Industrial policy space in emerging economies: The case of Chile's lithium industry and the energy and raw materials chapter in the EU-Chile free trade agreement

Adequate policy space is essential for resource-rich countries to move up the value chain and seize the opportunities presented by global decarbonization and the demand for low-carbon technologies. However, WTO rules, investment and free trade agreements (FTAs) deprive nonhegemonic powers of the industrial policy tools used by successful developmental states in the past, thus reducing policy space and arguably 'kicking away the ladder'. The present article addresses these issues in the context of Chile's lithium industrial policy and the modernised EU-Chile FTA. With the objective of moving up the lithium value chain, Chile employs preferential pricing: offering lithium at a preferential price to companies that establish production sites for higher-value processes. However, the modernized FTA includes restrictions on the use of preferential pricing, as outlined in its Energy and Raw Materials Chapter (ERM) -a novel element in the EU FTAs aimed at safeguarding access to critical raw materials for the EU's Green Deal objectives. By means of document analysis and 21 expert interviews, we find that the modernised FTA and its ERM are compatible with Chile's current lithium industrial policy. Nonetheless, they further restrict Chile's policy space, potentially limiting future policy adaptations. These restrictions, alongside further national factors, may hinder the fulfilment of Chile's industrial policy goals. The article offers explanations for the negotiation outcomes and identifies factors beyond policy space that constrain the effectiveness of Chile's lithium industrial policy.