Indonesia’s Nickel Diplomacy: Navigating US–China Competition in Critical Minerals

Indonesia has quietly become one of the most consequential players in the global race for critical minerals. As the world’s largest nickel producer, Jakarta now sits at the intersection of strategic competition between the United States and China, both seeking secure access to supply chains that will shape the future of electric vehicles, battery production, and energy transition industries.

A new trade agreement between Indonesia and the United States, signed on February 20, has intensified this dynamic. By expanding American access to Indonesia’s critical minerals sector, the agreement introduces a new variable into a supply chain long dominated by Chinese investment and industrial capacity.

Beijing’s response has been cautious rather than confrontational. Yet China’s carefully calibrated reaction reflects deeper strategic concerns about maintaining its dominant role in Indonesia’s nickel ecosystem.

Understanding this triangular dynamic is essential for assessing the future of the global critical minerals supply chain.

Indonesia–US Trade Agreement

On February 20, the US and Indonesia signed a new reciprocal trade agreement covering tariff arrangements and investment access, including in critical minerals such as nickel. Under this framework, the US reduced import tariffs from Indonesia from 32 percent to 19 percent, with the exception of zero percent tariffs on several key Indonesian export commodities such as palm oil, coffee, and cocoa.

Indonesia, in return, agreed to open market access to US investors and remove export barriers for industrial commodities, including critical minerals such as nickel, bauxite, and rare earth metals. The agreement also includes Indonesia’s commitment to facilitating US investment, including direct investment cooperation between US and Indonesian companies in the critical minerals sector.

While Jakarta characterized the agreement as a “win-win,” the structure of market access for the US clearly signals Jakarta’s willingness to expand its strategic partnership beyond its traditional relationship.

Beijing responded to the US-Indonesia agreement with an official statement calling out certain technical aspects of the agreement that allow for US and Indonesian authorities to harmonize punitive trade actions against a third party on (US) national security grounds. The response reflects attention and concern on the part of Beijing over the direction of US-Indonesia trade relations, a natural consequence given China’s role as Indonesia’s closest commercial partner in the minerals sector.  The majority of Indonesia’s nickel exports in recent years have been destined for the Chinese market, and the majority of Indonesia’s nickel processing facilities were established with capital and technology initiated or supported by Chinese entities.

Threads of Dependence

China has gradually expanded its role in Indonesia’s mineral supply chain following the implementation of a ban on raw ore exports in 2020. This ban encouraged foreign investment to build processing facilities domestically.

The surge in investment has primarily come from Chinese entities, which now control the majority of Indonesia’s nickel processing and smelting capacity. Several market analyses have even revealed that over 90% of Indonesia’s nickel exports go to China, demonstrating the intense and integrated relationship between the two countries in this commodity.

This structural dependence has two main implications. First, China has a strong interest in maintaining stable supplies from Indonesia, meaning Beijing tends to prioritize dialogue and coordination over direct confrontation when addressing foreign policy issues involving Indonesia. Second, China’s dominant position gives Beijing leverage in informal negotiations or future bilateral policies, as access to mineral supplies remains a key component of its domestic industrial strategy.

Adjusting the Board: Market and Investment Dynamics

Despite China’s strong position, the dynamics of the global mineral market also present real challenges to its supply dominance. Analysts note that the US-Indonesia agreement has the potential to change several aspects of the global supply structure, and even more so now since the US increasingly has more formal and wide access to commodities previously dominated by China’s processing networks.

In response, some predict that China will intensify efforts to diversify its supply sources and strengthen value-added chains beyond traditional channels. This could include investments in other regions, expanding cooperation with other mineral-producing countries, or accelerating the development of internal processing technologies to minimize the competitive impact of shifts in the foreign policies of producing countries like Indonesia.

It is difficult to see Beijing’s response as a direct rejection of Jakarta–Washington policy. Rather than creating new tensions, Beijing is likely strengthening its economic position by optimizing existing capacity and through economic diplomacy that emphasizes rule-based compliance and market stability.

Final Frames: The Trilateral Puzzle

The US-Indonesia agreement on market access and investment in the critical minerals sector clearly reflects Jakarta’s ambition to position itself on the global stage. By opening new channels for US investment while maintaining deep commercial ties with China, Indonesia is effectively navigating between two competing economic systems.

Beijing’s response, on the other hand, demonstrates a cautious approach but consistent with its long-term interests: maintaining proven commercial relationships, minimizing immediate shocks, and adapting strategies to maintain its position in global value chains.

For Indonesia, the key challenge is to capitalize on this potential bargaining power without losing control of the direction of domestic industrialization and without compromising the stability of its relations with major world powers. Success in managing these dynamics will depend on pragmatic policy choices, adaptive responses to global market trends, and the ability to design a balanced long-term framework for cooperation with all parties.

In this context, Indonesia’s nickel sector is no longer merely an industrial policy instrument. It is emerging as a geopolitical lever—one that could shape the future balance of influence in the global critical minerals supply chain.