The Economics of Rare Earths: Global Implications of Shortages and Industrial Policy

Why It Matters

Supply disruptions in rare earths could erode GDP and stall key industries, prompting firms and governments to prioritize coordinated de‑risking strategies now.

Key Takeaways

• Rare earths underpin EVs, defense, wind, and smartphones.
• China controls ~70% mining, >90% refining, creating supply risk.
• US could lose 1.5% GDP from severe rare earth shortage.
• Early de‑risking (10‑20%) self‑sufficiency cuts vulnerability cheaply, significantly.
• Coordinated global subsidies lower costs versus unilateral policy actions.

Summary

The IMF research team examined the economics of rare earth elements, highlighting their essential role in electric vehicles, defense systems, wind turbines and consumer electronics. Although the global market is modest—about $31 billion in 2024—the downstream impact spans trillions of dollars, making supply security a macro‑economic priority.

China dominates the supply chain, controlling roughly 70% of mining and over 90% of refining capacity. Using a value‑added‑at‑risk metric, the analysts estimated that a severe, 80% supply cut could shave 0.8% of U.S. GDP in a first‑pass calculation, but a network‑model that captures inter‑industry linkages doubles that loss to about 1.5%. Germany’s exposure appears lower (≈1.2% GDP) because its auto sector is export‑oriented, allowing shocks to bleed abroad rather than reverberate domestically.

The panel discussed policy levers: short‑term buffers like recycling and stockpiling, versus mid‑ to long‑term strategies such as reshoring and friend‑shoring. Investment subsidies for new refineries proved fiscally efficient, costing $1.2 billion over ten years if the U.S. acts alone, but dropping to $800 million when multiple countries pursue parallel de‑risking. Price‑floor mechanisms were found less efficient, with delayed fiscal impacts. The speakers emphasized that the first 10‑20% increase in self‑sufficiency yields the greatest risk reduction at modest cost.

The analysis underscores that rare‑earth shortages can trigger sizable GDP losses across advanced economies, but coordinated industrial policy can mitigate damage while keeping costs manageable. De‑escalating trade tensions remains the preferred first step; if that fails, simultaneous global de‑risking offers a cost‑effective second line of defense, with broader lessons for other concentrated commodity markets such as energy and fertilizers.

Original Description

Rare earths are critical to manufacturing but supply chains are concentrated. We quantify disruption costs and show that coordinated industrial policy can de-risk supply chains affordably—framing REE policy as an insurance problem.

Speakers

Andrea Paloschi, Research Department, IMF

Christian Bogmans, Research Department, IMF