A Stackelberg Model of China’s Rare Earths Strategic Lead

Abstract China’s dominant position in the rare earth elements (REE) sector results from a strategic political approach that emphasizes technological control over simple resource scarcity. This paper uses a Stackelberg leadership model to explain how China takes advantage of first-mover benefits in upstream extraction, midstream processing, and downstream standard-setting to create unequal power within the global supply chain. Based on patent data (China holds about 50% of global REE-related filings), policy events, and stylized simulations adjusted with USGS production data, PATSTAT filings, and follower entry metrics, the analysis shows that patent activity and tacit knowledge—rather than export quotas—are key to maintaining market dominance. China’s export controls, licensing policies, and opaque IP networks create barriers that sustain dependency for follower countries like the US, EU, and Japan. Simulations of historical, patent-only, and counterfactual diversification scenarios reveal nonlinear lock-in effects, where follower output drops as China’s technological advantage grows. A complementary regression confirms the post-2010 increase in China’s recycling patent share, rising roughly 1.6% points each year. Overall, this framework redefines REE competition as a matter of techno-industrial sovereignty, urging follower nations to focus on coordinated R&D and open platforms to lessen vulnerabilities in critical sectors such as renewables, electric vehicles, and defense.