Model-based assessment reveals global risks from rare earth export controls
An ECB Occasional Paper assesses the global macroeconomic consequences of rare earth supply disruptions. Hypothetical Chinese export restrictions could lead to output losses of 0.3-0.6 percent for the United States and higher inflation in importing economies.
Simulations project output losses and inflation
The paper quantifies the global macroeconomic implications of a hypothetical scenario involving stringent but partial Chinese export restrictions on rare earths lasting for 18 months.
This period is sufficient to exhaust Western inventories but temporary enough to avoid permanent substitution.
Model simulations suggest estimated output losses for the United States ranging between 0.3 percent and 0.6 percent, with the largest impacts concentrated in automotive and electronics manufacturing.
Inflationary pressures would arise in rare earth-importing countries as higher input costs and shortages propagate through global supply chains.
The study underscores that these outcomes are sensitive to assumptions regarding the substitutability of rare earths and the severity of restrictions, with more extreme scenarios showing disproportionately larger losses of around 2 percent.
China's strategic rare earth dominance
Rare earth elements (REEs) are indispensable inputs for high-tech and security-sensitive sectors, including automotive, electronics, and defence-related industries.
China dominates critical stages of the REE supply chain, particularly refining and permanent magnet production, creating strategic dependencies.
Past short-lived export controls in 2025 demonstrated China's ability to leverage this dominance as part of a broader geoeconomic strategy.
This paper addresses an analytical gap by combining a partial equilibrium setup, a closed-economy DSGE model, and a multi-country multi-sector model to comprehensively assess the global implications of such restrictions, a novel approach in the literature.
Beyond prices: Geoeconomic leverage
This research highlights that strong dependence on rare earths creates strategic vulnerabilities concentrated in a few high-tech and security-sensitive industries.
While severe, sustained bans are difficult to enforce, even partial and temporary restrictions can generate meaningful economic effects and inflationary pressures.
The findings underscore the critical importance of timely policy responses, including inventory management, technological substitution, recycling, and international coordination to strengthen supply chain resilience.