Between the Eagle and the Dragon: Latin America’s Stance in the Energy Transition

Selene López

Sep, 2024

MUSIC:

Contrary to liberal theorist predictions, war has resurfaced as a pressing global issue. The war between Russia and Ukraine has not only upended assumptions about the stability of the international order but also caused significant disruptions in terms of energy supply. This situation underscores how energy security and geopolitics are deeply intertwined, offering clear policy directives. The disruptions caused by Russia’s actions have elevated energy security to a top priority once again. Fully understanding the importance of energy security, the feasibility of energy transition, and the need to tackle climate change requires acknowledging the over-arching questions of international politics and power competition, especially under the ongoing reconfiguration of the international order. The energy transition has become a key arena for geopolitical competition.

In less than five years, green policy proposals like the Inflation Reduction Act (IRA) in the U.S. and the Green New Deal in Europe have been introduced with the aim of addressing climate change. Similarly, China has launched its 14th Five-Year Plan, committing to peak carbon emissions by 2030, achieve carbon neutrality by 2060, and invest heavily in renewable energy and green technologies. These policies are not solely focused on climate change but also consider the strategic geopolitical implications of the energy transition, which is an intrinsically geopolitical matter. The push of major global powers towards green policy packages raises a crucial question: what options does Latin America have in this new era of energy transition and geopolitical strife?

Photo_ Brian Lauer_ CC BY 2.0

The region, rich in critical minerals such as lithium, cobalt, and rare earth elements (REEs), finds itself at a crossroads. It must navigate the competing interests of major powers—the “eagle” of the United States and the “dragon” of China—while formulating strategies to leverage its mineral wealth for its sustainable development and energy transition. This text will explore Latin America’s position in the rising geopolitical landscape to answer this question, examining the challenges and opportunities ahead in balancing economic interests with environmental and social considerations.

The Eagle: from Strategic Denial to Inward Turn

Forty years ago, former President Ronald Reagan famously stated that the nine most terrifying words in the English language are “I am from the government and here to help”. The words of the 40th President of the United States make no sense now if we take into account the Inflation Reduction Act (IRA) of 2022, the largest federal investment in climate and energy in American history. It allocates approximately $369 billion over a ten-year period for the expansion of climate action and clean energy initiatives. The IRA has less to do with reducing inflation and more to do with fostering domestic industry and securing supply chains, by providing a range of incentives designed to drive the transition to a low-carbon economy. It sees the allocation of billions of dollars in tax credits and grants for solar and wind energy projects, bolstering the expansion of renewable energy and enhancing the role of the public sector in it.

These incentives encompass subsidies and tax credits for targeted technologies such as heat pumps, electric HVAC systems, electric vehicles (EVs), and renewable electricity generation. The IRA underscores the crucial role of the state by facilitating public-private partnerships and funding state and local government initiatives. This includes projects involving the processing, manufacturing, and recycling of critical minerals. The IRA also removes the innovation requirement for State Energy Financing Institution-backed projects, thus broadening project eligibility. Additionally, it doubles down on nuclear energy by supporting both existing and new nuclear plants, recognising the vital role of nuclear power in achieving a low-carbon energy mix, keeping an eye on energy security by modernising the electrical grid and encouraging domestic sourcing and processing of critical minerals [1][1] Jordan, Katherine; Adams, Peter; Jaramillo, Paulina & Muller, Nicholas (2023), Closing the Gap: Achieving U.S. climate goals beyond the Inflation Reduction Act, Renewable and Sustainable Energy Transition, Volume 4..

By quietly building up its capabilities and focusing on long-term goals, China has positioned itself as a leader in renewable energy technologies.

While subsidies to support the energy transition are not new in the global fray, the IRA introduces a novel element by discriminating products on the basis of their origin. Unlike the type of green subsidies often used by the European Union (EU), the IRA specifically discriminates against foreign producers to promote the aforementioned domestic sourcing and processing of critical materials. To give an example, half of the tax credit for electric vehicles is linked to the origin of their batteries, and the other half to the raw materials used, aiming to protect national production and consumption from supply chain disruptions. This policy forces the reorganisation of those chains, diverting resources to the U.S. Still, it is argued that this local-content requirement is inconsistent with World Trade Organization (WTO)’s rules for being trade-distortive.

The importance of the IRA is not just quantitative but qualitative, representing a major shift in U.S. policy. Diverging from the Bretton Woods principles of embedded liberalism and multilateralism, which allowed for a separation of trade and economic policy from so-called “high politics”, the IRA’s market and trade-distortive policies [3][3] Ídem. reflect a strategic shift inward, a sort of green nationalism. It is the first time the U.S. has implemented WTO-prohibited subsidies contingent on local content requirements, a move that represents a significant blow to the international trading system and could have ramifications for global trade.

While some countries, particularly those with Free Trade Agreements (FTAs), may benefit in the short term by being part of accepted supply chains, the broader impacts are mixed. For example, the tensions between China and the U.S. have diverted significant trade through Mexico, benefiting its economy in the short term. An increase in Foreign Direct Investment (FDI) in Latin America’s energy sector can also be foreseen. Countries in Latin America enjoy easier access to the U.S. market for green technologies and related components, along with increased funding and support for climate mitigation and adaptation projects. However, this dynamic leads to an inequitable distribution of green technology, unfair competition, increased regional fragmentation, and growing extractive pressure on countries with reserves of critical minerals needed for the energy transition, as well as raising concerns about environmental and social impacts.

The US has historically pursued a grand strategy centred on tactical denial against rival powers [4][4] Berg, Ryan (2021) South America’s Lithium Triangle: Opportunities for the Biden Administration, Center for Strategic and International Studies., aiming to prevent powerful adversaries from establishing a foothold in the region. The inward-focused policies adopted during the Trump era, and continued or even intensified under Biden, have created international vacuums that China has increasingly occupied. China has significantly expanded its regional influence through its role as a creditor, investor, and trading partner. While the IRA aims to contain China’s rise, years of strategic engagement have already transformed China’s power into substantial influence.

The Dragon: Turning Energy Transition into Big Business

Prominent democratic theorists such as Samuel Huntington and Robert Dahl have long asserted that the absence of legitimacy undermines the long-term sustainability of authoritarian regimes. However, the Chinese political system has demonstrated remarkable resilience, evolving and adapting in significant ways. Deng Xiaoping’s “hide your strength, bide your time” (韬光养晦) is the principle that encapsulates this transformation. This approach manifests clearly in China’s strategic industrial policies, which have shaped its remarkable progress with the energy transition. By quietly building up its capabilities and focusing on long-term goals, China has positioned itself as a leader in renewable energy technologies.

In contrast to the conditionalities typically imposed by the International Monetary Fund, China employs a different approach to ensure future repayment, often securing commitments from state-owned oil companies.

Overall, China exemplifies a unique ability to both regulate and foster development within its economic sphere. An example of this dynamic is the Party’s oversight of centrally controlled businesses, known as yangqi (央企). These enterprises play a pivotal role in propelling the country toward its energy transition and sustainable development objectives. China stands as the world’s foremost supplier of critical minerals such as lithium, cobalt, nickel, and graphite, accounting for more than 80% of the rare earth elements market . It handles between 50% to 70% of global lithium and cobalt refining and dominates the entire rare earth value chain, with 85-90% of the world’s capacity to convert them into alloys and magnets.

Strategic industrial policies are crucial to the country’s rise, meticulously targeting the entire supply chain from raw minerals to battery packs. China’s dominance also extends to manufacturing, where it reigns as the single largest producer of solar panels, wind turbines, lithium-ion batteries, and electric vehicles [6][6] Asmeret Asghedom (2023), Examining the Energy Transition Through the Lens of Great Power Competition, Lawrence Livermore National Laboratory Center for Global Security Research, December 19.. China has been called “the Saudi Arabia of low-carbon energy manufacture” [7][7] Ídem)., since it has positioned itself as the largest electric vehicle (EV) market worldwide, underscoring its commitment to driving sustainable transportation solutions. Government incentives further bolster domestic demand and manufacturing capacity for EVs, solidifying China’s position as the global leader in this arena.

The China Development Bank (CDB) and the Export-Import Bank of China (China ExIm) have emerged as the main public creditors to governments in Latin America and the Caribbean (LAC). Remarkably, China has surpassed traditional multilateral institutions such as the World Bank’s International Bank for Reconstruction and Development (IBRD), the Inter-American Development Bank (IDB), and the Development Bank of Latin America (CAF) when it comes to credit extension to LAC nations. China’s overseas development finance is nearly on par with the scale of the World Bank’s financial activities, albeit characterised by a more intermittent pattern. Between 2008 and 2019, Chinese overseas development finance reached an impressive sum of approximately $462 billion. During the same period, the World Bank, through its sovereign lending windows—the IBRD and the International Development Association—only marginally surpassed this amount, extending approximately $467 billion [8][8] Ray R., & Simmons, B. (2020), China’s Overseas Development Finance Database, Boston University Global Development Policy Center..

In contrast to the conditionalities typically imposed by the International Monetary Fund (IMF), China employs a different approach to ensure future repayment, often securing commitments from state-owned oil companies such as Brazil’s Petrobras, Ecuador’s Petroecuador, and Venezuela’s PDVSA [9][9] Myers, M and Ray, R (2021). China in Latin America: Major impacts and avenues for constructive engagement; a U.S. perspective. China Research Center.. Moreover, up to 21 Latin American countries have signed agreements to join China’s Belt and Road Initiative (BRI), with energy sector projects representing 40% of the scheme. By prioritising energy initiatives within the BRI framework, China is strategically positioning itself as a proactive agent of change in addressing global climate challenges.

Latin America is increasingly anchored between longstanding dependencies on North America and Europe and emerging dependencies on China.

The BRI’s digital dimensions are also far-reaching, as they include fibre optic cables, 5G networks, satellites, data centres, smart city projects, and devices that connect to these systems, all of which, in turn, can support the information and communications technology business . Despite US efforts to ban Huawei from the region, Brazil, Argentina, and Chile are also preparing for 5G upgrades, with Huawei being the most likely provider. In the context of domestic underinvestment in innovation, foreign capital and technological enterprises play a crucial role in Latin America’s innovation development, which is the main reason why Huawei has emerged as a major player in Mexico, assisting the government in building the largest public Wi-Fi network.

In 2022, Chinese investments predominantly focused on lithium, renewable energy, and electric vehicles. This trend underscores the region’s strategic importance in the supply chain for green transition materials. These policies align with China’s broader objective of securing supply chains for critical minerals and other resources essential for its industrial and technological advancements. The boom in commoditisation through de-fossilisation has further cemented the country’s role as a dominant supplier of resources critical for the energy transition. However, it also raises critical questions about how LAC countries will prevent future re-primarisation and manage the social and environmental impacts of Chinese-funded investment projects.

Latin America: Navigating Challenges and Opportunities amidst Great Powers competition

The manoeuvres of both the U.S. and China in Latin America illustrate their broader geopolitical struggle for dominance and influence, particularly in the context of the energy transition. As an analytical framework, Realism argues that great powers tend to be the rule-makers [11][11] Keohane, R. (2001). Lilliputians’ Dilemmas: Small States in International Politics, International Organization, Vol. 23, No. 2 (Spring, 1969), pp. 291-310.. In this sense, Latin American and Caribbean countries often find themselves as the rule-takers. Although this rivalry impacts the strategic autonomy of countries within the region, the extent to which it narrows or expands its strategic space remains uncertain. Considering the energy transition, it is crucial to examine the challenges and opportunities the region faces.

The first thing to acknowledge is Latin America’s significant heterogeneity and its many contradictory elements. This diversity is evident in its countries’ economic structures, with some relying heavily on fossil fuels (Mexico, Ecuador, Venezuela) while others make important advancements in green technology (Argentina, Bolivia, Chile). Additionally, their states’ capacities and policy directions towards energy transition and climate change differ widely; for example, Brazil prioritises addressing deforestation, while others focus on different, related aspects of sustainability (Costa Rica). This variety of interests affects the region’s overall bargaining power, making it challenging to present a unified front when it comes to negotiations and policymaking.

Photo_ José Carlos Cortizo Pérez_ CC BY 2.0

Some scholars have argued that right-wing populist parties negatively influence climate and renewable energy policies in Organisation for Economic Co-operation and Development (OECD) countries; however, the left-right division does not provide a clear picture of climate action policies in Latin America. For instance, former leaders such as Duque in Colombia, Lacalle Pou in Uruguay, and Piñera in Chile pursued arguably green agendas. In contrast, incumbents like Andrés Manuel López Obrador in Mexico have largely focused on fossil fuels without actively pursuing climate action initiatives. Under a progressive-left president, Mexico is not at all moving towards decarbonisation or a green energy transition; instead, it is revitalising and funding the hydrocarbon sector. Leaders of the right, like Milei in Argentina and Bolsonaro in Brazil, have been sceptical of the Paris Agreements and climate commitments. Still, others who could be very much considered progressive, like Rafael Correa, have taken controversial stances on environmental issues, as seen in his calling for a “No” vote in the Yasuní consultation, which would have protected a key biodiversity area from oil drilling. These disparities highlight the complexity and variability of environmental policies across the Latin American political spectrum.

What we observe in the region is that energy transition is not strictly tied to ideology, and even when incumbents are ideologically aligned, an integrated process is not guaranteed. Local demands take priority for each state, and given the high turnover rate of incumbent leaders, local agendas will often be at the forefront of their priorities. The implementation of energy policies requires political stability, which in turn is challenging amidst frequent changes in leadership. From this observation, we can derive our first policy recommendation: energy transition should be treated as a state policy rather than a government policy.

The second challenge/opportunity worth discussing ties in with old and new forms of extractivism and the region’s integration into the global economic order, particularly concerning the commodification of raw and critical minerals needed for the energy transition. The increasing demand and prices for materials such as lithium, a key component in solar panels and batteries for zero-emission EVs, pose significant opportunities. These critical minerals are strongly concentrated in Chile, Argentina, and Bolivia. And although these countries have all enjoyed higher prices for these materials, each has had a different approach to resource management and development.

To break free from an extractivist and colonial destiny, it is crucial that Latin America adopts a mindset that transcends binary alignments.

Argentina has played a decentralised resource ownership strategy, meaning that the potential for lithium expansion lies primarily in the private sector. In this context, China has exerted relevant influence through Ganfeng Lithium, the world’s largest lithium miner as of 2019, which holds the majority stake in the Caucharí-Olaroz lithium carbonate brine operation. Chile, on the other hand, adopts a middle-ground approach with state guidance, balancing state oversight with private enterprise participation. China’s Tianqi Lithium, for example, is the second-largest shareholder in Chile’s largest lithium mining company, Sociedad Química y Minera (SQM), which ranked as the fourth-largest lithium mining company globally as of 2019. Conversely, Bolivia’s model is highly state-controlled and aimed at maximising state profits by partnering with foreign companies under strict terms, which ensure state ownership and majority control of any lithium production ventures. This model aims to retain a larger share of the profits within the country and promote industrialisation, but it has also led to slower development and a lack of technological expertise and investment compared to its neighbours [12][12] Berg, Ryan (2021) South America’s Lithium Triangle: Opportunities for the Biden Administration, Center for Strategic and International Studies..

Despite varying approaches to resource management within the Lithium Triangle, none of those countries have successfully developed significant value-added industries, thus [13][13] Feffer (2022), The impact of green new deals on Latin America, Foreign Policy in Focus. Available here: https://fpif.org/the-impact-of-green-new-deals-on-latin-america/, perpetuating regional development models historically reliant on natural resource extraction. Moreover, there are significant concerns about severe human rights abuses and environmental degradation in the mining industry [14][14] Munich Security Conference (2023). Power shifts: On the geopolitics of the energy transition. August, 15. Available here: https://securityconference.org/en/media/msc-blog/article/power-shifts-geopolitics-energy-transition/. Environmental shortcomings, such as high water consumption, exacerbate water shortages and the potential for water pollution. This adversely affects agricultural activities and the local indigenous communities who rely on these resources. As Feffer argues [15][15] Feffer (2022), The impact of green new deals on Latin America, Foreign Policy in Focus. Available here: https://fpif.org/the-impact-of-green-new-deals-on-latin-america/, “We are living with a sort of neo-neo-extractivism. Instead of the commodities boom of the previous period, it’s now all done in the name of the energy transition”.

Amidst short-term profit gains from commodity booms and certain benefits from U.S. “friend-shoring” policies, there is a risk of obscuring a larger trend: Latin America is increasingly anchored between longstanding dependencies on North America and Europe and emerging dependencies on China. Consequently, the region may miss the opportunity to realign itself with the new global order. As Barragán points out [16][16] Barragán, Mélany & Mittelman, Ariel. (2024). El ajedrez geopolítico de América Latina en el nuevo orden multipolar [Latin America’s geopolitical chess game in the new multipolar order]. Revista CIDOB d’Afers Internacionals. 11-33. 10.24241/rcai.2024.136.1., there is a potential danger of Latin America becoming an arena for competing great powers vying to secure essential components for semiconductors and other critical technologies. This underscores the importance of strategic foresight and balanced international engagements for the region’s sustainable development and geopolitical stability.

To break free from an extractivist and colonial destiny, it is crucial that Latin America adopts a mindset that transcends binary alignments. It is not merely about choosing between being pro-U.S. or pro-China, as this approach could lead to increased costs and disruptions in clean energy supply chains. Instead, the focus should be on securing a strong position at each energy concession while challenging the corporate models that often burden developing countries in the name of energy transition.

It’s time to explore the strength of collective arrangements.

Considering that the region has historically been a graveyard for integration-focused multilateral organisations, driven more by ideological alignments than concrete policies, the energy transition offers a specific issue where countries can coordinate their policies to harness the collective bargaining power of some nations. While earlier energy transitions were driven by technology and economic advantages, today, public policy plays a pivotal role . Policies first, integration second. Isolated public policies on energy transition that weaken individual countries are suboptimal; thus, coordination is key. For example, Argentina, Bolivia, Brazil, and Chile have the opportunity to discuss creating a regional EV supply chain that boosts access to high-tech and eco-friendly consumer goods.

Additionally, collaboration on hydrogen production among these countries could be highly beneficial. Joint efforts in research and development should be fostered to maximise technology exchange. Countries like Colombia and Ecuador should focus on more interconnected electricity grids, energy storage, and other flexibility options. It’s time to explore the strength of collective arrangements through specific policies.

Small states should not passively accept predetermined rules but actively disrupt them, thereby reshaping trajectories and securing stronger global positions.

Recognising that heterogeneity weakens the region’s overall bargaining power and that the absence of robust integration and coordination spaces hinders progress , focusing on concrete actions could enable Latin America to leverage its resources for the energy transition. By doing so, the region could enhance its negotiating capacity and strategically position itself within an evolving international order.

Conclusion

Latin America finds itself at a critical juncture between the strategic interests of the United States and China in the global energy transition. The region’s rich endowment of critical minerals presents both opportunities and challenges as it navigates the complexities of geopolitical competition. The contrasting approaches of the U.S., with its inward-focused policies under the Inflation Reduction Act, and China’s expansive Belt and Road Initiative underscore the need for Latin American countries to adopt a strategic and coordinated approach to energy transition.

The dynamics between the U.S. and China resemble a prisoner’s dilemma, where their reluctance to cooperate could potentially worsen their respective positions. Latin America risks losing if it aligns solely with the dominant strategy of either the U.S. or China. Introducing multiple players into the equation is crucial to resolve the prisoner’s dilemma. Small states should not passively accept predetermined rules but actively disrupt them, thereby reshaping trajectories and securing stronger global positions. By prioritising collective action, Latin America can capitalise on the uncertainty and ongoing reconfiguration of the international order. This approach not only fosters sustainable development but also enhances resilience against external pressures and promotes equitable participation in the global green economy. As the energy transition unfolds, Latin America’s proactive engagement will play a pivotal role in shaping its future within the emerging global energy landscape.

Please check your email to complete de process.