Image: U.S. Secretary of the Treasury Janet Yellen, left, shakes hands with Chile’s president Gabriel Boric, right, as Chile’s Finance Minister Mario Marcel looks on during their meeting in Santiago, Chile, March 1, 2024. Source: VOA News.
As the clean energy transition accelerates and demand for critical minerals and rare earth elements skyrockets, including for lithium, nickel, and cobalt, Chile finds itself at the forefront of a historic economic opportunity. Amidst the global scramble for these resources, caught in the geopolitical crosshairs between the U.S. and China, lies a nation poised to make monumental strides. The March 2 visit of U.S. Secretary of the Treasury Janet Yellen to Chile’s lithium mines underscores the critical urgency for the U.S. to secure these essential mineral supply chains, deemed strategic for the entire U.S. economy’s stability and for the successful implementation of President Biden’s Inflation Reduction Act. Nestled in Latin America, home to the world’s largest lithium reserves within the renowned lithium triangle, Argentina, Bolivia, and Chile collectively hold over half of the world’s lithium reserves. This comprehensive explainer ventures into how the Inflation Reduction Act benefits Chile, its operational dynamics, areas lacking efficacy, and the adjustments required to optimize its attractiveness for both the U.S. and Chile, alongside assessing the impact of President Gabriel Boric’s National Lithium Strategy and the broader geopolitical implications and challenges that confront the development of Chile’s lithium sector.
How does the Inflation Reduction Act (IRA) signed by the United States benefit Chile, especially considering its position as a supplier of critical minerals?
The Inflation Reduction Act (IRA), enacted by the U.S. Congress in 2022, seeks to boost the U.S. green energy transition, reducing the country’s greenhouse gas emission by 40 percent and creating 1.5 million new jobs by 2030. Considered one of President Joe Biden’s leading industrial policies, it contains USD 369 billion worth of incentives to promote green energy production and innovation over a decade. It includes tax credits for up to USD 7,500 to buy new electric vehicles, an annual residential clean energy credit up to USD 3,200 for energy efficiency improvements as well as credits for battery, solar cell, and turbine manufacturers. Estimates suggest that the IRA lowers the emerging clean energy technology up to 15 percent.
In addition, the IRA aims to secure the supply chain of critical minerals and rare elements vital for the green energy transition, reducing the reliance on Chinese suppliers. To this end, the IRA makes eligible for tax credits products manufactured in the U.S., including electric vehicles, battery components and critical minerals. Given that the U.S. remains heavily dependent on lithium imports with only one active lithium mine, the IRA provides an exception for countries with which the U.S. has free trade agreements. Among these is Chile, which has had a free trade agreement with the U.S. since 2004 and is the world’s second largest lithium producer. Indeed, Chile today accounts for 43 percent of U.S. lithium imports. With projections from S&P showing that EVs could account for up to 67 percent of new light-duty auto sales by 2032, Chile is in an ideal position to expand its market share.
What challenges does the development of the lithium market in Chile face and how could these affect relations between Chile and the United States?
The lithium industry has had a profound impact on Chile’s economy, with sales in 2022 surpassing USD 7.7 billion and tax revenue exceeding USD 5 billion. Indeed, according to Chile’s Central Bank, in 2022 the lithium sector had an annual growth rate of 10.4 percent. While the IRA benefits Chile greatly compared to other countries, including neighboring Argentina (which is seeking to negotiate a bilateral agreement to bypass IRA restrictions on lithium imports), President Gabriel Boric’s new National Lithium Strategy could impact U.S. interests with regards to Chile’s lithium but also slow the development of the country’s lithium sector. The strategy, unveiled in 2023, looks to increase the role of the government in the lithium industry by creating a state-owned lithium firm that would participate in every step of the production process. In addition, the government will promote the local manufacture of battery cells and seek the development of new technologies to minimize environmental impact.
Worries are centered on government delays in signing new lithium projects as well as the actual capacity of Chile to add value to the lithium industry. By requiring all new lithium projects to grant a majority stake to the Chilean state, negotiations have become slower, and Chile may lose competitiveness. China, which has a higher tolerance for state participation, may come to dominate the field. Indeed, projections show that Argentina, with a market-based lithium policy, will soon overtake Chile as the leading regional producer of lithium by 2035. Moreover, according to Juan Carlos Jobet, Chile’s former mining minister, the country does not have the competitive advantage nor technology to produce lithium-ion batteries as Boric has proposed. As the U.S. government rushes to secure its critical minerals supply chain, a more restrictive access to Chile’s lithium reserves could impact the U.S.-Chile economic relations. Although Chile says that it remains open to foreign investment, investors remain cautious as the national lithium strategy takes form in Congress.
What were the main objectives of Treasury Secretary Janet Yellen’s visit to Chile in relation to energy policy and lithium?
As the U.S. has not been able to keep up with lithium demand and China increases its influence over the green energy transition controlling over 80 percent of the world’s battery cells production, Treasury Secretary Janet Yellen’s visit to Chile in early March underscores the U.S. interest in implementing the IRA, securing its critical mineral supply chain as well as supporting U.S. mining companies that play a role in this. Indeed, Yellen’s trip shows that Chile, a long-time U.S. ally in Latin America, is expected to play a leading role in the U.S. larger green energy transition. Today, U.S.-based Albemarle, one of the two lithium producers in Chile, contributes significantly to the country’s ability to meet over 30 percent of the global demand. Albemarle Chile has been considered instrumental in the early development of the county’s lithium sector. Although President Boric’s plans aim to give the Chilean state a larger control in lithium production, attracting foreign investment will continue to play an important role in the country’s development of lithium. Under public-private initiatives, the proposed state-owned lithium company would partner with companies to develop new projects. Indeed, while touring Albemarle’s plant with Yellen, Chile’s Finance Minister Mario Marcel announced that the country will open a new bidding process later this year with the hope of adding more lithium projects.
Considering the statement that Chile could become the “Team China” for the future development of lithium, what political adjustments should the United States government consider necessary to maintain a balanced relationship with Chile?
Today China is Chile’s main economic partner. In 2023, Chile’s exports to China amounted to USD 38.4 billion, representing 39.4 percent of the country’s total exports. With regards to lithium, in 2023 exports totaled USD 4.3 billion, with China being the main destination. The importance of China is recognized and supported by actors across the political spectrum. Both countries have maintained a free trade agreement since 2006. In 2018, former President Sebastian Piñera decided to join the Belt and Road initiative — China’s flagship policy aimed at increasing cooperation and infrastructure projects worldwide. On a visit to China in October 2023, President Boric expressed his government’s intentions of being China’s gateway to Latin America.
As the green energy transition accelerates and the demand from critical and rare earth minerals increases, China’s interest in Chile’s mining sector has grown. In October 2023, during a state visit to China, President Boric announced an investment of over USD 250 million by Tsinghan, a Chinese company specialized in lithium production. Last December the Chilean government signed a long-awaited agreement with SQM (partially owned by China’s Tianqi Lithium Corp.) to cooperate on lithium extraction until 2060. Considering China’s role in Chile’s development and economic growth strategy, it is clear that China is in Chile to stay. The U.S. government should consider developing policies aimed not at forcing Chile to choose between China or the U.S., but rather at making the American market more attractive and accessible for Chilean exports.
Recognizing the complicated nature of reaching bipartisan agreements to expand free trade, U.S. lawmakers should rise to the occasion and build consensus around important legislation that would benefit both U.S. and Chilean economic interests. Among these is the recently unveiled Americas Act, a comprehensive bill that would, among other things, harmonize existing free trade agreements, propose the creation of a docking mechanism to the USMCA, as well as incentivize near-shoring operations of critical supply chains from China to the region. Under this framework Chile would be eligible to access the North American auto manufacturing ecosystem, not only increasing the competitiveness of Chile’s lithium sector but also attracting foreign investments and technology to develop a battery cell industry. This approach would not only bolster economic ties with Chile but also reinforce the strategic partnership between the two nations, offering a balanced and mutually beneficial alternative to the growing influence of China.
