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Trade and Industrial Policy in Supply Chains: Directed Technological Change in Rare Earths

Author

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  • Alfaro, Laura
  • Fadinger, Harald
  • Schymik, Jan
  • Virananda, Gede

Abstract

Trade and industrial policies restricting critical inputs can inadvertently promote foreign downstream industries via a directed technological response. We provide evidence for this mechanism by examining rare earth elements (REEs) – critical manufacturing inputs with highly concentrated production and low substitutability. We show that China’s REE export restrictions in 2010 induced a surge in global innovation increasing REE input-efficiency and exports in REE-intensive industries. A quantitative trade model with Heckscher-Ohlin-based comparative advantage, directed technological change and input-output linkages rationalizes how input-supply restrictions induce REE-enhancing innovation and expand REE-intensive industries abroad. This directed technological response substantially mitigates foreign welfare losses.

Suggested Citation

  • Alfaro, Laura & Fadinger, Harald & Schymik, Jan & Virananda, Gede, 2025. "Trade and Industrial Policy in Supply Chains: Directed Technological Change in Rare Earths," CEPR Discussion Papers 20315, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:20315
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    2. Chowdhry, Sonali & Heiland, Inga & Mahlkow, Hendrik, 2026. "Quantitative trade with ships," Kiel Working Papers 2314, Kiel Institute for the World Economy.
    3. Tianyu Fan & Mai Wo & Wei Xiang, 2025. "Geopolitical Barriers to Globalization," Papers 2509.12084, arXiv.org, revised Apr 2026.
    4. Kee, Hiau Looi & Xie, Enze, 2025. "Nickel, Steel and Cars : Export Ban and Domestic Value-Added in Indonesia," Policy Research Working Paper Series 11249, The World Bank.
    5. Florencia Airaudo & Francois de Soyres & Alexandre Gaillard & Ana Maria Santacreu, 2025. "Recent Evolutions in the Global Trade System: From Integration to Strategic Realignment," Working Papers 2025-027, Federal Reserve Bank of St. Louis.
    6. Fusillo, Fabrizio & Orsatti, Gianluca & Pialli, Guido & Quatraro, Francesco & Scandura, Alessandra, 2026. "Trade in Critical Raw Materials and the direction of innovation," Department of Economics and Statistics Cognetti de Martiis. Working Papers 202606, University of Turin.
    7. Bastianin, Andrea & Castelnovo, Paolo & Frattini, Federico Fabio & Vona, Francesco, 2026. "Induced Innovation in Critical Mineral Saving Technologies," FEEM Working Papers 391378, Fondazione Eni Enrico Mattei (FEEM).
    8. Fusillo, Fabrizio & Orsatti, Gianluca & Pialli, Guido & Quatraro, Francesco & Scandura, Alessandra, 2026. "Trade in Critical Raw Materials and the direction of innovation," Department of Economics and Statistics Cognetti de Martiis LEI & BRICK - Laboratory of Economics of Innovation "Franco Momigliano", Bureau of Research in Innovation, Complexity and Knowledge, Collegio 202603, University of Turin.

    More about this item

    Keywords

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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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