Harvard Study Says China's Rare Earth Restrictions Drive Innovation Abroad

A new Harvard-led study has found that China's restrictions on rare earth exports, while meant to strengthen its own control over critical minerals, have instead pushed companies outside China to innovate faster and become more competitive.

Rare earth elements are essential for modern technologies such as electric vehicles, wind turbines, medical equipment and artificial intelligence. China dominates this sector, producing over 90% of the world's rare earths. In 2010, Beijing imposed strict export controls after a diplomatic dispute with Japan, causing global prices of some rare earth materials to jump by as much as 4,500%.

According to a May working paper by Harvard Business School professor Laura Alfaro and her co-authors, "Trade and Industrial Policy in Supply Chains: Directed Technological Change in Rare Earths", these supply shocks forced foreign companies to adapt rather than collapse. Using data from nearly 30,000 patents worldwide, the researchers found a sharp rise in innovation outside China, particularly in industries heavily dependent on rare earths.

The study shows that non-Chinese firms increased investment in developing substitute materials and new manufacturing processes that reduce or even eliminate the use of rare earths. Industries most exposed to the restrictions built a 7.4% larger stock of rare earth-related patents compared to less-affected sectors.

The productivity impact was also striking. Firms outside China saw gains in both overall and labour productivity, while Chinese industries that relied heavily on rare earths experienced declines. Over time, rare earth-intensive industries outside China also expanded their exports faster than others, making them more competitive globally.

The researchers conclude that trade restrictions on critical inputs can unintentionally fuel innovation and long-term growth abroad, reshaping global supply chains in unexpected ways.