Andean aspirations: Why is India cosying up to Chile for a trade deal?

While both sides have shared trade interests such as agricultural products and services, the elephant in the room is Chiles expansive reserves of critical minerals, key among them being lithium

While addressing a joint press conference during Chilean President Gabriel Boric's visit to New Delhi in April, Prime Minister Narendra Modi remarked that even though India and Chile are at different ends of the world map, separated by vast oceans, they still share unique natural similarities.

 

“The Himalayas of India and the Andes mountains of Chile have shaped the way of life in both countries for thousands of years… The great Chilean poet and Nobel Laureate Gabriela Mistral found inspiration in the ideas of Rabindranath Tagore and Aurobindo Ghosh. Similarly, Chilean literature has been appreciated in India too. The growing interest among the Chilean people towards Indian films, cuisine, and classical dances is a living example of our cultural ties,” he added.

 

During the April visit, both countries agreed to expand their existing limited trade deal known as preferential trade agreement (PTA) to a comprehensive economic partnership agreement (CEPA). Earlier this month, both countries signed the terms of reference for a CEPA, negotiations for which will be held in New Delhi on May 26-30. 

 

The broad contours

 

Both countries first signed a Framework Agreement on Economic Cooperation in January 2005, followed by a PTA in March, 2006. An expanded PTA was subsequently signed in September 2016 and became effective May 2017. This increased the scope of the agreement from about 474 tariff lines to 2,829 tariff lines.

 

The CEPA now aims to build upon the existing PTA between the two countries and seeks to encompass a broader range of sectors, including critical minerals, digital services, investment promotion and cooperation, MSME, thereby enhancing economic integration and cooperation. 

 

India had a $1.3 billion trade deficit with Chile in 2024, with $1.1 billion exports and $2.45 billion imports. While India supplies pharmaceutical products, engineering goods, automobiles and chemicals, it imports critical mineral resources from Chile which are important ingredients for industrial development. In 2024, India imported $1.25 billion of copper ore and concentrates, amounting to almost half of its total imports from Chile. Import of lithium oxide & hydroxide and lithium carbonates together accounted for just $1.6 million during the period.

 

“To deepen their economic engagement, both sides expressed their intention to negotiate a CEPA to unlock the full potential of their trade and commercial relationship, boosting employment, facilitating investment promotion, and cooperation and exports, as suggested by the Joint Study Group (JSG) established under the Framework Agreement,” India’s commerce department said in a statement.

 

According to P Kumaran, secretary (East) in the ministry of external affairs, both sides are trying to find a balance on how to secure their respective interests. “Our interests include expanding our agricultural exports, securing critical minerals. And on the Chilean side, naturally, the interest is on exporting some of their agricultural products that are not necessarily available in our market that Chile is good at producing,” he said at a media briefing on Boric’s visit.

 

Kumaran said Indian interest also includes opening up the services market in Chile. “Chile wants more investments in mining, agro-processing, renewable energy, etc. We naturally, as part of our Atmanirbhar Bharat initiative, want investment in a number of areas that help us develop industrial capacities and help us become a manufacturing hub,” he added. 

 

Critical minerals: The elephant in the room

 

Chile is part of the so-called Lithium Triangle countries along with Argentina and Bolivia that together contain over 75 per cent of the world’s lithium reserves, a critical mineral for electric vehicles and batteries. About 24 per cent of the world output of copper and 30 per cent of the world's lithium comes out of Chile. However, Chile holds over 52 per cent of the world’s lithium reserves, concentrated mostly in the Atacama Salt Flats. Mining contributes about 13 per cent to Chile's GDP. In 2023, the Chile government unveiled a National Lithium Strategy along with a National Lithium Company, emphasising state-led development through public private partnerships.

 

According to the joint statement signed in April, both leaders agreed to accelerate collaboration in exploration, mining and processing along with research and development to promote investment across the entire critical mineral value chain for mutual benefit. “The two sides agreed to work together on initiatives to strengthen supply chains and local value chains by fostering mutually beneficial partnerships and understandings in mining and minerals, including the possibility of long-term supply of minerals and materials from Chile to India,” the statement read.

 

As part of the CEPA discussions, India is looking at a chapter on critical minerals. “We think that will allow us an opportunity to go into some detail on what arrangements can be worked out which are of mutual benefit to India and Chile. This will naturally involve Indian investments, possibly some kind of value addition in Chile. The Chilean side is very keen that investors come and add value in Chile before taking the refined material out of Chile. I am sure we will have occasion to discuss more about this and the terms and conditions associated with the critical minerals partnership,” Kumaran said. 

 

However, Kumaran insisted that the trade deal is not all about critical minerals. “India is one of the most competitive producers of pharmaceuticals, vaccines, etc. We also want to work with Chile in the area of renewable energy. I understand that Chile wants to expand its energy infrastructure, particularly transmission lines, etc., so that more of the country can be covered, and the renewable energy infrastructure that is available can effectively reach all sections of the population. So those are all areas which are of interest,” he added.

 

The Red Dragon

 

China leads the world in lithium-ion battery production, accounting for approximately 73 per cent of global manufacturing capacity, mostly thanks to the first mover advantage and its deeper economic engagement with Chile. China and Chile signed a free trade agreement in November 2005 that came into effect in October 2006. In November 2017, both nations signed an upgraded protocol to the FTA enhancing trade liberalisation and expanding tariff exemptions to approximately 98 per cent of all items. China has quickly increased its influence in Chile, especially in energy, where Chinese companies now control approximately two-thirds of all of Chile’s energy sector.

 

In 2018, China's Tianqi Lithium acquired a 24 per cent stake in Sociedad Química y Minera (SQM), one of the world's leading lithium producers, based in Chile. This investment provided China with direct access to lithium extraction in the Salar de Atacama, a region known for its high-quality lithium reserves.

 

Chinese EV manufacturer BYD has also secured a contract to extract up to 80,000 tons of lithium in Chile. Additionally, BYD announced plans to invest approximately $290 million in building a lithium cathode factory in Antofagasta, aiming to enhance value addition within Chile. Chinese companies have invested in infrastructure projects in Chile, such as the proposed lithium industrial park in Antofagasta, further strengthening economic ties.

 

Ajay Srivastava, founder at Global Trade Research Initiative, said since India doesn’t have the capacity to process lithium or use it in manufacturing yet, the India-Chile FTA is unlikely to affect lithium sourcing. "For now, India continues to import finished lithium-ion batteries from China for smartphones and electric vehicles,” he added.

 

At present, investments in manufacturing and overall value addition for Advanced Chemistry Cells (ACCs) such as lithium-ion batteries are negligible in India and almost the entire domestic demand of ACCs is still being met through imports. In 2024, India imported lithium-ion batteries worth $2.8 billion, three fourths of which was from China.  In order to reduce dependency of imported ACC batteries for EVs, the Indian government in May, 2021, approved a Production Linked Incentive (PLI) scheme for manufacturing of ACC in the country with a total outlay of Rs. 18,100 crore. However, the scheme is off to a tardy start.

 

India will need to up its game with Chile if it wants to catch up with China in lithium ion battery manufacturing. And that is no less than a Himalayan task.