VoxEU Study: Chinese Rare Earth Export Shocks Spurred Innovation Abroad, But Risks Remain

Highlights

• China’s 2010 rare earth export restrictions triggered significant R&D investments in REE-saving technologies across Japan and Europe.
• A 1 standard deviation increase in REE exposure led to 0.5% annual total factor productivity growth in Japan and 0.3% export growth.
• The research demonstrates how supply disruptions can catalyze innovation in critical industrial inputs, particularly in clean energy, aerospace, and electronics sectors.

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A new VoxEU analysis led by Laura Alfaro (Harvard Business School) argues that China’s 2010 rare earth element (REE) export restrictions, while initially disruptive, ultimately catalyzed innovation and productivity gains in REE-dependent industries outside China. Using a novel input-output framework and patent classification methods, the study finds that firms in Japan and Europe responded to sharply higher REE prices by accelerating R&D in REE-saving technologies, boosting productivity and export growth in sectors like clean energy, aerospace, and electronics.

The authors model these dynamics through a directed technological change framework (based on Acemoglu 2002), suggesting that when essential, hard-to-substitute inputs like REEs face supply shocks, innovation can shift toward efficiency or substitution. Empirical results show that a 1 standard deviation increase in REE exposure led to 0.5% annual TFP growth in Japan and 0.3% export growth over eight years.

However, the analysis omits key real-world constraints: time lags in scaling innovation, limited substitute materials, geopolitical frictions in patent transfers, and the long development timelines for new supply chains. It also underplays China’s continued dominance in refining capacity, which still leaves global industries vulnerable in the short-to-medium term.

Rare Earth Exchanges (REEx) suggests that the study offers a valuable long-term lens, but policymakers must not overestimate innovation’s ability to offset near-term geopolitical risks or structural supply chokepoints in rare earth markets, especially with a lack of an all-encompassing industrial policy emanating out of the West.

See source: VoxEU, “When supply shocks to essential inputs spur innovation: Lessons from the global rare earths disruption” (Alfaro, Fadinger, Schymik, Virananda, June 20, 2025) https://cepr.org/voxeu/columns/when-supply-shocks-essential-inputs-spur-innovation-lessons-global-rare-earths (opens in a new tab)