The EU-Chile Advanced Framework Agreement and the global quest for Critical Raw Materials

The EU-Chile Advanced Framework Agreement

On December 9, 2022, the European Union (EU) and Chile concluded the negotiations for the renewal of the EU-Chile Association Agreement (Aarup and Moens, 2022). The revamped deal, now called EU-Chile Advanced Framework Agreement, has been under negotiation since 2017, when the two sides decided that was time to modernise their Association Agreement which was in place since 2002. While the EU was Chile's top trading partner between 2003 and 2009, now it is only third, after China and the US. This is why negotiations were started to broaden and strengthen the agreement. With bilateral trade flows in goods and services amounting to almost €24 billion in 2021, the new pact will serve to deepen EU-Chile trade and investment ties (European commission, 2022). 

To speed up the ratification process, following some cases of protracted delays in the ratification of EU trade agreements due to the need for EU mixed agreements to receive the sign off from every national parliament and even some regional ones (Moens and Hanke Vela, 2022), the new deal is composed of two legal instruments. The first one is the Comprehensive Agreement, which includes the Political and Cooperation pillar, and the Trade and Investment pillar. This, being a mixed agreement involving not only the EU's exclusive competences, will need to be ratified by all Member States. The second legal instrument is an interim Free Trade Agreement (iFTA) covering only the parts of the Trade and Investment pillar which are of EU’s exclusive competence, and which do not need ratification by all Member States, but only from the Council of the EU and the European Parliament. This second part will expire once the Comprehensive Agreement will be ratified.  

The trade pillar of the new agreement will further liberalise agricultural products, making 95% of bilateral trade in agricultural goods tariff-free. Trade in industrial goods was already fully liberalised under the current agreement. Trade in services will be made easier, as access to government procurement contracts on both sides. Importantly, comprehensive investment protection will substitute the current system based on 16 bilateral investment protection treaties concluded by Chile with some EU Member States. In addition, for the first time for the EU the agreement will include a Trade and Gender equality chapter, with commitments to effectively implement conventions against women discrimination and to ensure gender equality. 

While the Trade and Sustainable Development (TSD) chapter of the agreement does not include the possibility to retaliate with trade sanctions for violation of key sustainability provisions, differently from the recent EU-New Zealand FTA, Chile and the EU expressed the intention to launch a review of this chapter once the agreement enters into force, to strengthen the enforcement provisions. Crucially, the agreement also includes an energy and raw material chapter. This will facilitate hydrogen trade and will provide the EU with more access to Chile’s important lithium reserves, prohibiting import and export monopolies for raw materials, and committing Chile to not apply any kind of export restrictions toward the EU, while allowing the South American country some policy space to develop its own raw material industry. There are also joint commitments to sustainable mining and appropriate environmental impact assessments to minimise pollution during the extraction of raw materials (Grieger, 2023). 

The global quest for Critical Raw Materials

The deal’s provisions about raw materials are particularly significant in the current geoeconomic context, where states are fiercely competing over Critical Raw Materials (CRMs). CRMs are crucial elements for many high-tech products, including green technologies needed to decarbonize the world’s economy. Some of the most important CRMs are the Rare Earths Elements (REEs), 17 elements of the periodic tables, which, due to their versatility and unique properties, are indispensable to the production of green technologies such as solar panels and wind turbines, high-tech devices such as smartphones and computers, and for the defence and aviation industries. REEs actually are not that rare. They can be found throughout the Earth’s crust, yet the problem is that REEs are usually found in low concentrations which make it difficult to extract them. The challenge is to find them in concentration large enough to make their mining and processing economically sustainable (Kalantzakos, 2017).

Other CRMs which do not belong to REEs but are nonetheless considered essential are lithium and cobalt. Cobalt is used in smartphones, batteries, and electric cars, and 60% of its world’s production is concentrated in the Democratic Republic of Congo (DRC), making the African country a crucial hotspot in the competition to control CRMs. Similarly, lithium is important to produce lithium-ion batteries used in hybrid and electric vehicles, and for other electric tools. Lithium resources are concentrated in South America, in the so-called “lithium triangle” of Argentina, Bolivia, and Chile (Kalantzakos, 2020). Therefore, the raw material chapter of the EU-Chile Advanced Framework Agreement is important as it can strengthen EU’s supplies of this key material for its decarbonisation push, particularly considering the expected increase in production of electric and hybrid vehicles following the EU ban on the combustion engine starting in 2035. 

The problem for the EU, and for other countries like the US, is that the country which has a dominant position in the CRMs sector is China. Indeed, the country accounts for 40% of REEs world’s reserves, 60% of its production, and around 90% of its processing and refining. Moreover, China produces 93% of the world's permanent rare earth magnets, which are used in wind turbines generators and electric vehicles, among others (Cooper, Zimmermann and Aarup, 2023). China has been able to acquire such a large control of the REEs supply chain through a combination of lax environmental rules, inexpensive labour costs, and state subsidies, while industrialised nations reduced their mining activity due to the environmental pollution associated with REEs mining and processing (Kalantzakos, 2017). Furthermore, China also has some lithium reserves of its own and has increased its control of this strategic industry through Chinese companies’ investments in lithium mines in South America and Australia. Similarly, Chinese capital is involved in some of the major cobalt mining companies in the DRC, ensuring China the leading position in the cobalt mining sector of the African country (Kalantzakos, 2020). 

Such a commanding role in the CRMs sector gives Beijing a strong leverage over the rest of the world if it were to threaten to halt or reduce its CRMs exports. And China did not shy away from doing exactly this in the past. In 2010, in the midst of a diplomatic dispute with Japan, and out of fear of domestic shortages of REEs, Beijing slashed of 40% its REEs export quotas, and unofficially suspended the shipments of REEs to Japan, causing prices to spike. China completely reversed these actions only in 2015 following a verdict of the Appellate Body of the World Trade Organisation (WTO). In 2019 China threatened to use REEs export again as a leverage during the trade war with the US, though in the end it did not follow through (Kalantzakos, 2020).

The EU Critical Raw Materials Act

Major industrialised countries, such as the EU, the US and Japan, in the last decade implemented a raft of measures to counter China’s sway in the CRMs sector. These measures include initiating WTO complaints against China’s actions; stockpiling some CRMs to cope with potential shortages; realising list of CRMs, which are updated regularly, based on the minerals’ economic importance and supply risk; investing in research and development, also through trilateral cooperation between the US, the EU, and Japan, to develop techniques to reduce or substitute the use of CRMs within high-tech products; reopening REEs mines, such as the Mountain Pass mine in the US, investing in exploration of new REEs deposits, or supporting foreign companies’ REEs projects to ensure domestic supplies, as Japan did when financed Lynas, an Australian mining corporations; diversifying the supply of CRMs through new trade agreements, as the EU has done through the raw materials chapter of its revamped association agreement with Chile (Guangli and Zhongxue, 2019).

The EU recently stepped up its actions further, with the publication of the Critical Raw Materials Act, which is part of the wider Green Industrial Plan, an initiative the EU is developing to respond to the challenges posed by the US Inflation Reduction Act (IRA) and to strengthen its net-zero industries (European Commission, 2023a). The Critical Raw Materials Act is composed of a regulation, which has to be approved by the European Parliament and the Council of the EU, and a communication. The aim of the initiative is to ensure that the EU has a reliable and diversified access to CRMs, identified according to their supply risk and economic importance. The measure also introduces a list of strategic raw materials, which could be subject to potential supply risks in the future. The Critical Raw Materials Act calls for both internal and international actions that the EU should pursue to reduce its dependency on external suppliers for these critical minerals.

With regard to internal action, the initiative establishes benchmarks for domestic capacity for extraction (at least 10%), processing (at least 40%), and recycling (at least 15%). Moreover, no more than 65% of EU annual consumption of each of these materials at the stage of processing should come from a single third country. These targets should be reached by 2030. To do this, administrative and permitting procedures will be simplified and timeframes reduced, to shorten the time needed to get the approval for new mining projects, which today can take up to 15 years. Moreover, the Act provides for information exchange and monitoring of CRMs supply chain requirements for Member States, as well as measures to improve the circularity and recycling of these materials.

When it comes to international actions, it is recognised that the EU cannot be self-sufficient in the supply of CRMs. Hence, diversifying imports will be crucial. To this regard, a set of actions are called for, such as striking new trade agreements to secure new sources of supply, creating a critical raw materials club with all the countries interested in order to strengthen global supply chains, reinforcing enforcement against unfair trade practices also through the strengthening of the WTO, and using the Global Gateway initiative to foster investments in partners along the raw materials value chains (European Commission, 2023b).

In this context, the raw material provisions of the revamped trade agreement between the EU and Chile are a boost to the EU efforts to pursue diversification of its CRMs imports. Furthermore, the EU is currently negotiating a critical minerals agreement with the US administration, to enable the free flow of these precious materials between the two sides of the Atlantic. Though this initiative is happening as part of the efforts to heal the transatlantic trade rift which followed the adoption of the IRA by Washington last summer, potentially allowing Europe-manufactured cars to be eligible for some of the subsidies offered under the new US legislation, it could also pave the way for the creation of a larger club of countries which want to cooperate to strengthen CRMs global supply chains, as urged by the EU Critical Raw Materials Act. This is even more likely since Japan recently negotiated with the US a similar agreement, and the United Kingdom is doing the same (Lanktree, 2023).

Conclusion

Thus, the new EU-Chile Advanced Framework Agreement, together with the Critical Raw Materials Act, is part of a coherent endeavour by the EU to strengthen its position in the CRMs markets and to lessen its dependence on third countries, and particularly on China, from which the EU sources 98% of its permanent rare earth magnets. These actions are in line with the EU push toward strategic autonomy, and together with other proposed pieces of legislations, such as the European Chips Act, and the Anti-Coercion Instrument, show a picture of an EU which is increasingly warming up to the geoeconomic competition in the context of rising technological and trade tensions between China and the US.  

References

Aarup, Moens. 2022. “EU ties trade bow with Chile-to carmakers delight.” Politico Europe, December 9, 2022. EU ties trade bow with Chile — to carmakers’ delight – POLITICO

Aarup, Cooper and Zimmermann. 2023. “China leaves EU playing catchup in race for raw materials.” Politico Europe, March 10, 2023. China leaves EU playing catchup in race for raw materials – POLITICO

European Commission. 2022. The EU-Chile agreement explained. The EU-Chile agreement explained (europa.eu)

European Commission. 2023a. A Green Deal Industrial Plan for the Net-Zero Age. COM_2023_62_2_EN_ACT_A Green Deal Industrial Plan for the Net-Zero Age.pdf (europa.eu)

European Commission. 2023b. Critical Raw Materials: ensuring secure and sustainable supply chains for the EU’s green and digital future. Critical_Raw_Materials__ensuring_secure_and_sustainable_supply_chains_for_EU_s_green_and_digital_future.pdf

Grieger, G. 2023. “Modernisation of the trade pillar of the EU-Chile Association Agreement.” European Parliamentary Research Service, January 2023. Modernisation of the trade pillar of the EU-Chile Association Agreement (europa.eu)

Guangli, Zhongxue. 2019. “Global political economy of rare earths: changing positions of major market actors including China, European Union, Japan and United States.” IOP Conference Series: Earth and Environmental Science, 295(5), 2019. Global political economy of rare earths: changing positions of major market actors including China, European Union, Japan and United States - IOPscience

Kalantzakos, S. 2017. “China and the Geopolitics of Rare Earths.” Oxford University Press. China and the Geopolitics of Rare Earths | Oxford Academic (oup.com)

Kalantzakos, S. 2020. “The Race for Critical Minerals in an Era of Geopolitical Realignments.” The International Spectator, 55(3), 2020. The Race for Critical Minerals in an Era of Geopolitical Realignments: The International Spectator: Vol 55, No 3 (tandfonline.com)

Lanktree, G. 2023. “Rishi Sunak presses Joe Biden for a trade deal - just not the one the UK wants most.” Politico Europe, April 11, 2023. Rishi Sunak presses Joe Biden for a trade deal — just not the one the UK wants most – POLITICO

Moens, Hanke Vela. 2022. “Brussels looks to evade EU capitals to get Mercosur deal done.” Politico Europe, September 28, 2022. Brussels looks to evade EU capitals to get Mercosur deal done – POLITICO