This paper investigates China's capability to exert power on Rare Earth markets until
2020. A dynamic partial equilibrium model allowing for a disaggregated representation
of the mining sector and endogenous investment in capacities is developed. The
model is calibrated on a novel dataset on Rare Earth mines. Simulations show that
Chinese market power is a transitory phenomenon. In 2014 and 2015, Light Rare
Earth prices increase by 21 per cent and Heavy Rare Earth prices more than double
compared to free trade, if assuming export restrictions to remain unchanged. Market
power on Light Rare Earths vanishes almost completely by 2017 due to the entry of
new suppliers, while it persists until 2019 for Heavy Rare Earths. Export restrictions
imply a loss of Marshallian welfare of US$ 1.96 billion outside China. In the short run,
even moderate cuts in export quotas can increase exerted market power substantially.
Altering tariffs induces smaller but more persistent effects. Sensitivity checks indicate
that the results are robust, but delayed opening of new mines and demand shocks can
be important for China's capability to exert market power.
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