The geopolitics of China in Chile’s lithium strategy and the trouble with critical minerals – Developing Economics

Industrialized countries are actively formulating ambitious plans aimed at reshoring production networks and securing mineral supplies—illustrated by initiatives such as the Inflation Reduction Act in the U.S., the EU’s Green Industrial Plan, and the Net-Zero Industry Act. Meanwhile, mineral-rich peripheral economies are also increasingly implementing their own policy interventions. Recent reports indicate that export restriction measures have increased fivefold over the last decade, with approximately 20% of critical mineral trade now subjected to at least one form of export restriction. Although these measures vary widely in their specific objectives, they generally aim to enhance rent capture or foster industrial upgrading further downstream within global production networks.

While some analysts interpret these interventions as a setback for free trade —particularly prior to the introduction of protectionist tariffs by the United States—and a resurgence of resource nationalism, mainstream international organizations such as IEA or UN are gradually beginning to acknowledge—and in some cases even endorse—such policies as strategic tools for “harnessing the potential of critical minerals for sustainable development.” Regardless of differing perspectives, the growing significance of critical mineral policies in peripheral economies is undoubtedly reshaping the global relationship between governments and industry.

A crucial question emerging from these developments is whether such policy measures might serve as “green ladders” for peripheral economies, or whether they merely reinforce rentier dynamics. The notion of a “green ladder” refers to the potential of industrial policies, implemented in the context of the energy transition, to foster new productive capabilities in peripheral economies. While traditional rentier states focus primarily on capturing resource rents to fund general public spending, many contemporary export restriction measures pursue more ambitious objectives, such as advancing down the value chains associated with energy transition technologies reliant on their minerals. Notable examples include Indonesia, which banned nickel ore exports to stimulate domestic processing and move downstream into stainless steel production, and Chile, which established clauses in lithium extraction contracts mandating producers to offer 25% of their output at preferential prices to companies committed to developing value-added products domestically.

The (latest) failed attempt to industrialize via lithium in Chile

In 2023, both BYD and Tsingshan had been selected through a competitive process overseen by the Chilean state agency CORFO to receive preferential quotas of domestically extracted and processed lithium, specifically intended for local value-added manufacturing. According to information provided by CORFO, these projects were expected to supply lithium cathodes primarily for the Brazilian market. Indeed, Brazil had recently emerged as BYD’s largest market for electric vehicles (EVs) outside China, prompting the company to initiate construction of an EV assembly and components manufacturing plant in Bahia (Brazil). This scenario appeared highly favorable for Chile, as it promised integration into a regional value chain within South America, potentially overcoming the country’s historical geographic disadvantage concerning access to competitive markets. Momentarily, the plan seemed strategically sound.

However, the announcement on May 7th acknowledged this policy’s failure. The principal reason provided was the significant decline in global lithium prices, rendering preferential pricing agreements far less attractive to producers. Additionally, specific complications arose regarding the corporate structure of Tsingshan—particularly its subsidiary Yongqing—and internal challenges faced by BYD.

This latest setback, reflecting the difficulties inherent in industrial policies leveraging competitive advantages in critical minerals, echoes a similar scenario from 2018. At that time, CORFO selected three lithium-processing projects under analogous conditions—Molymet, Posco-Samsung SDI, and Sichuan Fulin. None of these projects materialized, largely due to contractual disputes with lithium producer Albemarle regarding the definition of preferential prices, as well as unmet expectations related to Albemarle’s intended production of lithium hydroxide—a critical component used in certain types of cathodes.

Why is industrialization via critical minerals a struggle in the periphery?

Despite Chile’s efforts to develop value-added products derived from mineral processing, this episode serves as a reminder that it is not easy for peripheral economies to challenge their position within the international division of labor. One of the most evident obstacles relates to the limited state capacity often observed in peripheral contexts—both in general terms and specifically for industrial policy—is typically lacking in peripheral economies. The capacity to conceptualize, implement, and oversee industrial policy does not spontaneously emerge from goodwill or strategic vision alone. Instead, it requires sustained governmental efforts to build institutional capacities and cultivate technocrats and bureaucrats who deeply understand both policy and industry dynamics. Chile exemplifies this point clearly: the country’s scope for industrial policy has been constrained since the dictatorship era. Lithium became politically salient in Chile around 2009, and although the state has since acquired knowledge about the industry, its learning curve has lagged significantly behind industry developments. This disparity partly explains the contractual issues observed during the first tender aimed at attracting specialized lithium processors—issues which Albemarle leveraged to its advantage. Additionally, the Chilean state has become embroiled in legal disputes with both major lithium producers (Albemarle and SQM), primarily over taxation. Likewise, BYD publicly criticized the Chilean government—even before announcing its withdrawal from the quota allocation—citing uncertainties in the existing agreement for developing value-added products, particularly regarding lithium supply and the mechanism for determining the preferential rate. Thus, peripheral economies must realistically assess and acknowledge their institutional capacities when crafting industrial policies for critical minerals.

However, peripheral economies must also contend with the profound power asymmetries that structure the global economy. In this context, multinational corporations from developed countries often have limited incentives to align with the policy objectives of host states. Their primary objective remains profit maximization; if they perceive conditions as unfavorable, they simply will not invest. In this regard, the limited availability of productive capabilities in peripheral economies, the relatively weak domestic markets, and the strategic control maintained by developed economies over technological capacities are likely more decisive factors than preferential pricing for strategic minerals. Certainly, enhancing state capacity to develop clear and robust contracts and regulations is crucial to align corporate behavior with policy goals. However, equally important is exploring complementary mechanisms that incentivize or compel multinational corporations to cooperate. A potentially transformative path involves rethinking the global governance of the energy transition, promoting cooperation between developed nations and peripheral economies in pursuit of shared policy goals. Current discourse around a just energy transition predominantly emphasizes local socio-environmental impacts, but it rarely addresses, with equal urgency, the need for global actors to support industrial policy ambitions of peripheral economies.

From this perspective, the Chinese embassy’s recent message in Chile is notable, especially in the context of the contemporary upheavals reshaping the international order. Nothing comes freely in the global economy—neither before nor during the energy transition. Chile’s longstanding diplomatic relations with the United States and the European Union have not advanced its industrial policy goals; quite the contrary, policies such as the U.S. Inflation Reduction Act and the EU’s Green Industrial Plan explicitly focus on reshoring value chains within their borders, merely securing mineral supplies from abroad. Far from it, the EU-Chile FTA restricted measures such as preferential rates. While the modernization of the FTA created conditions to allow—and regulate—existing preferential price quotas, it also constrains the use of other potential industrial policy instruments. Such protectionist policies effectively “kick away the green ladder”. China, thus far, has not demonstrated significantly different behavior from the U.S. or EU. Indeed, Reuters reported that BYD’s investment plans were delayed by authorities in Beijing, largely due to a more cautious stance adopted by Chinese officials toward overseas investments by automakers. However, with the global economy navigating troubled waters in 2025, the Chinese embassy’s recent message to Chile represents the first explicit diplomatic signal toward supporting mining policy in the country—an intriguing development given the broader geopolitical context.

Felipe Irarrazaval is Assistant Professor at Universidad Mayor, Chile.