This study examined firms’ entry and exit behavior through export rebate policies, which is illustrated by China’s rare earth market. It analyzed whether the adjustment of export rebate policies promotes the efficiency of resource allocation, and whether the adjustment facilitates low efficiency and low value-added firms quitting the rare earth industry. The empirical study showed that the reduction of export rebate rates has intensified competition among rare earth enterprises. It has promoted low efficiency and low value-added enterprises quitting the rare earth market, raised the threshold of entry level, and limited the entry of rare earth enterprises. The major policy recommendations are as follows: First, export structure and export rebate policies should be further reformed in China’s rare earth industry. Second, rare earth enterprises should be encouraged to improve their technology and productivity. Third, the government should enhance the management and control of China’s rare earth market, protect high quality rare earth products, and promote transformation of the market.