Industrial Policy, Supply Chains and Directed Technological Change: Evidence from Rare Earths — Jan Schymik

Sprecher

Dr. Jan Schymik (University of Mannheim)

Abstract

Industrial policies, traditionally aimed at boosting the competitiveness of protected sectors, can unintentionally drive productivity growth in downstream sectors abroad. We document this mechanism using the case of rare earth elements (REE) – critical inputs for manufacturing and the green transformation, with production highly concentrated in China. To assess the importance of REE across industries, we construct an input-output table incorporating individual REE inputs. Using REE-related patents classified by a large language model and sectoral TFP data, we show that the introduction of REE export restrictions by China led to a global surge in innovation in REE-intensive downstream sectors outside of China. Following the adverse REE supply shock, exports in REE-intensive downstream sectors outside of China increased. To rationalize these findings and quantify the global impact of the Chinese REE policies, we develop a quantitative general equilibrium model of trade and directed technological change. Under endogenous technologies, input-supply restrictions shift the direction of innovation in downstream sectors toward scarce inputs when inputs are gross complements, which can lead to the expansion of these sectors.

Autoren

Laura Alfaro (Harvard Business School) – Harald Fadinger (University of Vienna) – Jan Schymik (University of Mannheim) – Gede Virananda (New York University).

Raum

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