Highlights

• China's 2010 rare earth export restrictions triggered significant innovation in Japan and Europe, demonstrating how supply constraints can catalyze technological progress.
• Research shows measurable total factor productivity gains and export growth in rare-earth-intensive sectors following strategic input constraints.
• Despite innovative responses, fundamental geopolitical vulnerabilities remain, highlighting the need for comprehensive domestic production and processing capabilities.

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A new analysis from the Center for Economic Policy Research (opens in a new tab) (CEPR)—led by Laura Alfaro (opens in a new tab), Harald Fadinger (opens in a new tab), Jan Schymik (opens in a new tab), and Gede Virananda (opens in a new tab)—delivers a compelling thesis: China’s rare-earth export restrictions in 2010 sparked a measurable wave of innovation in rare-earth-intensive industries outside of China, with powerful effects in Japan and Europe. The research, grounded in novel input-output modeling, REE-specific sensitivity metrics, and global patent tracking via large language models, finds that constrained supply can catalyze technological progress—but only if adaptive capacity exists.

CEPR, established in 1983, is an independent, non-partisan, pan-European nonprofit organization. Its mission is to enhance the quality of policy decisions through providing policy‐relevant research, based on sound economic theory, to policymakers, the private sector, and civil society.

Recognize that, although the authors may bring a Pan-European perspective, the same rare earth element/critical mineral crisis applies to both Europe and North America.

On the Money

The authors powerfully demonstrate how input shocks—especially to essential, non-substitutable inputs—can redirect innovation. Their empirical findings show:

• A surge in REE-saving patent activity in third-party countries post-2010.
• Measurable TFP (total factor productivity) gains and export growth in REE-intensive sectors.
• That REEs, due to their unique functional properties and supply bottlenecks, represent a textbook case of "directed technical change."

They introduce original metrics to quantify industry-level REE exposure and substitutability, providing policymakers with a valuable new toolset.

Rare Earth Exchanges (REEx) Reflection

Despite its rigor, REEx suggests that the paper makes several assumptions that warrant scrutiny.

First, the authors understate China’s strategic intent.  In this case they frame export restrictions as a trade policy shock but don’t sufficiently interrogate the intentional long-game behind China's rare earth dominance—specifically, its state-backed industrial policies, subsidies, and market flooding tactics that crippled Western competitors (e.g., Mountain Pass's 2015 bankruptcy).

Second, the authors assume innovation is a substitute for security.  While innovation flourished in Japan and Europe, domestic REE production and processing capacity remained virtually stagnant. R&D is a weak shield when a nation still imports 90% of its critical inputs from a rival power.

And then there’s what we suggest is model overreach. The general equilibrium model simulates a world where innovation offsets nearly all negative impacts of supply shocks. That’s theoretical. Then there is reality: U.S. auto, defense, and magnet industries remain dangerously exposed, as seen in the 2023–2025 REE export throttling. Mark our words, this will not improve much piecemeal, as politicians are only focused on the midterms.

Rare Earth Exchanges™ Bias Meter™

Source	Bias Rating	Justification
CEPR Authors	Evidence-Based Academic	Uses high-quality data and rigorous modeling to explore long-term innovation impacts.
Policy Implications Section	Optimistic Technocratic	Risks overstating innovation’s ability to solve geopolitical vulnerabilities.
Geopolitical Framing	Underplayed Strategy	Fails to capture China’s industrial doctrine or weaponization of REE chokepoints.

Yes, scarcity can spur innovation. However, innovation without production (and all that is needed in U.S. society to support it) equals dependency. The lesson of 2010 isn’t just about creative adaptation—it’s about strategic urgency. The U.S. and its allies must pair technological ingenuity with serious investment in mining, processing, and magnet manufacturing, or risk repeating history again—only this time, under more hostile terms.

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