“We analyzed the impact on manufacturers of the rare earths supply shock after China had imposed export
restrictions on the rest of the world,” says Jan Schymik from the EPoS Economic Research Center. “Our results
show, that EU manufacturers were initially hit hard, as global prices for rare earths spiked up to 45-fold. Yet,
companies were able to adjust and make innovative changes to their technologies. For example, car
manufacturers invented new technologies that reduced the usage of rare earths in permanent magnets or
catalysts. These adjustments paid off, as they helped to compensate for the increased input prices and
sometimes even led to a subsequent expansion of industries."
Supply shock led to innovation and export growth
Thanks to technological change, manufacturers in the EU that relied intensively on rare earths innovated so
much, that their annual export growth was 0.3 percentage points higher compared to manufacturers that were
not negatively affected by the supply shock. By contrast, Chinese firms, who retained full access to rare earths,
did not boost their exports at the same rate.
To assess the innovation activities, the EPoS team built an input-output table for the use of rare earths and
analyzed text descriptions of granted patents that describe key improvements of technologies using rare earths.
“We find that companies adapted by using rare earths less intensively or found substitutes - the corresponding
patenting activities in the EU rose by more than 7.4 percent,” says Schymik. The innovation activities are
strongest in industries which had used most rare earth elements before the crisis.
What is more, the European economy as a whole did not experience substantial real GDP losses following the
restrictions. “The technological advances mitigated the negative effect of supply shortages almost entirely,”
says Schymik. “Without these technological advances, GDP losses would have been much more substantial.” In
his view, the potential losses are comparable in magnitude to the GDP benefits of a large free trade agreement,
such as the Mercosur agreement currently under discussion.
How policymakers can help to build resilience
“Technological advances play a key role in mitigating the negative effects of export restrictions on rare earths,”
says Schymik. “We conclude that EU companies have become more competitive as a result. Policymakers can
help manufacturers to cope with supply bottlenecks in a similar situation by enabling an innovation-friendly
environment that builds resilience for the long run.”
Rare-earths, a group of 17 elements, are crucial for numerous industrial technologies, such as vehicle
electrification, or clean energy. They are difficult to substitute. China controls about 60 percent of the mining
and 90 percent of the post-mine processing globally. From 2010 until 2015, China restricted access to the rest
of the world. Following a ruling of the World Trade Organization the country lifted restrictions after five years.
In April 2025, China reimposed export restrictions on certain rare earth elements.