigenous communities. As the battle for supply chain resiliency intensifies, it’s time for Canada to step on the accelerator with partners like South Korea – before we fall further behind.
About the Author
Amanda Doyle is a Master of Public Policy and Global Affairs student at the University of British Columbia, with a focus on global governance and security in the Asia-Pacific Region. She spent eight years as a senior political strategist, advising multiple levels of government and industry. Her research interests and perspectives are also shaped by her experience living and working in Daegu, South Korea.
Canadian Global Affairs Institute
The Canadian Global Affairs Institute focuses on the entire range of Canada’s international relations in all its forms including trade investment and international capacity building. Successor to the Canadian Defence and Foreign Affairs Institute (CDFAI, which was established in 2001), the Institute works to inform Canadians about the importance of having a respected and influential voice in those parts of the globe where Canada has significant interests due to trade and investment, origins of Canada’s population, geographic security (and especially security of North America in conjunction with the United States), social development, or the peace and freedom of allied nations. The Institute aims to demonstrate to Canadians the importance of comprehensive foreign, defence and trade policies which both express our values and represent our interests.
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