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dc.titleTrade and Industrial Policy in Supply Chains: Directed Technological Change in Rare Earths (Discussion Paper)
dc.contributor.authorAlfaro, Laura
dc.contributor.authorFadinger, Harald
dc.contributor.authorSchymik, Jan S
dc.contributor.authorVirananda, Gede
dc.contributor.orgunitDepartment of Research and Chief Economist
dc.date.available2025-09-12T00:09:00
dc.date.issue2025-09-12T00:09:00
dc.description.abstractTrade and industrial policies, while primarily intended to support domestic industries, may unintentionally stimulate technological progress abroad. We document this mechanism in the case of rare earth elements (REEs)--critical inputs for manufacturing at the knowledge frontier, with low elasticity of substitution, inelastic supply, and high production and processing concentration. To assess the importance of REEs across industries, we construct an input-output table that includes disaggregated REE inputs. Using REE-related patents categorized by a large language model, sectoral TFP data, trade data, and physical and chemical substitution properties of REEs, we show that the introduction of REE export restrictions by China led to a global surge in innovation and exports in REE-intensive downstream sectors outside of China. To rationalize these findings and quantify the global impact of the adverse REE supply shock, we develop a quantitative general equilibrium model of trade and directed technological change. We also propose a structural method to estimate sectoral input substitution elasticities for REEs from patent data and find REEs to be complementary inputs. Under endogenous technologies and with complementary inputs, input supply restrictions on REEs induce a surge in REE-enhancing innovation and lead to an expansion of REE-intensive downstream sectors.
dc.format.extent69
dc.identifier.doihttp://dx.doi.org/10.18235/0013690
dc.identifier.urlhttps://publications.iadb.org/publications/english/document/Trade-and-Industrial-Policy-in-Supply-Chains-Directed-Technological-Change-in-Rare-Earths-Discussion-Paper.pdf
dc.language.isoen
dc.publisherInter-American Development Bank
dc.subjectTrade in Services
dc.subjectIndustrial Policy
dc.subjectIntellectual Property
dc.subjectIntra-Regional Trade
dc.subjectExport
dc.subjectInnovation
dc.subjectManufacturing Industry
dc.subjectScience and Technology
dc.subjectIntegration and Trade
dc.subject.jelcodeF13 - Trade Policy • International Trade Organizations
dc.subject.jelcodeF14 - Empirical Studies of Trade
dc.subject.jelcodeF42 - International Policy Coordination and Transmission
dc.subject.jelcodeO33 - Technological Change: Choices and Consequences • Diffusion Processes
dc.subject.jelcodeO47 - Empirical Studies of Economic Growth • Aggregate Productivity • Cross-Country Output Convergence
dc.subject.keywordsRare earth elements
dc.typeDiscussion Papers
idb.identifier.pubnumberIDB-DP-01101
idb.operationRG-K1098
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