Highlights

• NBER study reveals China's 2010 rare earth export restrictions paradoxically triggered innovation surges in Japan, Europe, and the US.
• Downstream industries developed REE-saving technologies that reduced dependence on Chinese supply.
• Patent data shows REE-intensive industries outside China gained export share post-2010 through technological upgrades.
• Innovation—not new mining—absorbed most of the supply shock as global mining capacity failed to scale quickly.
• The research demonstrates supply-chain weaponization can backfire: export controls on critical minerals may accelerate foreign technological self-sufficiency.
• Such export controls can weaken the supplier's long-term leverage and pricing power.

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In a landmark NATIONAL BUREAU OF ECONOMIC RESEARCH  NBER study (opens in a new tab), Laura Alfaro, Harald Fadinger, Jan Schymik, and Gede Virananda analyze one of the most consequential supply-chain events of the past two decades: China’s 2010 rare earth element (REE) export restrictions.

Their research, supported by extensive patent datasets, a new REE-specific input-output (IO) table, and a quantitative general-equilibrium model, reveals a counterintuitive outcome: China’s tightening of REE supply triggered a wave of innovation outside China, enabling downstream industries to reduce dependence on Chinese-processed rare earths and—at least temporarily—soften Beijing’s leverage over the global supply chain.

Their findings illuminate a paradox with enormous implications for governments, manufacturers, and investors: when a dominant supplier weaponizes a critical mineral, global competitors do not simply suffer—they innovate.

Study Methods

Combining IO Tables, Patent Mapping, and a New 14-Industry Global Model

The authors build a first-of-its-kind input-output table that isolates REE usage by element (Nd, Dy, La, Ce, Pr), allowing them to measure exposure across industries from permanent magnets to catalysts. They then link more than 30,000 REE-related patents to industries via a large language model (LLM) trained to classify technological purpose—whether a patent improves REE efficiency or substitutes away from REEs entirely.

To evaluate global economic impacts, they construct a multi-region directed-technological-change model, capturing how industries respond when the price of a critical and hard-to-substitute input suddenly spikes.

The supply shock they study was dramatic: REE unit prices jumped by factors of 10–45 between 2010–2011, stemming from China’s export quota cuts, tariff increases, and an informal halt of shipments to Japan following the Senkaku/Diaoyu dispute.

Key Findings: China’s Monopoly Sparked a Global Diversification Wave

1. A surge in REE-saving innovation outside China

Downstream industries most dependent on REEs—especially those using highly non-substitutable elements like dysprosium—saw sharp increases in REE-reducing or substituting patents in Europe, Japan, and the United States after 2010.

Examples include:

• GM’s 2011 patent reducing dysprosium and terbium use by 20% (page 66).
• South Korean patents eliminating permanent magnets in position sensors (page 67).
• Toyota’s 2016 catalyst technology replacing cerium with more abundant REEs (page 68).

These responses confirm that REEs behave as complementary inputs—hard to replace chemically, but inspiring efficiency-focused innovation when supply tightens.

2. REE-intensive industries outside China gained export share

Despite higher input costs, Western and Japanese industries increased exports relative to less REE-intensive peers, contradicting traditional expectations where cost shocks reduce competitiveness.

The mechanism: technological upgrades outpaced cost increases, allowing firms to move up the value chain.

China, by contrast, showed no comparable export surge, even though it controlled ~90% of global processing.

3. Technology, not stockpiling or new mining, drove adaptation

The study finds that global mining capacity did not increase sufficiently—Mountain Pass reopened but soon collapsed into bankruptcy; Lynas scaled gradually; recycling remained negligible due to small material volumes.

Thus, innovation—not diversification of supply—absorbed most of the shock.

Implications for Today’s Market and Policy Landscape

1. Chinese export restrictions may backfire

If REEs are complementary inputs, restricting supply accelerates foreign innovation, weakening China’s pricing power over time. This was observed again when China restricted REE magnets and six elements in 2025.

2. Downstream industries can adapt faster than mining and processing

The slow pace of mine development (5–10+ years) contrasts sharply with rapid innovation cycles in automotive, electronics, and catalyst technologies.

3. Industrial policy must anticipate “directed innovation” effects

The authors caution policymakers: export controls on essential inputs rarely produce simple outcomes. In this case, technological self-help in the West partly neutralized China’s leverage.

Limitations and Controversial Aspects

• Working paper status: As an NBER paper, it is not yet peer-reviewed.
• Patent-based measures may miss unpatented or proprietary innovations.
• Model simplifications: The world is reduced to five regions and 14 industries for tractability.
• Assumption of China as sole REE supplier may overstate its influence in later years as Australia and the U.S. re-emerge.
• Temporary shock: China lifted quotas in 2015 after a WTO ruling, raising questions about long-term persistence.

Still, the empirical consistency across patents, exports, and productivity makes the findings robust and compelling.

Conclusion

This study offers one of the clearest quantitative demonstrations yet that supply-chain shocks in critical minerals can trigger waves of innovation—sometimes offsetting the strategic goals of the supplier imposing the shock. For investors, policymakers, and OEMs, the message is clear: technological elasticity is often the hidden variable shaping geopolitical outcomes in rare earth markets.

Citations: NBER Working Paper No. 33877, Trade and Industrial Policy in Supply Chains: Directed Technological Change in Rare Earths, Alfaro et al., 2025.

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