Geopolitical Risk and U.S.–China Tensions in Critical Material Markets: Implications for the Green Energy Transition

The worldwide green energy transition has escalated the demand for critical electric vehicle (EV) battery materials. However, these materials are heavily concentrated in specific regions, notably China; hence, trade conflicts, especially with China, and worldwide geopolitical shocks likely disrupt their supply chains and lead to price volatility. In this context, this study examines the dynamic effects of U.S.-China tensions (UCT) and geopolitical risk (GPR) on four critical materials for the energy transition—aluminum, cobalt, copper, and nickel. We employ a blend of sophisticated econometric techniques: Local Projection Impulse Response Functions (LP-IRFs), Structural Vector Autoregression (SVAR), and Forecast Error Variance Decomposition (FEVD) for monthly data (July 2010-February 2024). Overall, our findings reveal heterogeneous, material-specific responses to geopolitical tensions, with stronger statistical evidence for aluminum and nickel than for copper and cobalt. UCT is associated with an immediate and persistent positive impact on nickel and aluminum. Conversely, GPR exerts broader, longer-lasting downward pressure, particularly on aluminum and nickel. Copper shows a moderate response for a short duration to both shocks, while cobalt exhibits a relatively muted response. These responses become more pronounced in the post-COVID-19 and post-trade-war periods. Finally, our findings carry significant policy ramifications for supply chain resilience and green energy initiatives.