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José Miguel Ahumada holds a PhD in Development Studies from the University of Cambridge. He was an Assistant Professor at the Institute of International Studies, University of Chile. In 2022, he was appointed the Vice Minister of Trade in the Government of Chile.

Dr Ahumada is the author of The political economy of peripheral growth: Chile in the global economy (Palgrave, 2019) and co-author of La lección nórdica: trayectorias de desarrollo en Noruega, Suecia y Finlandia (Fondo de Cultura Económica, 2021).

For issue #89 of The Internationalist, Dr Ahumada looks at how Latin America's new 'critical minerals lottery' driven by the global energy transition is reminiscent of historical resource booms, risking economic stagnation and environmental degradation.

A new critical mineral lottery in Latin America

Latin America's economic history does not repeat itself, but it rhymes. In the 1940s, Raul Prebisch wrote about the emerging division of labor of the 20th century and how it differed from that of the 19th century, where the periphery exported natural resources and imported manufactures. Prebisch asserted that Latin America was entering a process of relative industrial development but that, because of its peripheral condition, it faced structural limitations.

For his part, the famous Cuban economist Carlos Díaz-Alejando characterized the region's trade pattern at the end of the 19th century based on the ‘lottery of natural resources’, where the industrial development of the core economies demanded increasing agricultural and mining goods from Latin America. 

Such lottery cycles are common in the region. Indeed, it was the commodity lottery from the mid-2000s onwards that saw the region recover economically after a half-decade of economic stagnation since the Asian crisis (1998-2003). However, as in the 19th century, once this boom was over, the region was left without new productive capacities or a more diversified export matrix. The last decade, in fact, has been a lost decade in economic terms, widening the region's gap with the core economies (Figure 1).

Source: The Conference Board-Total Economy Database, 2024.

However, the region is currently experiencing the onset of a novel 'critical minerals lottery'. The ongoing global energy transition is causing core industrial economies to increase their demand for key minerals for electric cars, wind turbines, photovoltaic plants, and power grids, etc., such as lithium, copper, silver, nickel, etc. As shown in Table 1, Latin America is highly endowed with these minerals.

The high concentration of critical minerals in the region (particularly in Argentina, Bolivia, Chile and Mexico) is transforming it into an area where geopolitical competition for control of mineral reserves, infrastructure, logistic chains and supply contracts for these minerals by the US, EU and China is brewing.

China and the first-move advantage

China’s economy has rapidly adapted to the energy transition by quickly diversifying in the production and processing of critical minerals. Indeed, in aggregate terms, China accounts for about 70% of world cobalt processing, 58% of lithium, 24% of nickel, 42% of copper, 100% of graphite and 93% of magnesium (IEA, 2023). 

This Chinese advance can be clearly seen in Latin America. In terms of copper, the region produces 36% of the world's copper (Chile 23.6%, Peru 10% and Mexico 3.4%) and China just 8.6%. However, in the refining stage, the figures are reversed and China accounts for 42.3% of world refining, while the region accounts for only 11% (Lagos et al., 2021). In turn, if we look at the value chain of a lithium battery, we observe a similar situation. While Chile, Argentina and Australia account for 93% of lithium production (29%, 50%, and 14% respectively), China practically controls all of international lithium refining (approximately 90%), along with 75% of global electrochemical production, 50% of cell production, and 20% of battery assembly (Poveda, 2021).

China's influence in Latin America dates back to the commodities boom, when it became its top trading partner, displacing the EU and the US. If in 2002 Latin America's trade with China (exports plus imports) was equivalent to 1.1% of the region’s GDP, in 2022 it increased to 7.8%. However, China's economic penetration has also come about through massive investment credits and foreign direct investment (FDI). In the latter, Chinese FDI has changed its objectives: while during the commodity boom, these went mainly to extractive sectors such as oil; in the post-boom period (2013–2022) they have turned to infrastructure, mainly around renewable energy and electric car value chains (Albright, Ray, Liu, 2023).

For example, recent Chinese mergers and acquisitions have mainly targeted the lithium and battery sector in Argentina, Bolivia and Chile, the geographic triangle where the largest amount of lithium reserves and production in the world is concentrated. In 2019, Tianqi acquired 24% of the Chilean company SQM, one of the largest lithium producers in the world. In 2023, the Bolivian government announced a 1.4 billion USD contract with the Chinese conglomerate CBC for the creation of two industrial complexes for direct lithium extraction, with the aim not only of extracting the mineral but also of exporting lithium batteries. The case of Argentina is along the same lines, strengthening alliances between Argentine and Chinese capital, as with the company Minera Exar, a joint venture between Ganfeng Lithium and Lithium Argentina, which owns one of the largest mineral areas in the Olaroz-Cauchari salt flat.

In this context, China's strategy in the region has been to increase its presence in the entire value chain around the energy transition, from extraction, processing and transformation into manufactured goods of strategic minerals. These goods (e.g. lithium batteries) are exported to China, where they are inserted as inputs in its automotive infrastructure and electromobility industry.

Chile, the political economy of critical minerals 

Chile is particularly well positioned in this rush for critical minerals, producing 23.6% of the world's copper and 29% of the world's lithium. The US agenda, particularly through the Inflation Reduction Act (IRA),  focused on giving credit supports to high-tech firms producing in the country, subject to using inputs produced locally or imported from countries with which the US have good trade relations (such as having signed a FTA), and the EU agenda of consolidating trade agreements (FTA) with the region, with special emphasis on chapters and content related to the management of critical minerals, will only accelerate the demand for Chile’ minerals. For example, in July 2024 the Chilean government reached an agreement with the US that permits firms that import Chile’s lithium as an input for the production of electric vehicles, obtain the benefits that the IRA offers; while in 2022 the government concluded the negotiations of the modernization of the trade agreement with the EU.

However, Chile’s participation in lithium batteries, offshore wind or electric car component value chains ends where they begin. In other words, its position in these chains is typically peripheral: supplying minerals with very little processing, exporting them to be refined, processed and transformed into complex technological products by core countries.

Chile is facing a growing boom in demand for these minerals that will generate a self-reinforcing process. The boom can imply higher growth, increased tax revenues, more investments and, therefore, the possibility of recovery in what has been a decade of weak growth and stagnant productivity. This growth will strengthen political coalitions in favor of this peripheral growth (liberal parties, export associations, transnational companies, pro-free trade sectors within the government apparatus, with the active support of core economies diplomats) and, amid a mineral boom, questions of productive transformation and green industrialization may be quickly eclipsed by easy and abundant rents (as has happened in previous moments of natural resource lotteries). 

However, experience teaches us that passive enjoyment of these booms only anchors peripheral economies to unstable growth, from big booms to big falls, leaving the national productive matrix with less technological capabilities, in deep premature deindustrialization and export reprimarization (Palma, 2019; Gallagher, 2016).

Chile has recently launched a National Lithium Strategy, with two main actions. The first one is the entrance of the State to the exploitation of lithium through the acquisition of more than 50% of the shares of the biggest lithium firm in the country (SQM) whose main investments are in the Atacama salt flat. The second one, consists in the establishment of a public Technological Institute, focused on research towards the technological innovation and green transition of the lithium production. 

Despite these steps forward, the most conservative political forces have blocked attempts to modify trade rules or to strengthen its position in the face of EU pressures for Chile to enter into agreements that limit the country's policy space. This makes it difficult to consolidate a robust agenda for development, since Chile is a country whose trade policy has consolidated a vast network of FTAs that are plagued by the ISDS mechanism, restrictions on selective industrial policies (such as local content or technology transfer requirements for FDI (as China, the US and the EU are doing today), and very strong protection for intellectual property rules.

In turn, the possibilities of strengthening an alliance between Argentina, Bolivia and Chile (the so-called ‘Lithium Triangle’) to forge a common and unified position in the international arena, enhance regional value chains and appropriate higher rents in negotiations with the core economies, have been restricted by internal dynamics. Chilean elites have opposed such proposals, appealing to perpetuate a neutral trade policy linked more to the core economies and less with the region. This, while Argentina, with President Milei, is utterly closed to this strategic vision of regional insertion, and the local provinces (those in charge of lithium in Argentina) hinder the capacity for strategic coordination. 

In this sense, Latin America in general, and Chile in particular, face the possibility that, once again, history will repeat itself: periods of economic booms through natural resource lotteries, followed by ‘lost decades’ of economic stagnation. That, however, is not a destiny, and can be reversed. But in order not to fall into these inertia, the region should take advantage of its (temporary) market power over these minerals. This implies, among other things, achieving inter-state coordination on several fronts. First, stimulating regional value chains between the countries of the ‘lithium triangle’ and the Brazilian and Mexican markets (for example, by accelerating infrastructure projects such as the bio-ocean corridor). Second, (re)negotiating trade agreements as a bloc with the core economies, and focusing on recovering the policy space lost after decades of FTAs. Finally, an intense policy of support, subsidies and state coordination for the establishment of investments in areas further up the value chain (for example, lithium battery components).

It is true, the chances of that are slim, but here again, Antonio Gramsci's maxim applies: pessimism of the intelligence, optimism of the will. 

Bibliography

Albright, Z.; Ray, R.; Liu, Yudong. (2023). China-Latin America and the Caribbean Economic Bulletin. 

Global Development Policy Center, Boston University, Massachusetts.

Gallagher, K. (2016). The China triangle. Oxford University Press: Oxford.

IEA (2023), Latin America’s opportunity in critical minerals for the clean energy transition. Paris, available at: https://www.iea.org/commentaries/latin-america-s-opportunity-in-critical-minerals-for-the-clean-energy-transition

Lagos, G.; Peters, D.; Salas, J.C.; Parra, R.; Pérez, V. (2021). ‘Análisis económico de las cadenas globales de valor y suministro del cobre refinado en países de América Latina’. Documentos de Proyectos (LC/TS.2021/149).

Comisión Económica para América Latina y el Caribe (CEPAL): Chile.

Palma, J.G. (2019). ‘Deindustrialization, “premature” deindustrialization, and “Dutch disease”. El Trimestre Económico, 86(344): 901-966.

Poveda, R. (2021). ‘Políticas públicas para la innovación y la agregación de valor de litio en Chile’. Documentos de Proyectos (LC/TS.2020/84), CEPAL: Santiago.. 

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