Unintended shift in supply bases away from well-governed jurisdictions after critical mineral export restrictions

The global shift toward clean energy relies on a hidden foundation: a handful of minerals like lithium, cobalt, and rare earths. These materials are essential for batteries, motors, and electronics, but they are not evenly distributed across the planet. A few countries hold the keys to these resources, and in recent years, some of those nations have begun to restrict how much they sell to the rest of the world. In response, governments in the United States and Europe have introduced rules designed to help companies "de-risk." The idea is simple: if a company relies on a mineral from a place with political instability or strict export limits, it should find new suppliers in countries with strong laws, stable courts, and reliable contracts. The hope is that by moving their supply chains to these well-governed places, companies will become more secure and the global energy transition will be less vulnerable to sudden stoppages.

But does this plan actually work when companies are forced to react on their own? A new study by researchers at the University of Cambridge and the University of Sheffield suggests the answer is no. By examining the annual reports of thousands of American companies and tracking their supplier relationships over more than a decade, the team discovered a surprising reality. When export restrictions hit, these companies did not move their supply chains toward safer, better-governed countries. Instead, they moved in the opposite direction. On average, the suppliers of companies facing these restrictions ended up headquartered in countries with weaker legal systems and less reliable courts. The shift was driven largely by an increase in suppliers based in China, the very nation that many de-risking policies aim to reduce reliance upon.

The researchers built their investigation on a massive dataset, pulling information from 142,150 annual reports filed by US-listed companies between 2005 and 2026. They looked for specific mentions of critical minerals like gallium, germanium, antimony, and nickel, searching for sentences where these materials were described as inputs, suppliers, or sources of shortage. This allowed them to identify which companies were truly dependent on these resources. They then matched these companies with a list of their disclosed suppliers, using a commercial database that tracks business relationships. To measure the quality of the environment where these suppliers operated, the team used a standard global index that rates countries based on how well they enforce contracts, protect property rights, and maintain an independent court system. A higher score means a more predictable and secure business environment; a lower score suggests more risk.

The study focused on six major export restrictions imposed between 2010 and 2024 by China, Indonesia, and the Democratic Republic of the Congo. These included China's 2010 cut in rare-earth quotas, Indonesia's bans on exporting unprocessed nickel ore, and China's recent licensing requirements for gallium, germanium, and antimony. The researchers compared the companies that were exposed to these restrictions with a large group of similar companies that did not rely on these specific minerals. They looked at what happened to the location of their suppliers before and after the restrictions took effect.

The results were clear and counterintuitive. After a restriction was announced, the average legal quality of the countries where the exposed companies' suppliers were based dropped. Specifically, the score fell by 0.064 points on the World Bank's rule-of-law index. While this number might seem small, it represents a meaningful shift in the landscape of global trade. It is roughly equivalent to replacing one supplier based in the United States with one based in China for every twenty-eight suppliers a company has. This decline was not caused by the countries themselves becoming less stable; the scores for those nations remained the same. Instead, the drop happened because companies added more suppliers from China and fewer from the United States, its free-trade partners, and Japan.

The study carefully ruled out several alternative explanations. The researchers checked to see if the shift was simply a general trend affecting all metal-using companies, but found that while other metal users also moved slightly toward weaker jurisdictions, the shift for companies facing restrictions was distinct and larger. They also looked at whether companies were simply finding new suppliers or if they were just reporting old ones differently. The data showed that the change was real: companies were actively adding new suppliers in China and dropping some existing ones, a pattern that was most visible among companies that had been exposed to restrictions more than once or those with fewer disclosed suppliers.

Interestingly, the companies did not seem to be searching for alternatives in the way policymakers hoped. The researchers analyzed the text of the annual reports to see if companies were writing more about looking for new suppliers or diversifying their sources. While companies did write slightly more about these topics after a restriction, this increase was just a continuation of a trend that had already been happening for years. There was no sudden spike in search activity that could explain the move toward weaker jurisdictions. Furthermore, the study found no evidence that companies were moving toward better-governed sources as a direct response to the restrictions. In fact, when China lifted its rare-earth quotas in 2015, the supply chains of the affected companies moved back toward stronger legal systems, suggesting that the initial shift away from them was indeed a reaction to the restriction.

The findings challenge the assumption that market forces will naturally guide companies toward safer, more stable supply chains when faced with geopolitical pressure. The study suggests that when a raw material is cut off, companies often turn to the most readily available alternative, which frequently involves processed materials or components coming from the same hub that controls the midstream of the supply chain. In the case of Indonesia's nickel ban, for example, the ban forced the development of refining capacity within Indonesia, much of which is controlled by Chinese interests. Consequently, companies that needed nickel ended up buying from Chinese-controlled entities, registering as suppliers in a jurisdiction with a lower rule-of-law score.

This does not mean that companies are ignoring the risks of their supply chains, but rather that the path to security is more complex than simply swapping one country for another. The study highlights that the governance of a supply base is a critical factor that deserves attention precisely when supply is under pressure. For policymakers, the results indicate that de-risking objectives cannot be assumed to happen automatically through company responses to export bans. If the goal is to move supply chains toward well-governed jurisdictions, relying on companies to figure this out on their own after a crisis may not be enough. The evidence shows that without specific incentives or support, the natural reaction to a supply shock can lead companies deeper into the very jurisdictions they are trying to avoid.