Highlights
- China’s 2010 REE export restrictions inadvertently triggered a global innovation boom in patents and technological development outside its borders.
- Countries like the U.S., Europe, and Japan responded by increasing REE-related patent filings and improving productivity in REE-intensive industries.
- The study reveals that technological innovation can effectively counteract supply shocks and potentially weaken monopolistic trade strategies.
Laura Alfaro (Harvard), Harald Fadinger (University of Vienna, Jan S. Schymik (University of Mannheim, plus Gede Virananda (NYU Stern deliver a comprehensive and provocative insight into the global ripple effects of China’s rare earth element (REE) export restrictions. According to the study, “Trade and Industrial Policy in Supply Chains: Directed Technological Change in Rare Earths,” China’s attempt to assert dominance over REEs—critical to EVs, wind turbines, and defense technology—unexpectedly triggered an innovation boom outside its borders.
Key Hypothesis
Export restrictions on inputs with low substitutability and high supply concentration (like REEs) can unintentionally catalyze technological change in other countries—especially when those inputs are gross complements in production.
- Patents surged: Countries outside China, especially in Europe, Japan, and the U.S., saw a spike in REE-related patent filings after China’s 2010 REE export clampdown. Innovation targeted both REE efficiency and substitution.
- Productivity and exports rose: REE-intensive industries abroad experienced significant gains in productivity and export growth, while China’s domestic REE-intensive sectors stagnated or declined.
- Long-term innovation offsets supply shocks: A general equilibrium trade model showed that REE supply restrictions initially hurt downstream industries. Still, technological innovation ultimately reversed much of the damage, and in some cases even boosted global welfare.
- China’s advantage eroded: With global innovators scrambling to design around China’s REE monopoly, the policy ultimately weakened China’s stranglehold on downstream value.
Why This Matters Now?
China reimposed REE export restrictions in April 2025 amid escalating trade tensions. This paper delivers a blunt warning: restrictions on critical inputs may backfire, triggering global diversification and weakening monopolistic leverage. The authors’ empirical and modeled results show that directed technological change is a powerful counter-strategy to weaponized trade policy.
As REEx has long emphasized, supply chain resilience depends not just on new mines but on innovation, recycling, and policy foresight. The global economy cannot afford to repeat the 2010 blind spot. This time, the West must seize the opportunity to break its dependence on single-source critical inputs permanently.
While the authors may have a point in this critical study, China’s stronghold on midstream and downstream continues. President Donald Trump will likely need to travel to China and negotiate at least a provisional deal for access.
Source: NBER Working Paper No. 33877, “Trade and Industrial Policy in Supply Chains: Directed Technological Change in Rare Earths” (May 2025), https://www.nber.org/papers/w33877 (opens in a new tab)
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