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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, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20315
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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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