As countries charge up to meet the rising demand for electric vehicles, they will have to face the reality of China’s position as a leader in the Lithium-ion (Li-ion) battery economy. The renewed pledges of the Paris Agreement have prompted states to minimize dependency on fossil fuels and transition into a green economy. Transportation is one of the main contributors of greenhouse gas emissions – propelling many countries to invest in electric vehicle (EV) technology in order to meet their commitments. Li-ion batteries, used in EVs, have become central to establishing a fossil fuel-free economy due to their excellent storage capacity, safety, and uninterrupted flow of energy. Frequent improvements in EV technology are further bolstering demand for Li-ion batteries, whose market is projected to grow from US$30 billion in 2017 to $100 billion in 2025.

The rising demand has increased the prices of lithium. Consequently, lithium has emerged as one of the most important minerals in the global energy market and is commonly referred to as ‘white petroleum’ to reflect its nature as a strategic commodity. While many countries are sprinting to secure their supply and increase their production capacity, China has already gained a significant advantage through its domestic and foreign policies. Having long recognized that the Li-ion battery economy is a marathon, not a race, China continues to race ahead in the game.

Then and Now: States’ Interests in Critical Minerals

Historically, natural resources, such as lithium, cobalt, and nickel, were obtained through colonial territorial acquisition, robbing colonized populations of critical mineral wealth. Inequitable and onerous agreements between foreign companies and resource-rich colonized countries strengthened the demands for political sovereignty over the economic domain during decolonization. Consequently, the principle of permanent sovereignty over natural resources was enshrined in UN General Assembly’s Resolution 1803 (XVII), following which newly independent countries renegotiated contracts in their economic interests.

Recently, the rising demand and prominence of lithium and other minerals for Li-ion EV batteries have prompted a renewed wave of nationalization over minerals. States are attempting to increase revenue and assert greater control over minerals through changes in fiscal regimes. For instance, Zimbabwe has banned the export of unprocessed raw lithium to incentivize domestic production of Li-ion batteries. The impact of such export restrictions can be wide-ranging due to the geographical concentration of minerals which leads to a dependence on imports by consuming countries. Export restrictions not only impact market prices and availability of resources but can also influence investments in the mining industry which are often long-term and capital-intensive.

As states scramble to secure their supply chain for Li-ion batteries, they will find China’s dominating presence in every stage of the industry. China has not only been the undisputed consumer king of Li-ion batteries but has also become its largest producer. In 2022, China dominated global battery manufacturing, comprising 75 per cent of global capacity according to BloombergNEF’s (BNEF) global lithium-ion battery supply chain 2022 ranking. During the initial quarter of 2022, Contemporary Amperex Technology Co. (CATL), the world’s largest battery manufacturer, alone accounted for 35 percent of the global lithium-ion battery market. Six out of ten of the world’s largest lithium-ion battery manufacturers, including CATL, are Chinese companies.

Sourcing Lithium and Strengthening Alliances through Interdependencies

China’s rise to the top has been a result of vertical integration across the lithium battery supply chain which has been significantly aided by the Chinese government. This means that Chinese companies have streamlined their operations by owning various stages of the production process instead of relying on external suppliers. Accordingly, China is responding to domestic resource scarcity and securing future supply to meet the rising demand for electric vehicles and lithium batteries by purchasing economic lithium assets in other countries, aided by China’s Belt-and-Road Initiative (BRI). Latin American countries, including the “Lithium Triangle” (Argentina, Chile, and Bolivia), are now capitalizing on this trading opportunity with China and are joining the BRI. Chinese investments here are particularly welcome as these will help bolster infrastructural capacity and thereby, improve performance against key economic indicators. In exchange, China can secure minerals and a potential market to export high-tech products given the large geographical area.

Such developments have created the climate for Chinese companies to acquire several million tonnes of lithium reserves. CATL acquired Canada-based Millennial Lithium Corp. and its lithium project in Salta, Argentina. Similarly, in January 2023, the Bolivian government signed a $1 billion agreement with three Chinese firms, including CATL, and the Bolivian state company Yacimientos de Litio Bolivianos (YLB) to explore lithium deposits in Bolivia. China’s presence in the region has not gone unnoticed as it has displaced the United States as South America’s largest trading partner and is just one spot behind the US to also become Latin America’s biggest trading partner. Washington has become increasingly wary of China’s presence in its ‘backyard’ as such alliances, aided by the Li-ion battery economy, are offering Beijing invaluable votes at the UN, and support for Chinese appointees at multinational institutions.

This could be an underlying motivation behind an increasing pro-China stance from Latin American countries, illustrated by certain voting patterns in multilateral bodies. For instance, Latin American countries which have stronger economic ties with China tend to vote contrary to Washington’s interests more than 30% of the time in the UN Human Rights Council. Even in the Organization of American States, Washington’s influence over roll call votes has declined by 26% between 2001 and 2021 among Latin American countries economically dependent on China. This diplomatic clout will enable China to influence international discourse along its interests. Similarly, in a push to isolate Taiwan, China refuses to form diplomatic ties with states that recognize Taiwan. As China offers attractive FDIs and loans that promise development with far fewer conditions, more Latin American countries opt to withdraw support for the island – Honduras recently changed its loyalty to Beijing after Taipei refused its request for aid.

Regardless of where the lithium is sourced, 67% of lithium is shipped to China to be refined to battery-grade level. These refinement processes, which include heating, steaming, and drying lithium, require huge amounts of energy which generate high costs for firms. However, the Chinese government has supported local companies through cheap land and energy, scaling lithium refinement at lower costs and resulting in shut down of refineries elsewhere. Along with extraction and refinement, China also dominates the production of the components of lithium batteries. China’s monopoly over the production of upstream materials not only allows China to control the costs of battery production but also to hold it hostage against any other country that relies on these materials for its transition to EVs.

A Future with Lithium Producing and Exporting Countries (LPEC)

Experts have started speculating about the establishment of a Lithium Producing and Exporting Countries (LPEC) organization analogous to the OPEC (Oil and Petroleum Exporting Countries) in the future as lithium’s importance rises in global energy markets. The dominant market-position of countries in a future-LPEC will enable it to operate like a cartel, similar to the OPEC, coordinating lithium production levels to control global lithium prices. China possibly leading an organization comprised of countries that are not the strongest allies of the USA is expected to raise the risk of friction between the US and China. There is a palpable fear that given enough provocation, LPEC under China’s leadership, could restrict US’s access to lithium reserves or resources which could have disastrous consequences as demand rises and consumers switch to EVs. The 1973 oil embargo against the United States by OPEC members remains a brutal reminder of global vulnerability to energy supply disruptions, as market prices skyrocketed in USA, pushing its economy into a recession. Similarly, China would be able to use lithium as a geopolitical leverage tool by adjusting lithium production levels based on how much a country’s diplomatic stance conformed with Chinese interests. Although recyclable, lithium reserves are finite, and highly geographically concentrated with long lead times to set up a full-scale mining operation, which raises the risk of potential future shortages and inter-state conflicts similar to those over oil.

Conversely, other experts do not foresee such conflict due to the advantages derived from economic cooperation. Western companies find it profitable to produce cheaper Li-ion batteries in China, creating technological interdependencies with the country. China achieves its market dominance as the largest manufacturer of batteries through domestic investments, exports, and foreign direct investments as companies like Apple and Tesla source their batteries from China. Such interdependence fosters reciprocal exchange, facilitating the growth of technological production capacity worldwide. Consequently, there is little economic incentive for confrontation between states as one country’s technological advancements help other states to improve their capabilities. By collaborating with Chinese companies that are leaders in the market, Western companies improve cost-efficiency, reduce development time, and gain knowledge, thus enabling companies like Tesla to bring cars quicker to the US market, reinvest saved resources to research and development at home, and leverage insights gained through the partnership to better tailor its products to meet the needs of domestic markets.

It is for reasons like these that Western companies like Nvidia and Volkswagen have partnered with or heavily invested in Chinese companies to develop new software or manufacture new EVs. Furthermore, LPEC could be a great platform to advocate standardizing Li-ion battery technology, which would simplify manufacturing for new-comers. Similarly, it could be an avenue to advocate for promoting sustainable and ethical lithium mining practices.

By developing interdependencies to source lithium from supplier states whilst creating interdependencies with other countries by leading battery technological advancement, China’s share of the lithium global economy seems to demonstrate the capitalist peace theory. The mutual benefits accrued from such interdependencies make conflicts costlier. However, as cell suppliers announce capacity expansion in Europe and the US, China’s Li-ion battery share is expected to decline, which will transform the geopolitics of lithium in unpredictable ways.

Moving Forward

Global demand for Li-ion batteries is projected to rise by 27% annually, surging from around 700 GWh in 2022 to around 4.7 TWh by 2030. Such a trend is driven by a regulatory shift towards reducing greenhouse gas emissions, as evidenced by European Union’s ‘Fit for 55’ package. Further, the rising demand reflects changing consumer attitudes toward green technologies- providing China an opportunity to capitalize on its dominant share in the Li-ion market space.

However, Li-ion batteries are not as green as expected and present significant environmental and social challenges. For instance, the extraction of lithium through mining and evaporation of brine has severe environmental effects such as land degradation and water and air pollution. Consequently, the impacted indigenous communities are protesting through mine blockages and lawsuits which is disrupting the lithium supply. Chinese company, BYD, found its $61 million lithium-mining deal with Chile suspended by a local court in response to a claim filed by indigenous communities alleging the bid violated principles of environmental protection and economic development.

The urgency for switching to a greener economy is pushing states to transition to EVs. If there is any possibility of an organization like LPEC entering the international arena, states will have to be ensure friendly relations with China. While such an organization will open doors to lithium production for other states, either through standardization or technology transfers, it could also serve as a proxy to further Chinese geopolitical interests though market manipulation. As companies adapt to challenges and disruptions in lithium supply, such as through battery recycling, they will still have to face the reality of China’s unipolarity in the Li-ion global economy. By 2030, China will continue producing twice as many batteries as every other country combine. Other nations can try to ramp up capacity, but they will have to accept that it is difficult to win this race, at least in the medium-term.

Global Governance Initiative (GGI) blog