Latin America offers the best hope the United States has to diversify and relocate its vulnerable, highly consequential supply chains for critical minerals, semiconductors, pharmaceuticals, and large-capacity batteries. The same commercial investments that could address U.S. national security weaknesses could also help stem the forces now pushing millions of migrants to leave their home countries and pulling young people into organized crime. If Latin American nations prosper, their citizens will have more reasons to plan for their futures at home. Latin America’s combination of proximity, bounty, and democratic bona fides make its countries better suppliers, producers, customers, and partners for the United States than nations in any other place in the world. Latin America has so much of what the United States needs—and vice versa.
BY SHANNON K. O’NEIL FOR FOREIGN AFFAIRS
Since 2020, however, U.S. national security strategy has taken a sharply commercial turn. The COVID-19 pandemic and its huge disruptions of economies made strategists more conscious of supply chains’ fragility. Where, exactly, are all the chips and ball bearings that go into weapons manufactured?
The pandemic also illuminated just how much U.S. companies depend on China in the multistep manufacturing processes that bring products to consumers, including items crucial for national security and for the transition to green energy. China currently processes 85 percent of the critical minerals that go into high-tech devices. China also boasts 77 percent of the world’s battery-manufacturing capacity and makes more than half the electric vehicles sold worldwide. Beijing makes no secret of its intent to displace Washington as the motor that drives the world’s economies—or of its willingness to use subsidies, espionage, and coercion to achieve this end.
Since U.S. President Joe Biden took office in early 2021, his administration has worked to try to diminish the threat China’s supply chain dominance poses to the United States. In his first 100 days, he ordered a sweeping analysis of the supply chains for four areas vital to U.S. security and economic stability: critical minerals, large-capacity batteries, semiconductors, and pharmaceuticals. The review found that the minerals that power Americans’ mobile phones and computers mostly come from China, as do a good portion of the active ingredients that go into 120 of the most basic medicines. The analysis showed how reliant the U.S. electric vehicle, solar panel, and wind turbine industries are on Chinese factories.
These far-flung efforts, however, badly neglect solutions in the United States’ own backyard: the countries of Latin America. The region is rich in the critical minerals the United States needs. Many Latin American countries already boast sophisticated pharmaceutical industries. Others have technically sophisticated, economically competitive, and geographically proximate workforces that could assemble, test, and package microchips made in U.S.-based fabrication plants. American car makers already rely on Mexico, and incorporating Latin America more fully into electric vehicle manufacturing would make the industry more competitive by drawing on different labor markets and tapping into a fuller range of subsidies provided by the Inflation Reduction Act.
U.S. leaders consistently overrate the worth of securing alliances next door to China and overestimate Europe’s commercial prospects. Neither Europe nor Asia can provide substantial or sustainable solutions to the threats to U.S. supply chains. The United States and Europe can certainly benefit from unifying the way they set technology standards, screen their foreign investments, and move toward more environmentally friendly and labor-friendly sourcing of all kinds of goods. But Europe will never become a strong source of critical minerals or an affordable supplier of inputs to semiconductors or electric vehicles. Other than Australia, few U.S. allies in the Indo-Pacific have significant critical mineral reserves. And it will be enormously hard to pry Asian electric vehicle, semiconductor, and pharmaceutical supply chains free of Chinese influence.
In terms of geographical proximity, Latin America, by contrast, is a Goldilocks option for U.S. manufacturers. It is not so close to the United States that moving production there would dangerously concentrate risk from natural or manmade disasters, but it is not so far that it creates complicated long-distance logistics problems. The United States has a great deal to gain broadly from helping Latin American countries strengthen their economies. Most of those countries are democracies, and economic growth and democratic consolidation in the region would create new investment opportunities and middle-class consumers for U.S. companies. And Latin America is the one region in the world with which the United States has an existing trade and market advantage, having already inked free trade agreements with 11 countries there.
Yet the United States is failing to engage Latin America’s nations commercially or strategically, missing an opportunity to shore up national security and wasting built-in geopolitical advantages. Indeed, the United States cannot afford to overlook the opportunities Latin America offers. China already recognizes Latin America’s potential. It is swooping in fast, expanding its trade with the region from $12 billion in 2000 to nearly $500 billion in 2022. Its mining and refining companies are moving to lock up access to the region’s natural resources.
When it comes to the countries south of the U.S. border, some American leaders may simply feel that good fences make good neighbors. Taking that stance would be a big, counterproductive mistake. If the United States fails to integrate Latin America substantially into U.S. supply chains and keeps looking farther afield for economic allies, it will only help bring more Chinese influence closer to its doorstep.
ALL THE WRONG PLACES
Eighty percent of the U.S. supply of critical minerals comes from abroad, and the United States relies especially heavily on China for materials used in battery production such as nickel, manganese, and graphite. Sixty percent of the microchips—and 90 percent of the most advanced kind of semiconductor chips—vital to both Americans’ daily communications and U.S. national defense are manufactured in a nation under perpetual Chinese threat, Taiwan. Over 70 percent of the facilities that make the advanced ingredients on which the U.S. pharmaceutical industry relies are located abroad, and the United States is running short of more medications than at any other point in nearly a decade. China has become the United States’ biggest provider of many antibiotics, blood thinners, and chemotherapy and diabetes drugs, as well as the main source for the active ingredients in pharmaceuticals manufactured in India, a top source of imported U.S. medications.
To shore up U.S. supply chains, the Biden administration has placed big bets on boosting domestic capacity and on better integrating Europe and Asia into U.S. manufacturing. The 2022 CHIPS and Science Act allocated tens of billions of dollars to build up U.S. domestic semiconductor production. The 2022 Inflation Reduction Act (IRA) offered electric-vehicle manufacturers subsidies of up to $7,500 per car if most of the inputs are made in the United States or in countries with which Washington has free-trade agreements. The U.S. Department of Energy recently launched investments into more than two dozen critical minerals and materials projects across the United States, including lithium mines and refineries. And in November 2023, Biden announced a major initiative to encourage domestic pharmaceutical production, rebooting the pandemic-era authorization President Donald Trump gave the U.S. Defense Department to produce crucial medications. The pharmaceutical supply chain “is going to start here in America,” Biden vowed.
U.S. leaders consistently overrate the worth of securing alliances next door to China.
The Biden administration’s security and resilience efforts, however, are bound to fall short. Indeed, they already do. Most of the money earmarked for domestic semiconductor production has gone toward the capital- and tech-intensive manufacture of chips in fabrication plants. But U.S. national security depends on controlling a fuller supply chain—from chip design to assembly, testing, and packaging. The vast majority of these steps still take place in Asia, particularly in China. New Arizona- and Texas-based fabrication plants will continue to have to send their chips back to geopolitical rivals for completion. Full back-end chip manufacturing is unlikely ever to take place solely in the United States: the final chips would be too costly to be commercially viable.
In terms of electric vehicles, no U.S. ally in Europe or Asia will be able to undo China’s control of the critical minerals these vehicles require. They don’t have the natural resources, and environmental regulations and costs make large-scale refining in these regions less competitive. And few of these nations qualify for the IRA’s subsidies as they have not ratified free-trade agreements with the United States.
Even with subsidies, U.S. domestic electric vehicle production faces stiff competition given the technological advances and economies of scale of China’s heavily subsidized rival models. When it comes to refining chemicals and manufacturing anodes, cathodes, and battery cells, the United States lags behind China. In early 2023, when Ford unveiled a plan to build a new $3.5 billion electric-vehicle battery factory in Michigan, it indicated it would bring Chinese engineers to the plant and license Chinese technology rather than develop its own.
Despite U.S. efforts, Asian countries’ integration with China will likely only deepen in the coming years. In September 2020, 15 Asian countries—including China, as well as the major U.S. allies Japan and South Korea—signed the Regional Comprehensive Economic Partnership, which intends to coordinate production across Asian economies, eliminating tariffs, streamlining customs, and unifying rules of origin requirements. Over time, products made throughout Asia will likely have more, not fewer, Chinese inputs, especially if China gets its wish to join the Comprehensive and Progressive Trans-Pacific Partnership. When Trump withdrew the United States from the agreement’s predecessor, the Trans-Pacific Partnership, he incentivized the countries that stuck with the agreement to build supply chains that cut out the United States.
THE MISSING LINK
Latin America offers the best hope the United States has to diversify and relocate its vulnerable, highly consequential supply chains for critical minerals, semiconductors, pharmaceuticals, and large-capacity batteries—all four of the supply chains that Biden’s administration identified as most crucial to U.S. security and prosperity. Latin America has ample reserves of half the over four dozen minerals Biden deemed critical. The region has a particular abundance of the minerals needed to make batteries: it is estimated to hold 60 percent of the world’s lithium reserves, 23 percent of the world’s graphite, and over 15 percent of its manganese and nickel. Latin America already mines a good amount of the world’s copper, which is crucial for the construction of electric vehicles, wind turbines, and other green technologies.
Latin America also has a strong leg up through formal preferential trading ties, as a majority of all U.S. free trade agreements are with countries in the region. These reduce costs for importers and exporters, and safeguard investments. They also enable critical mineral providers to take advantage of U.S. subsidies for electric vehicles. Mexico can provide a further lift to the United States’ ambition to build out resilient electric vehicle supply chains: its factories are already pillars of the North American car industry, and electric vehicle components manufactured in Mexico or Canada are eligible for the IRA’s full set of subsidies.
Brazil, Costa Rica, Mexico, and Panama are well positioned to take the place of Asian countries in testing, packaging, and other less capital-intensive and technologically intensive semiconductor steps: investments and initial facilities and pilot training programs are already underway in these countries. And to quickly boost resilience in its pharmaceutical supply, the United States need not look further than the Western Hemisphere. The region already produces tens of billions of dollars’ worth of vaccines, active pharmaceutical ingredients, and consumer-ready medications every year and hosts sophisticated research and development institutes: Brazil’s Butantan Institute and Oswaldo Cruz Foundation are among the 15 largest vaccine manufacturers in the world.
Mexico already produces a variety of medicines and medical devices, exporting $800 million in pharmaceuticals to the United States each year. Even smaller producers such as Argentina and Uruguay make over 30 percent of the drugs they consume. These manufacturing bases could become robust alternative suppliers.
With the right investments in training and infrastructure, within a decade, American companies could be sourcing all the lithium they need from a vibrant Latin American “lithium triangle”—Argentina, Bolivia, and Chile—and partnering with busy factories in Mexico to produce electric vehicle batteries, plastic casings, and chargers. When U.S. patients ask their doctors where their children’s mumps, measles, and rubella shots come from, the answer could be Brazil. American smartphones could feature chip technology tested and packaged in Panama. Most important, many more stages of the production cycles for America’s most critical national security technologies could unfold close to U.S. borders.
FLAWS IN THE OINTMENT
Latin America already has outsize access to the U.S. consumer economy. The United States is the region’s largest trading partner, with more than $1.1 trillion in goods and services exchanged each year. It is also Latin America’s biggest outside investor, contributing nearly 40 percent of all the foreign direct investment the region receives. Latin America’s political culture makes it a natural collaborator, too. Latin America is where democracy and development meet: over 550 million citizens there continue to use the ballot box to resolve their differences and address their grievances. Public opinion in the region generally regards the United States better than its geopolitical rivals: recent surveys suggest that strong majorities of Argentines, Brazilians, Colombians, and Mexicans hold a positive view of the United States, outpacing any warmth of feeling for China and Russia. Four decades of polls collated in 2022 by the Centre for the Future of Democracy show that the United States has recently become more popular in Latin America, unlike in the rest of the developing world.
So why is the United States neglecting to engage Latin America commercially or strategically? The CHIPS and Science Act is underwriting studies of Costa Rica’s and Panama’s ability to contribute to the semiconductor supply chain. And U.S. officials are working to beef up Inter-American Development Bank (IDB) funding to support American companies’ bids for investment-ready projects in the region. But this does not reflect the ambition the United States needs.
The infrastructure deficit in Latin America is monumental. Transportation is expensive within and between Latin American countries thanks to a lack of paved roads, railway lines, deep commercial ports, and flights. Bureaucratic red tape adds to businesses’ expenses in the region. Many new industries require expertise that Latin American workforces still lack. Latin American nations must also seize opportunities themselves. Local governments will need to invest in infrastructure, education, and the rule of law to better attract U.S. and other international companies. They will need to think strategically about the niches they can best fill in supply chains, differentiating themselves and specializing in specific components rather than trying to do it all.
But a stronger U.S.-Latin American economic-security alliance would not just be nice to have: for both places, it is an urgent need. China has recently transformed its presence in Latin America to play an important, even dominant, role in many of the region’s economies—a development that seriously threatens both Latin American and U.S. interests.
OPPORTUNITY COST
Over the last two decades, China has recognized opportunities in Latin America that the United States has overlooked. It has assiduously courted Latin American governments by making loans, at times coercing them to withdraw diplomatic recognition from Taiwan. China is now the largest trading partner for Brazil, Chile, Peru, and Uruguay and the second largest trading partner for a score of other nations, accounting for nearly 20 percent of Latin America’s total trade. Beijing has also become a significant banker in the region. China is now one of the only sources of outside financing available to Argentina, Ecuador, and Venezuela. Beijing has curtailed its international lending since 2020, but it still comes through in emergencies: in 2023 alone, China stepped in twice to offer currency swaps to help Argentina meet its International Monetary Fund repayments during a volatile election season.
Through its Belt and Road Initiative and other commercial forays, China has also become a big funder and builder of Latin American infrastructure. Its banks finance the mostly Chinese companies now building highways, ports, hydropower dams, solar power plants, and electricity grids in over 20 countries. It bankrolls energy and mining projects across the region, including an $8 billion nuclear power plant in Argentina and a nearly $10 billion copper mine in Peru. During the first two decades of the twenty-first century, these growing trade, financial, and infrastructure ties filled many Latin American governments’ coffers and brought in much-needed capital.
Yet China’s growing role in the region has not been an unalloyed good. As Latin America’s trade with China ballooned, many Latin American economies simultaneously became less diverse, less sophisticated, and less equal. China’s economic activity in the Americas is lopsided: between 2015 and 2019, just five commodities—iron ore, copper ore, refined copper, soy, and crude oil—accounted for nearly 70 percent of Latin America’s exports to China. China then sold finished goods back to the region, undercutting local manufacturers.
China has recognized opportunities in Latin America that the United States has overlooked.
Chinese investments tell a similarly ambiguous story. Beijing’s foreign direct investment in the continent remains somewhat limited, at just six percent of the foreign capital that has flowed into the region over the last 20 years. This investment was concentrated primarily in natural resources, energy, and mining, only recently shifting a bit toward utilities and power generation.
The loans that China provides are often opaque and onerous. They can feature high interest rates and provisions for immediate repayment if China or its companies feel slighted. The loans are often secured with natural resources as collateral at fixed and disadvantageous rates: between 2009 and 2021, when Ecuador had to send more than a billion barrels of oil to China to service some $20 billion in loans, it sacrificed nearly $5 billion it could have received on the open market. Many Chinese lenders to Latin America subordinate other creditors by demanding that they receive payments first in the event of a default, stymieing multilateral solutions to unsustainable sovereign debt loads. Chinese mining and other infrastructure projects are not known for their transparency—or for their adherence to domestic or international labor or environmental standards. Indeed, local communities and NGOs in Chile, Colombia, Ecuador, and Peru are fighting Chinese companies, citing deforestation, water pollution, environmental degradation, and poor working conditions in their numerous legal complaints.
And China has used its growing importance to the region to pressure Latin American nations. In 2020, aligning himself with U.S. President Donald Trump, Brazilian President Jair Bolsonaro intimated that Huawei would be excluded from Brazil’s 5G network. China then threatened to withhold COVID-19 vaccines from the country, and Bolsonaro had to relent.
FRIENDS WITH BENEFITS
Since 2014, Latin America has lost its economic luster. Growth has lagged behind other emerging markets: Latin American economies have grown, on average, less than one percent over the last decade, far less than Africa, eastern Europe, and Southeast Asia. This sluggish performance has many drivers: COVID-19 arguably hit Latin America harder than any other region, and many governments there have struggled to ensure their populations’ basic safety. Tens of millions of Latin Americans have lost their middle-class foothold as gains in fighting poverty and inequality in the first part of the twenty-first century have largely reversed.
But China has also played a role in this reversal of fortunes. China’s expanding economic importance to Latin America is, in fact, part of why many of the region’s nations have struggled to move up the value chain. Commodities now make up more, not less, of the region’s exports than they did in 2000, dangerously concentrating economies that already lacked diversity. Latin American countries, along with countries in Africa, have suffered premature deindustrialization as their manufacturing sectors shrank in size and economic importance before their economies matured.
To be fair, the history of commercial engagements between the United States and the region has not always been pretty, either. Countries such as Argentina and Bolivia continue to perceive U.S. efforts with particular suspicion owing to the many damaging U.S. interventions throughout the region in the twentieth century. More recently, in the 1990s, IBM bribed Argentine government employees for contracts to modernize the computer systems in the country’s largest government-owned bank, and in 2003, Walmart paid off zoning officials in Mexico to place a superstore next to the historic pyramids of Teotihuacán.
Latin America offers the United States its best hope to diversify its vulnerable supply chains.
But expansive enforcement of the U.S. Foreign Corrupt Practices Act has vastly reduced the amount of bribery involved in deals with U.S. companies: both IBM and Walmart were punished. And given the disclosures that U.S.-based public companies make to the U.S. Securities and Exchange Commission—as well as the myriad climate, labor, and governance promises that U.S. executives and company boards make to their shareholders and consumers—U.S. business operations and practices abroad tend to be more transparent, accountable, and mutually beneficial than commercial arrangements with companies not subject to these safeguards and legal requirements.
The economic relations that Washington pursues with Latin America already differ sharply from those that Beijing has built. Latin America’s exports to the United States are more diverse and lean toward more sophisticated and more value-added products; the majority are in machinery and transportation. When U.S. companies invest in Latin America, they tend to put money into higher-value-added sectors such as manufacturing, financial services, and information technologies and services. This helps create more stable and better-paying jobs and supports educational advancements.
And Western firms, unlike Chinese ones, often bring much-needed technology and intellectual property into the region. In July 2023, McKinsey estimated that nearly 90 percent of Latin America’s outside knowledge-based capital has come from Canada, the United States, and the European Union. Overall, engaging more closely with the United States offers Latin American countries a better path toward inclusive economic growth than does engaging with China.
BETTER TOGETHER
U.S. leaders must wake up to Latin America’s potential. The January 2023 Americas Partnership for Economic Prosperity was a start: 11 Latin American and Caribbean countries signed on to a U.S.-led initiative to boost trade, investment, and integrate regulations across the Western Hemisphere. In November of that year, APEP unveiled an agenda to expand and strengthen regional supply chains for clean energy, medical supplies, and semiconductors. It announced new financing mechanisms from the IDB and the U.S. International Development Finance Corporation (DFC) to build trade and energy infrastructure, $5 million in new USAID support to Western Hemisphere entrepreneurs, and $89 million in additional outlays for migrant-receiving nations such as Chile, Colombia, Ecuador, and Peru.
These initiatives are positive steps. But much more must be done to unlock Latin America’s great promise. First, the United States needs to change the rules and practices that structure lending. The DFC is largely prohibited from lending to the higher-income countries that would be vital to building out successful Western Hemisphere supply chains. The IDB, meanwhile, leans toward blue-chip investments to maintain its triple-A bond rating. But for APEP to work, it will have to invest in riskier ventures that create and expand new industries and build the supply chains they entail. Through an act of Congress, the United States should give the IDB a substantial capital increase to help APEP fulfill its mission.
Access to financing is just one hurdle. If U.S. companies want to compete with China on infrastructure or on other government contracts in Latin America, they need to be provided with more transparent ground rules. As a whole, Latin American countries rank below their Asian and Western European counterparts on Transparency International’s Corruption Perceptions Index and in measures of rule of law. U.S. government agencies should provide technical assistance and expertise to their local counterparts to draft public tenders with clear and transparent legal guarantees and anticorruption safeguards.
Hemispheric supply-chain ecosystems cannot be developed through a handful of biannual meetings of heads of state. This complex commercial agenda needs a mandate and a dedicated staff to drive coordination, collaboration, and implementation. APEP must establish a secretariat akin to that of the Asia-Pacific Economic Cooperation, which boasts a staff of over 50 at its Singapore headquarters. Standing committees, working groups, and task forces are funded by established member annual dues; APEP could do the same.
U.S.-tied regional supply chains will not survive if they are not commercially competitive. Unifying and harmonizing rules of origin across the United States’ Western Hemisphere free-trade agreements would reduce costs. More than that, however, the United States needs to revive its interest in free trade as an international diplomatic and commercial tool. Even dedicated U.S. allies cannot substantially benefit the United States if they still face tariffs and cumbersome regulatory hurdles. As a first step, the Biden administration and the U.S. Congress should move to include all South American critical mineral producers in the IRA subsidy program, which currently covers only the United States’ free-trade partners.
The United States’ security depends on Latin America’s broader social stability. Organized crime—powered by not just drug trafficking but also trafficking in migrants, kidnapping, and extortion—threatens the region’s fragile democratic development and terrorizes populations. Too often, the ill-gotten gains of Latin American crime networks flow through the U.S. financial system unimpeded. The U.S. Treasury’s Financial Crimes Enforcement Network needs more staff, and it needs to expand its attention beyond a narrow focus on antiterrorism. Moreover, Washington must support police forces and court systems in Latin America by providing equipment, intelligence, and training, as well as backing the local watchdogs that help keep governments and others honest.
Organized crime not only suppresses economic growth in Latin America. Cartels help kill tens of thousands of Americans who die from drug overdoses every year, far more than the terrorist networks that now dominate the Treasury’s portfolios. The United States must work harder to curtail its own contribution to this security crisis by blunting its demand for illegal drugs. Crime lords would have fewer markets without American consumers. More funding for expanded drug-use prevention and rehabilitation programs is not just a social good: it is a top U.S. economic and national security priority.
If Latin American nations prosper, their citizens will have more reasons to plan for futures at home.
If Washington better understood the gains it could make by integrating Latin America more thoroughly into U.S. supply chains, it might also find it easier to address the hopelessly gridlocked, ideologically charged issue of immigration. Over 20 million people in the Western Hemisphere have been forcibly driven from their homes by violence, repression, extreme weather, and economic desperation. That accounts for 20 percent of displaced people worldwide, even though Latin America is home to less than ten percent of the world’s population. Many of these sojourners are trying to cross the U.S.-Mexican border. But Americans often do not realize that their country is not alone in receiving migrants: of the more than seven million Venezuelans who have fled their country since 2015, eight in ten live elsewhere in Latin America. Costa Rica is home to over half of all Nicaraguan refugees and asylum seekers.
The United States must drop its siege mentality on immigration and start to understand it as a complex regional problem. If they work in concert, Western Hemisphere governments can more easily expand programs for humanitarian relief and housing, schools, and social services. They will also be better able to fund bigger policy shifts such as helping farmers in Central America plant more weather-resistant crops and providing seed capital for migrant-led business ventures.
The same commercial investments that could address U.S. national security weaknesses could also help stem the forces now pushing millions of migrants to leave their home countries and pulling young people into organized crime. If Latin American nations prosper, their citizens will have more reasons to plan for futures at home. Latin America’s combination of proximity, bounty, and democratic bona fides make its countries better suppliers, producers, customers, and partners for the United States than nations in any other place in the world. Latin America has so much of what the United States needs—and vice versa.
