How America Became Dependent on China-Centered Strategic Supply Chains

In 1987, Morris Chang founded Taiwan Semiconductor Manufacturing Company (TSMC) with Taiwanese government backing, creating the dedicated foundry model — a chipmaker that manufactures chips designed by others. The model allowed many chip designers to separate design from fabrication and rely on Asian foundries for capital-intensive manufacturing. Over the following decades, the United States retained major strengths in design while its share of global fabrication capacity fell sharply.

In 1990, US fabrication facilities produced approximately 37 percent of the world's semiconductor output. As US firms continued offshoring production to Taiwan, South Korea, and Japan through the 1990s and 2000s, this share fell steadily — reaching 12% by 2020 and about 10% by 2022 in later SIA estimates. The decline was documented by industry groups and later cited by the Commerce Department as a justification for the CHIPS Act.

During his 1992 Southern Tour, Deng Xiaoping made his now-famous remark: "The Middle East has oil; China has rare earths." Later policy and industry analysis treated the phrase as shorthand for China's strategic attention to rare earths. China subsequently became dominant in both rare earth mining and, more importantly, separation and refining.

By the late 1990s, US production had declined sharply while China became the dominant global rare earth supplier. DOE notes that the United States was the leading global producer until approximately 1998, when US production significantly declined and China became the dominant supplier. Mountain Pass had been central to US production, but global price pressure and environmental constraints eroded its position.

As China expanded its steel industry through state investment in the late 1990s and 2000s, it became the world's largest producer and a recurring focus of US trade complaints about overcapacity and subsidised exports. Research linked 2 to 2.4 million US manufacturing job losses between 1999 and 2011 to Chinese import penetration across manufacturing. Steel and aluminum import pressure contributed to layoffs in traditional industrial regions.

The Mountain Pass mine in California ceased production in 2002. The closure combined Chinese price undercutting, rising US environmental compliance costs following radioactive wastewater spills, and no durable federal policy to maintain strategic domestic production. With Mountain Pass closed, the US became almost entirely dependent on China for both raw rare earth materials and refining. Later DOE and CSIS assessments identify processing and separation, not only mining, as the enduring bottleneck in which China held the dominant global position.

Chinese-owned companies expanded solar cell production from less than 2% of the global market in 2004 to over 50% by 2010, backed by aggressive industrial support and rapid capacity expansion. The IEA later found that China invested more than $50 billion in new solar PV supply capacity over the decade after 2011, far more than Europe and the United States combined. The US, which had pioneered solar cell technology, did not build a comparable manufacturing base during this period.

A 2006 Government Accountability Office report documented the sustained trend of US semiconductor firms offshoring assembly and increasingly higher-value fabrication to Asia. It noted that foreign government incentives — direct subsidies, tax breaks, infrastructure investment — created conditions US domestic facilities could not match without equivalent federal policy. The report was entered into the congressional record. It did not trigger a major domestic semiconductor manufacturing incentive program.

By the late 2000s, China controlled approximately 97 percent of global rare earth mining. The transition from US and Western dominance to Chinese monopoly had taken roughly 15 years. Rare earths — 17 elements essential for electric motors, wind turbines, military guidance systems, and consumer electronics — had little diversified supply at scale. Processing and refining capacity was even more concentrated than mining; later DOE and CSIS assessments placed China's share of rare earth processing at roughly 90 percent.

During the 2010s, the split between US chip design strength and offshore advanced manufacturing deepened. By 2020, US fabrication facilities produced only about 12% of global semiconductor capacity, down from 37% in 1990. Commerce Secretary Gina Raimondo later said Taiwan produced 92% of the world's leading-edge chips, documenting how far advanced manufacturing had concentrated offshore.

Over the decade following 2010, the US share of global polysilicon production collapsed from approximately 35% to just 5%, while China's rose from 26% to 82%. By 2014, the US had lost all of its ingot and wafer manufacturing capacity, according to IEA-linked solar supply-chain analysis. By the early 2020s, IEA found China's share exceeded 80% across all major manufacturing stages of solar panels.

Following the arrest of a Chinese fishing trawler captain by the Japanese coast guard near the disputed Senkaku/Diaoyu Islands, China restricted rare earth exports to Japan. Japan, dependent on Chinese rare earths for its electronics and automotive industries, faced an immediate supply crisis. The incident became the canonical warning that concentrated rare earth supply could become geopolitical leverage. Academic literature later debated the exact mechanism and market effects of the restrictions, but the episode still drove US and allied concern about rare earth dependence.

President Trump imposed 25% tariffs on imported steel and 10% on aluminum under Section 232 of the Trade Expansion Act, citing national security. The tariffs applied broadly to all importers — not specifically China — generating friction with US allies including Canada and the EU. They provided some relief to domestic steel producers but did not address the broader strategic-sector dependencies in this paper, and did not extend to rare earths, semiconductors, pharmaceuticals, or solar manufacturing.

The COVID-19 pandemic simultaneously exposed two decades of supply chain vulnerability. A global semiconductor shortage beginning in late 2020 forced automotive plant shutdowns across the US and Europe, costing the automotive sector alone an estimated $210 billion in lost revenue in 2021 alone, according to consulting firm AlixPartners. In parallel, pandemic-era pharmaceutical demand revealed the depth of US dependence on Chinese chemical supply chains. Both crises had been foreshadowed in policy literature for years. The pandemic created the political conditions for legislation that years of government reports had failed to generate.

President Biden signed the CHIPS and Science Act on August 9, 2022, allocating $39 billion in manufacturing incentives and $13.2 billion for research and workforce development to rebuild domestic semiconductor capacity. The Commerce Department later finalized a $6.6 billion award for TSMC Arizona and announced preliminary terms of up to $8.5 billion in direct funding for Intel. The act also barred recipients from expanding advanced semiconductor capacity in China for ten years. It was the most significant US industrial policy intervention since the space race — triggered thirty years after the decline began.

The Inflation Reduction Act, signed the same month as the CHIPS Act, included domestic content requirements and production tax credits designed to rebuild US clean energy manufacturing, including solar panels, batteries, and wind components. It directed hundreds of billions in investment toward sectors that had been offshored over the previous two decades. Treasury guidance later tied bonus credits to domestic content for clean energy projects such as solar and wind.

TSMC confirmed that chip production was underway at its first Arizona fab in early 2025, following engineering and ramp activity in 2024. Commerce's award supported three planned Arizona fabs, with the first producing 4nm-class chips and later fabs planned for more advanced nodes. US-made TSMC chips are expected to cost more than Taiwan-made equivalents, but estimates vary; later reporting placed some premiums well below the older 50% figure.

On April 4, 2025, China's Ministry of Commerce and General Administration of Customs imposed export controls on seven medium and heavy rare earth materials and related magnets. The restrictions came amid renewed US-China tariff escalation and affected materials used in defense, electronics, clean energy, and advanced manufacturing. At the time, China controlled most rare earth processing capacity even where mining occurred elsewhere.