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.