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Macroeconomic Effects of Rare Earths Supply Chain Disruptions
Rare earth elements (REEs) are critical inputs in high-tech manufacturing. Following China’s 2025 export licensing requirements on REEs and permanent magnets, concerns have risen about the macroeconomic consequences of supply disruptions in import-dependent economies. Standard assessments based on “value added at risk” (VAAR) ignore production network linkages and input reallocation. We develop a small open economy model with imported REEs and production networks, calibrated using an REE-augmented input-output table from USGS data. Applying the model to the United States, Germany, France, the United Kingdom, Japan, and India, we find substantial cross-country heterogeneity in response to an 80% reduction in REEs supply. The most exposed economies are Japan, U.S. and Germany. Under low substitution elasticities (horizons under one year), these economies experience a GDP loss of 1.8, 1.5, and 1.2 percent, respectively. These differences reflect heterogeneity in sectoral composition, factor shares, and the strength of forward linkages of REE-intensive sectors. Under higher elasticities (longer horizons), aggregate losses become negligible.
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