Modeling China's Rare Earth Leverage: Strategy, Markets, and Deterrence

Highlights

• Pokorny's 2026 study analyzes China's rare earth export controls across four key episodes (2010–2025), finding that while restrictions generate significant short-term market reactions—MP Materials surged +29.36% following October 2025 controls—repeated use accelerates Western diversification and gradually erodes China's structural dominance.
• Using game theory and event analysis of $9.9 billion in trade flows, the research reveals a "coercion paradox": export controls function as powerful immediate shock tools but trigger countermeasures that undermine long-term leverage when overused.
• The study confirms China's true chokepoint is processing capacity (90% global share), not mining, and suggests Western resilience strategies focused on sustained capacity buildout—rather than reactive responses—can effectively counter coercive resource diplomacy over time.

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China controls approximately 60% of global rare earth mining and roughly 90% of processing capacity — the true chokepoint in the supply chain. In Coercive Resource Diplomacy: Modeling China’s Rare Earth Export Control Escalation Dynamics and Western Deterrence Options (2026), Laszlo Pokorny (opens in a new tab) of the Department of Strategic Resources and National Security at the ICL Institute examines (opens in a new tab) whether Beijing’s export controls function as effective coercive tools — and whether Western resilience reduces their long-term impact. The study analyzes four key episodes: the 2010 Japan embargo, the 2012–2014 WTO dispute, the 2023–2025 graduated export controls, and the November 2025 diplomatic pause.

At its core, the paper asks a simple but consequential question: Does rare earth leverage endure — or does it decay under pressure?

Method: Markets Meet Game Theory

Pokorny applies a mixed-methods framework combining event study analysis, trade flow data, case-study process tracing, and formal game-theoretic modeling. He evaluates 25 export control–related policy events and examines $9.9 billion in Chinese rare earth exports to the U.S., Japan, and the European Union between 2010 and 2024.

For the lay reader: the study tracks how stock prices, trade flows, and rare earth prices reacted to specific Chinese policy moves — then models whether escalation patterns follow predictable logic.

Findings: Markets React — But Leverage Isn’t Infinite

The quantitative findings are significant. Following the October 2025 MOFCOM export controls, MP Materials experienced cumulative abnormal returns of +29.36%. Conversely, Lynas Rare Earths fell -39.11% following diplomatic de-escalation signals. During the 2011–2014 WTO dispute period, price volatility peaked, with a strong correlation (r = 0.85) between trade values and strategic rare earth pricing.

All four research hypotheses were supported:

• Export controls generate statistically significant market reactions.
• Escalation follows patterned, staged dynamics.
• Western resilience and diversification reduce coercion effectiveness.
• Diplomatic pauses reshape market expectations.

The study’s most compelling concept is the “coercion paradox”: repeated restrictions accelerate diversification, gradually weakening the coercer’s structural leverage.

Constraints and Caveats

This remains a modeling study. Game theory simplifies political complexity. Correlation does not establish causation. Market reactions capture expectations, not necessarily structural capacity shifts.

The analysis does not fully incorporate stockpiling behavior, illicit rerouting, long-term demand elasticity, or retaliatory escalation dynamics beyond modeled assumptions.

Strategic Implications

For investors and policymakers, the message is disciplined and clear: export controls are powerful short-term shock tools, but they may erode long-term dominance if overused.

China’s strength lies in processing scale and throughput. The West’s counterstrategy must lie in sustained capacity buildout — not episodic reaction.

Leverage is strongest when used sparingly. Overuse breeds independence.

Citation: Pokorny, L. (2026). Coercive Resource Diplomacy: Modeling China’s Rare Earth Export Control Escalation Dynamics and Western Deterrence Options. ICL Institute. DOI: 10.5281/zenodo.18604158.