The spillover effect of trade policy along the value Chain: Evidence from China's rare earth‐related sectors

Abstract

This study examines the heterogeneous spillover effects of an export control policy from an upstream sector to its related downstream sectors. In 2010, China implemented tough policies on rare earth production and export that created a significant price premium for rare earth in foreign markets, thus offering downstream sectors in China cost advantages over their foreign competitors. This study exploits China's policy as an exogenous shock and performs a detailed examination of Chinese customs data. The results show that the export control policy has increased the export price of rare earth downstream products from China, whereas the effects on export quantity and value have been heterogeneous across sectors: they are significant for sectors in which the rare earth cost share is high, and the elasticity of substitution is low.