The European Central Bank has published an Occasional Paper assessing the macroeconomic and global value chain implications of export controls on rare earth elements (REEs), using recent Chinese measures as context and modelling a range of disruption scenarios. The paper concludes that supply restrictions on REEs can generate supply-driven output losses and inflationary pressures in REE-importing economies, with results highly sensitive to assumptions about substitutability and the severity of controls. The analysis documents that exposure to REE supply disruptions is concentrated in high-tech and security-sensitive sectors, notably automotive, electronics, semiconductors and defence-related industries. Using a partial equilibrium setup, a closed-economy DSGE model and a multi-country multi-sector model, it simulates a stringent but partial Chinese export restriction lasting 18 months and calibrated to the observed April-May 2025 export decline. Across model specifications, estimated US output losses range from 0.3% to 0.6%, with the largest impacts in automotive and electronics, alongside cost-push inflation effects in importing economies. Under more extreme assumptions such as a near-total export ban combined with very low substitutability, estimated losses rise to around 2%, illustrating non-linear impacts; the multi-country analysis also shows heterogeneous cross-country effects linked to geopolitical distance from China, sectoral composition and import reliance, and short-run gains in Chinese activity from capturing bottleneck rents even as global output falls and inflation rises. The paper reflects the authors’ views and not necessarily those of the ECB.
European Central Bank 2026-03-31
European Central Bank research models Chinese rare earth export controls and estimates 0.3-0.6% US output loss under an 18-month partial restriction scenario
The European Central Bank has published an Occasional Paper analysing the macroeconomic and global value chain effects of export controls on rare earth elements, using recent Chinese measures and disruption scenarios. The study finds that supply restrictions can generate output losses and cost-push inflation in importing economies, with particularly pronounced impacts on automotive, electronics, semiconductors and defence-related sectors. Losses are highly sensitive to the severity of controls and substitutability, ranging from 0.3%–0.6% of output under stringent partial restrictions to around 2% under near-total bans.