Mineral Demands for Resilient Semiconductor Supply Chains – csis.org

Tháng Sáu 20, 2024 The Art Of Semi 0 Comments

Photo: JENS SCHLUETER/AFP/Getty Images
Brief by Ryan C. Berg, Henry Ziemer, and Emiliano Polo Anaya
Published May 15, 2024
The People’s Republic of China (PRC) is the principal strategic competitor of the United States. In addition to antagonism in other domains, this rivalry entails escalating technological competition. No country is technologically self-sufficient, but the United States’ reliance on China’s considerable market share in the critical minerals industry for semiconductor supply chains creates a dependency that turns a trade imbalance into a potential national security threat. Chips are ubiquitous in all modern technology, and their relevance and worth will only expand in the coming years. The countries that are able to secure their own supply chains for critical technologies will be in a position to write the rules of global economic governance for years to come.
Critical minerals are behind every modern technology, from the latest developments in commercial electronics to the strategic defense equipment required for national security; leading-node semiconductors require over 300 materials, presenting multiple vulnerabilities for adversaries to manipulate their supply. Given that these minerals are indispensable for semiconductors (and the equipment to manufacture them), countries are now more attentive to the necessity of shifting away from trade models that create dependency on strategic competitors. Instead, the United States has pursued a strategy of “friend-shoring” or “ally-shoring,” shifting production to friendlier nations with shared values that are less likely to wield trade as a weapon.
China’s state-sponsored industrial policies, financing, and tax incentives have led to considerable political leverage worldwide over the raw materials required for semiconductor manufacturing; the country has positioned itself as the dominant supplier of raw material inputs for cutting-edge technology. Supply chains are fragile, especially for an industry characterized by its complexity, high-level expertise, and specialized manufacturing chains that cross international borders several times and depend on inputs from multiple private businesses and trusted suppliers. Self-sufficiency in the semiconductor industry is impractical and highly unlikely, but it is possible and desirable to diminish risks and increase resiliency. U.S. allies in the Western Hemisphere are crucial for this undertaking, and the United States should look at all segments of the value chain for the region, not just at assembly, testing, and packaging (ATP).
Reliance on China as a Strategic Vulnerability
The semiconductor industry is expected to be worth $1 trillion annually by 2030. Increased demand for semiconductors, especially those at the cutting edge of advanced design and capability, will require greater quantities and new varieties of minerals and metals of all types. China’s concentration—bordering on monopoly—of supply and production of critical minerals creates a vulnerability, leaving the industry exposed to supply chain disruptions. The International Energy Agency claims that China maintains 60 percent of the world’s rare earth mining production and approximately 90 percent of processing and refining. The West’s reliance on China’s minerals poses worrisome risks of supply shocks and China exercising its leverage over prices. A secure supply of critical minerals for the semiconductor industry is not only necessary for the private sector but also a concern for national security and defense; since 2020, the United States has recognized it has no domestic production of 14 of the minerals on the critical minerals list and is “completely dependent on imports to supply its demand.”
A detailed understanding of the risks associated with each material involved in semiconductor production is crucial to appreciating and measuring vulnerability. Dependence on China varies considerably for each critical mineral. Moreover, vulnerability should not be calculated merely by possible manipulations of supply but rather by the mineral’s sensitivity to price shifts; the availability of stockpiles, alternative suppliers, and substitute materials; and how quickly alternative production could be brought online.
China’s Actions
China is highly reliant on chip imports from its geopolitical rivals to drive its domestic design and production. Aware of this vulnerability in its tech sector, the PRC has pursued policies to become more self-reliant in the semiconductor industry. In part, this national effort is spurred by the “information innovation” project, launched in 2016 and expanded significantly in 2022, and aims to reduce dependence on technology suppliers from abroad.
In 2014, the PRC released a policy addressing semiconductors as a core technology. The “Guidelines to Promote National Integrated Circuit Industry Development” indicate “the goal of establishing a world-leading semiconductor industry in all areas of the integrated circuit supply chain by 2030.” As a stated objective, the strategy includes meeting 70 percent of the PRC’s semiconductor demand through domestic production by 2025. In response to U.S. efforts to build a multinational coalition to restrict its access to advanced semiconductor manufacturing technology, China increased its imports of lithography machines used to imprint circuits in silicon wafers by 450 percent in December 2023.
Responding to new U.S. export controls on chip manufacturing technology in October 2022 and additional controls in October 2023, the PRC has also increased subsidies to boost the domestic semiconductor industry—totaling an estimated $150 billion in the past decade. In March 2023, Huawei and the Semiconductor Manufacturing International Corporation (SMIC) spearheaded a technology initiative that managed to produce new chips “at the advanced 7-nanometer (nm) technology node” for the Mate60 Pro smartphone; SMIC, a partially state-owned company, is allegedly capable of creating 5 nm chips, though likely not yet at industrial scale. This has raised questions in the U.S. government about the effectiveness of technology export controls since China has nevertheless advanced in the semiconductor industry. For example, Beijing has prioritized “tool and material production lines free of Western inputs” and new approaches to lay out public-private collaboration to enhance innovation, mostly in advanced lithography technology. Yet despite the narrowing gap in technological advancement, Taiwan Semiconductor Manufacturing Company (TSMC) continues to outpace its PRC competitors and rivals, as it has been producing 3 nm chips at industrial scale since 2022.
In addition, again as a direct response to U.S. export controls, the PRC has leveraged its dominance in the early stages of supply chains to restrict exports of gallium, germanium, and graphite, which are essential to high-performance chips. In July 2023, alleging national security concerns, China announced the restrictions, which took the form of licensing requirements that mandate exporters first apply for permission from the Chinese Ministry of Commerce. Rather than outright banning exports, China would therefore be able to selectively increase or decrease the flow of gallium and germanium to world markets. While gallium exports remain at historic lows, the PRC has seemingly not sought to choke off U.S. access to the metal completely, taking a “presumption of approval” approach to licensing exports. However, concerns persist that this could rapidly switch to a “presumption of denial” for gallium and a host of other minerals and technologies.
The United States Responds
In September 2020, the Trump administration recognized in an executive order that “America cannot be dependent on imports from foreign adversaries for the critical minerals that are increasingly necessary to maintain our economic and military strength in the 21st century.” The United States has further recognized the supply chain vulnerabilities and geopolitical risks of its dependence on China for critical minerals, with the Biden administration clamping down on China’s access to advanced chip technology and imposing export restrictions intended to flag its military advancement. Part of this acknowledgment was spearheaded by the CHIPS and Science Act of 2022, signed into law by President Joe Biden that August and designed to boost U.S. investment and development. Two months later, the Department of Commerce’s Bureau of Industry and Security (BIS) imposed trade restrictions to cap China’s access to the most advanced semiconductors by limiting access to design capability and manufacturing, blocking expert assistance, scrutinizing investments, or narrowing licensing. The restrictions were “substantially tightened” in October 2023 with measures such as preventing circumvention efforts through subsidiary companies, adding items to the list of manufacturing equipment for chips, or blacklisting companies “to which the export of certain technology is prohibited.” Most recently, the Department of Commerce revoked the licenses that major U.S. chipmakers Intel and Qualcomm relied upon to export semiconductors to Huawei. Establishing export controls to halt the advance of Chinese technology companies is a tactic intended to work in tandem with the stimulus of domestic manufacturing and nearshoring. Alongside the CHIPS and Science Act, the Inflation Reduction Act of 2022 (IRA) sought to catalyze a reorientation of mineral supply chains away from China and toward the United States and other like-minded countries in the Western Hemisphere through tax credits and subsidies.
Another policy to address the United States’ unsustainable vulnerability is the entry into force of the Minerals Security Partnership, a strategic, U.S.-led alliance that endeavors to diversify the sources of mineral supply. The interconnectedness of semiconductor supply chains has emphasized that the partnership is not comprehensive enough, especially because it does not include “key mineral producers” in the Western Hemisphere such as Argentina and Brazil. Reducing risks in supply chains is challenging, and regulatory and practical obstacles exist among Western allies. For example, just in the United States, the challenge of U.S. higher labor costs vis-à-vis competitors is one of the barriers to relocating industry.

While China’s dominance over critical mineral supply chains has prompted concern from several corners of the U.S. government and private sector, understanding the nature of the threat is not entirely straightforward. Wielding coercive power through export restrictions, even when those exports are going toward an industry as globally important as semiconductors, is no easy task. Export restrictions are a blunt tool, and both governments and companies are more likely to adapt than cave to political pressures, at least if adaptation is possible in the short term.
The case of neon gas is especially instructive in this regard. Used as a buffer in the lasers responsible for the deep- and extreme-ultraviolet lithography responsible for advanced chipmaking, the neon industry was highly concentrated in Russia and Ukraine until recently. Moscow’s full-scale invasion in February 2022 brought neon production in both countries to a crawl, cutting off as much as 40–50 percent of global supply. Neon gas prices subsequently surged, alongside those of other rare gases such as xenon and krypton, which also depended heavily on Ukrainian and Russian sources. Notably, however, this did not bring about a significant market distortion in the semiconductor industry, where major producers were able to employ existing reserves and adapt their lithography processes to use less neon. Just a year later, neon prices had practically returned to their prewar levels.
While the neon shortage was an unintentional consequence of Russia’s revisionist foreign policy, even premeditated attempts to deploy critical minerals as a weapon in geopolitical competition can backfire on their wielders. One CSIS study found that in many cases, China’s attempts at economic coercion have proven counterproductive to Beijing’s strategic aims. In 2010, after a Chinese fishing vessel collided with the Japanese coast guard off the disputed Senkaku Islands, the PRC halted rare earth element (REE) exports to Japan. In response, the Japanese government created a budget of $1.2 billion devoted to mitigating its dependence on Chinese REEs. This fund supported investment in the use of alternative materials, recycling and stockpiling of REEs, and acquiring a stake in REE mines in friendly countries such as Australia.
Past success at thwarting China’s economic coercion does not mean the United States and its allies should be cavalier about the ability to adapt should China’s posture change from its current presumption of approval to a presumption of denial for exporting critical minerals. To the contrary, governments and chip manufacturers need to use a more fine-grained approach when surveying vulnerabilities in their mineral supply chains. Rather than looking at market dominance alone, “disruption potential” serves as a more promising standard. This framework was originally used by the U.S. Geological Survey (USGS) to synthesize the United States’ dependency on imports for a particular mineral and the estimated economic value that mineral provides. Applied to semiconductor manufacturing, inputs with the highest disruption potential are defined as those for which supply is highly concentrated in China and for which there are few to no readily available substitutes or alternative suppliers. The subsequent section evaluates five materials according to this definition of disruption potential: gallium, germanium, fluorine, arsenic, and copper.
This list is illustrative, not comprehensive. It encompasses elements that are common to virtually all semiconductors, such as fluorine and copper, as well as those needed for specialty chips. Gallium, germanium, and arsenic in particular are widespread among the semiconductors serving national defense functions, including missile defense radars, high-frequency radio, and satellite communications. However, a more fulsome accounting is necessary to map the expansive supply chain for semiconductor minerals.

Gallium
Among the most well-known semiconductor minerals, second only to silicon, gallium has been the topic of extensive coverage following China’s announcement of export controls in August 2023. Gallium wafers are used in lieu of silicon for “wide-bandgap” semiconductors, characterized by their resistance to high temperatures and ability to handle higher voltages and frequencies. Wide-bandgap semiconductors are especially sought after for defense applications (their size and efficiency being key to modern radars), telecommunications (especially 5G networks), and electric vehicles. Demand for gallium nitride (GaN) for the most advanced commercially available gallium-based semiconductors is projected to grow approximately 25 percent on average over the next decade.
Gallium supply is overwhelmingly concentrated in China’s hands, with 98 percent of unprocessed gallium and 86 percent of total gallium coming from the PRC in 2022. China’s control over gallium is emblematic of Beijing’s broader critical minerals strategy, which seeks to dominate the midstream processing and refining stages of production. Raw gallium is a byproduct of bauxite processing, the primary ore for producing aluminum, of which China accounts for nearly 60 percent of global supply. Thus, while China has less than half the bauxite reserves of Brazil, and less than one-fifth of those of Australia, its willingness to shoulder the environmental externalities that come with mineral processing has provided an unexpected geopolitical edge.
Disruption Potential: High
Gallium has the highest disruption potential of any semiconductor material. Finding alternative sources is dependent upon access to not only bauxite but also smelters capable of recovering gallium from aluminum production. The United States has just four primary aluminum smelters still in operation, while most smelters in Brazil, a country with sizeable reserves, have shuttered their production, unable to compete with China. Disruption potential is exacerbated by the fact that China has dramatically increased investment into its domestic semiconductor industry to advance GaN-based chip production. If the PRC succeeds in taking the lead in advanced semiconductor production using gallium-based chips, it will be able to restrict U.S. access to cutting-edge technology on two fronts, first in the finished products themselves and second in the raw materials needed to produce them.
Substitutes for gallium in wide-bandgap semiconductors do exist, notably in the form of silicon carbide (SiC). However, these chips have different performance characteristics, and the near ubiquity of GaN semiconductors in certain sectors (especially defense technologies) would pose a major logistical challenge to merely replacing these chips with ones made from another material. China’s export controls have already made an impact in this regard, with the price of gallium metal more than doubling since July 2023.

Germanium
Like gallium, germanium wafers can be used as substitutes for silicon in semiconductor technology. Germanium, too, boasts greater thermal resistance, making germanium-based chips suitable for high-performance electronics. Germanium is viewed as a possible solution to the ever-growing desire for smaller and smaller semiconductors. As a material, it boasts significantly higher electron mobility than silicon, allowing devices to wring greater power out of a chip of the same size. Germanium is already used in minute amounts as part of silicon chips to help improve electron mobility, and as the chip industry searches for new avenues to meet the future requirements for increased processing power, its prominence could rise substantially.
Germanium is produced either as a byproduct of coal or from zinc production, with China dominating the latter as the source of roughly 65 percent of germanium worldwide. At present, the global germanium market is miniscule, with USGS estimates recording just 140 metric tons of primary production in 2021. By comparison, primary production of gallium was more than three times larger during the same period. Of this relatively small total production, much of this is used for applications such as infrared imaging and fiber optics, with only a small percentage going toward semiconductors. The marginal size of the semiconductor-grade germanium market, coupled with China’s considerable zinc-refining industry, means the PRC is likely sitting on an overproduction of germanium, allowing it to keep prices for the mineral artificially low while maintaining comfortable reserves of its own.
Disruption Potential: Moderate to High
Germanium occupies a niche but important role in the modern semiconductor industry. Disruption to supply would create problems for certain specialized chips that could potentially reverberate throughout the wider market. While supply is less concentrated in China than in the case of gallium, with important germanium producers located in Canada, low prices mean smelters have little incentive to increase their production. The lack of transparency into China’s minerals sector has generated consternation over Beijing’s ability to flood the market and outprice competitors, a relatively easy feat given the small market size.
Accordingly, while other producers of germanium are available, most do not currently have the capacity to meet the full market demand and have little incentive to build excess capacity so long as prices remain low. If germanium rises in importance for future advanced chips, the risk posed by China’s position in the market will grow. Furthermore, should China pursue a strategy of bundling export restrictions on semiconductor minerals, such as cutting off both gallium and germanium at once, the combined economic impact may be felt more acutely, as chipmakers will have fewer substitutes to turn toward for high-performance materials.
Fluorine
Fluorine differs from the other materials considered here in that it does not make up a part of the final chip but is instead an essential input into the chip manufacturing process. Hydrogen fluoride (HF), produced through mining fluorite (also known as fluorspar), is essential both in the etching process for semiconductors and for removing impurities from the final chip. HF is especially valuable for its ability to dissolve the silicon wafer that comprises much of the semiconductor with the required precision to complete the electrical interconnections that allow the chip to function.
Fortunately for the United States, the world’s largest fluorspar mine is located in San Luis Potosí, Mexico, creating a strong proximity and trade advantage—including eligibility for IRA tax credits—while ensuring adequate supply to meet semiconductor demand. However, China retains a preeminent position both in mining raw fluorspar and producing HF. It is the source of approximately 63 percent of global fluorspar, with many semiconductor manufacturers throughout East Asia relying on Beijing for a sizeable portion of their supply.
Disruption Potential: Moderate
If HF access were significantly constrained, there are few readily available substitutes that would be economical to use in semiconductor manufacturing, potentially snarling production timelines.
Notably, HF supply chains have already been the subject of geopolitical contention. In 2019, Japan restricted exports of HF to South Korea in retaliation for a Korean court order seeking reparations from Japanese companies found to have engaged in forced labor during World War II. These export controls did not significantly affect the Korean semiconductor industry, which supplanted Japanese HF with domestic production and, more significantly, diversified its import sources. The downsides to both policy measures, however, were a significant uptick in South Korea’s dependence on China for HF. Furthermore, experts raised concerns regarding the relative quality of South Korea’s domestic HF vis-à-vis international suppliers. This episode is instructive for two reasons. First, it highlights the potential resiliency of semiconductor supply chains, at least provided substitute sources exist and can be integrated effectively into fabrication processes. Second, concerns over the quality of South Korean HF underscore the semiconductor industry’s risk aversion to “unvetted” suppliers and preference for dealing with well-established vendors in the chips sector—an important barrier to bringing supply back online quickly in the event of a disruption. Notably, South Korean HF exports remain low outside of China and the United States.
Arsenic
High-purity arsenic metal is primarily used in conjunction with gallium to produce gallium arsenide (GaA) wafers. The technology to produce these wafers can trace its origins to U.S. defense industrial production in the 1970s. Today, GaA wafers have been eclipsed in certain regards by true wide-bandgap semiconductors such as GaN-based ones but nevertheless remain a popular choice for many industries, with demand projected to grow over the coming years. Indeed, the vast majority of U.S. gallium imports come in the form of GaA wafers, whose higher radiation and temperature resistance has seen these chips used for a range of specialized applications from defense to telecommunications. GaA semiconductors are especially useful in LEDs, a sector which is forecast to drive demand through 2030.
Arsenic is also used for “doping” silicon—introducing arsenic atoms to the pure silicon to grant the resulting material unique, electrically conductive properties. While arsenic is a plentiful element, it is typically created as a byproduct of extracting and processing copper and gold. The high toxicity of arsenic to humans means these byproducts have little commercial use without the requisite facilities to safely handle and process arsenic metal, an undertaking in which few countries or companies have the desire to invest. Indeed, major copper and gold producers in the Western Hemisphere such as Chile and Peru have seen widespread outcry over arsenic contamination of water and soil as a consequence of their mining activities. China, however, has successfully built up a robust arsenic industry and in 2022 accounted for 95 percent of all U.S. arsenic metal imports.
Disruption Potential: Moderate
The rising popularity of GaN for defense industrial purposes has limited the national security relevance of GaA. However, any restriction on Chinese arsenic exports could be paired with restrictions on gallium, a move that would have substantial ramifications for U.S. and allied chip supplies. The greatest disruption potential arises from the use of arsenic for doping purposes, since the atomic makeup of arsenic allows it to influence the properties of semiconductors in unique ways, with few available substitutes. Nevertheless, arsenic is plentiful enough as a resource, and Japan in particular possesses substantial technical know-how to produce high-purity arsenic metal, meaning markets could likely react to a loss of Chinese supply in time to avert major market distortions.
Copper
Copper is the industry standard for semiconductor interconnects, the microscopic wires responsible for connecting billions of transistors into the single integrated circuit that forms the backbone of modern computing power. Copper’s conductivity and flexibility make it ideally suited for this role. Indeed, when the first integrated circuit manufactured using copper was unveiled in 1997, it was estimated that this change alone helped increase microprocessor speeds by as much as 15 percent.
Copper’s importance in electrical applications extends well beyond the semiconductor industry. Demand for copper is predicted to skyrocket by 2050, driven most notably by the energy transition. According to some estimates, achieving net-zero emissions targets will require as much new copper as humanity has produced in all recorded history. Of this massive increase in copper demand, semiconductors will consume a fractional amount. Still, given the vital role the metal plays in modern chips, it remains important to account for possible vulnerabilities in the copper supply chain. Here China again dominates the midstream, and while the PRC’s copper reserves pale in comparison to those of mining powerhouses such as Chile and Peru, China’s dominance in refining and processing means these countries often ship their raw copper outputs across the Pacific to be converted into a workable final state. This allows China to punch well above its weight in global copper supply chains and, critically, keeps copper-rich countries from progressing further into value-added industries such as advanced refining.
Disruption Potential: Low
Copper is unlikely to present a bottleneck for semiconductor manufacturing. The sheer size of the copper market means that for China to meaningfully restrict access to copper for semiconductors, it would need to virtually cease all its copper exports. Meanwhile, chip manufacturers would likely be able to adapt swiftly either by procuring copper from alternative refinery countries or exploring substitution with other minerals. Finally, copper’s recyclability means much of a demand shortfall could be compensated by simply reclaiming materials from old chips. Accordingly, any move to restrict copper supply by China would likely deal far more damage to China than it would to U.S. and allied semiconductor production. For now, copper does not feature on the official critical minerals list—the subject of substantial debate—but a move by China to restrict exports would earn copper a spot on the list rather quickly.

The complexity of modern chips and the ever-evolving chemistry of cutting-edge semiconductor manufacturing mean that a truly dizzying array of inputs are employed at every stage of production. The disruption potential analysis is encouraging, however, insofar as it demonstrates the surprising resiliency of many of these mineral supply chains. Apart from gallium and germanium, most mineral supplies have either moderate or low disruption potential. Nevertheless, supply chains for the minerals examined have a strong nexus in the PRC, granting China considerable freedom to manipulate its export controls across a range of material inputs, scaling up or down in accordance with its objectives. Building resiliency into semiconductor supply chains will require tapping into new networks of U.S. allies. In this respect, the Western Hemisphere plays an important but often overlooked role.
The Western Hemisphere’s role in meeting future demand for critical minerals is increasingly evident. From copper and lithium to significant REE deposits, the region will be vital in fueling the energy transition and supplying the inputs for new technologies. Notably, it has the latent potential to supply all five of the mineral inputs discussed above.
The hemisphere’s bauxite reserves are far larger than China’s. Brazil is the world’s fourth-largest producer of bauxite; Jamaica, with an estimated 2 billion metric tons of high-quality bauxite reserves, has seen its industry grow dramatically in recent years, becoming the seventh-largest producer in 2022. The challenge in this case is not one of production but of developing the requisite processing capacity to recover gallium within the Western Hemisphere.

Outside of China, Canada and Mexico are among the largest producers of germanium and fluorspar, respectively. Teck Resources is already engaged in germanium recovery from its smelting operations in British Columbia, while the Las Cuevas mine in Mexico singlehandedly generates 18 percent of the world’s fluorspar production. Firms in both countries benefit from close trade integration with the United States through the United States-Mexico-Canada Agreement (USMCA), making them natural candidates for strengthening semiconductor-critical mineral supply chains.
Peru and Chile together account for over a third of total copper production. These copper deposits are often situated near large quantities of arsenic, with Peru in particular identified by the USGS as the largest producer of arsenic trioxide in the world. While neither country possesses the capability at present to produce high-purity arsenic, developing a safe and robust arsenic industry could not only benefit supply chain security but also alleviate some of the environmental hazards associated with copper production.
Finally, beyond the resources listed above, the hemisphere’s mineral wealth encompasses a host of other semiconductor-critical inputs. For instance, Brazil possesses an estimated 22 percent of graphite reserves and 17 percent of global REE reserves, both of which are key inputs for chipmaking equipment, including high-purity graphite crucibles and specialized lithography lasers. Brazil’s potential in this space remains locked behind a lack of both new mining and investment in advanced refining needed to process minerals to the required degree of purity. As advances in chip design unlock new processes and manufacturing requirements, it is difficult to predict which materials may come into vogue for the next generation of semiconductors. For this reason, ensuring that like-minded countries maintain the expertise and technical capacity to recover the necessary inputs will be critical for the United States to maintain its qualitative edge in advanced semiconductor design and construction.
Across the hemisphere, the question of semiconductor mineral supplies is one of processing and refining. Gallium, germanium, and arsenic are all generated as byproducts from processing other minerals, while the relatively small quantities used to manufacture chips means it does not require substantial production in absolute terms to make a major impact on the ecosystem. Bolstering refinery capacity may also allow resource-rich countries to climb higher on the value chain by exporting high-purity minerals as opposed to raw outputs destined for Chinese refineries.
Greater supply chain resiliency implies and presupposes two converging interests: an intention to reduce risks for the incoming company and a positive outcome or gain for the receiving country. These two conditions do not necessarily always meet. Given the complexity of social and political dynamics in the region, countries in the Western Hemisphere epitomize this challenge. Although the hemisphere has the potential to serve as an alternative to China and reduce certain risks in semiconductor supply chains, especially in related mining and processing, stakeholders should anticipate some resistance and backlash from local communities and political authorities. In short, increasing mineral production and processing will be no easy feat for a region looking to shed a legacy of commodity dependence.
The region certainly embodies an opportunity to mitigate risk—but the benefits countries can obtain from greater supply chain security need to be communicated better. Other benefits include opportunities for workforce training and development, foreign direct investment, addressing inequality in certain areas, increasing tax revenue, reducing irregular migration, and growing local economies. An expanded role for the Western Hemisphere cannot be separated from an effective communication strategy that constantly promotes a dialogue between businesses and impacted communities.
Various political movements in the Western Hemisphere have historically identified themselves as obstacles to “extractivism,” representing strong political backlash. These cultural and ideological barriers persist within the hemisphere’s political environment and should be taken into consideration. The resistance to exporting raw materials in many regional countries has, on more than one occasion, underpinned the nationalization of strategic sectors of the economy because “higher prices for commodities favor resource nationalism.”
In addition to these ideological and political obstacles, the mining sector and the redrawing of supply chains have generated concern about local environmental impacts. These industries are not only highly polluting, they also require large amounts of other resources such as water and electricity. In many instances, considerable improvements have been implemented in recent years to address these ecological considerations and Indigenous people’s rights. However, countries with low environmental standards might have a comparative advantage in the short term: the inability of the Western Hemisphere to shoulder the environmental externalities assists not only China but any other countries willing to accept the pollution and associated costs with mineral processing.
Although the Western Hemisphere may not be ready yet to alleviate existing chokepoints, it can help address the current challenge. Due to its rich mineral reserves and highly skilled workforce, the region is of utmost importance for any successful de-risking strategy.
Policy Recommendations
Rerouting mineral supply chains for semiconductors will not happen overnight. Fortunately, China’s announcement of export restrictions has provided an early warning of the need to move quickly—but without significantly curtailing access to the necessary mineral inputs. A future U.S. strategy should emphasize multilateral coordination to friend-shore processing capacity, substitute critical mineral suppliers, stockpile for both defense and economic security needs, and survey for new and untapped sources of semiconductor-critical minerals.
China’s privileged position in the semiconductor minerals supply chain is due not to its innate resource wealth but to its dominance in the realm of smelting, refining, and processing. Bringing processing capabilities back to the Western Hemisphere therefore promises not only to help counteract China’s influence over semiconductor supply chains but also to allow Latin American countries to advance in the value-added manufacturing space. Whereas countries such as Chile, Peru, and Brazil currently export much of their raw minerals to China for further processing, building up the domestic refinery capabilities in these countries would allow them to export finished materials. In areas such as high-purity arsenic production, it could even allow countries to break into otherwise-untapped new sectors.
Encouraging training and knowledge transfer on high-purity refining for semiconductor manufacturing could be one underappreciated element of the U.S. Department of State’s International Technology Security and Innovation (ITSI) Fund. This agreement has focused primarily on workforce development to make the most of limited available funds. Improving knowledge of mineral processing could therefore be a natural extension of ongoing projects that would find purchase in ISTI partner countries such as the Dominican Republic, which already has a robust mining industry. Upscaling mineral processing also goes hand-in-hand with incentives laid out by the IRA, which prioritizes critical minerals originating in countries with free trade agreements (FTAs) with the United States, a category that includes a dozen Western Hemisphere nations. Extending IRA tax credits to include microelectronics produced using minerals from FTA countries could send a powerful signal to further encourage supply chain reorientation for these critical technologies.
The United States should prioritize existing smelting and refining infrastructure, both domestically and in partner countries. It is far easier to upgrade and expand infrastructure than to build new facilities from scratch. Nevertheless, as recently as January 2024 one of the five remaining aluminum smelters in the United States shuttered its Missouri facility.
There are two avenues for substituting Chinese-sourced critical minerals. First, the United States and chip manufacturers can look into alternative materials that can fulfill similar requirements in semiconductor design but are not so heavily controlled by the PRC. Encouraging research and development into potential alternatives could present another impactful deployment of ITSI funds with a salutary effect on supply chain security.
Second, the United States should seek to identify and connect alternative suppliers with chipmakers who can substitute in for Chinese sources. This latter dimension is perhaps even more critical, as the chip industry’s winner-take-all environment means manufacturers tend to build relationships with just a handful of highly specialized vendors and are strongly risk-averse to new supply sources. According to one analysis, just five companies account for 99 percent of the profits from semiconductor manufacturing equipment sales. The United States can spearhead an international effort to identify, vet, and connect alternative suppliers to semiconductor manufacturers in an effort to subvert this tendency toward market concentration. Within the Western Hemisphere, the U.S. Department of Commerce, in conjunction with embassies throughout the region, can lead delegations from the semiconductor industry to materials suppliers. Bringing vendors and manufacturers closer together can help reassure the latter of the quality and benefits to be gained from diversifying their supply chains.
The National Defense Stockpile (NDS) previously served as a contingency against potential disruptions to the flow of minerals needed for U.S. defense production. However, following the end of the Cold War, this stockpile has withered to a shadow of its former self. In 1989, the material in the NDS was worth an estimated $9.6 billion (more than $24 billion once adjusted for inflation). Today, it is just under $1 billion. Furthermore, semiconductor-critical minerals such as gallium are not included in the list of materials under management. Scaling up the NDS will be critical for U.S. security as a whole and especially for improving the resiliency of the semiconductor industry.
In addition to building up national reserves such as the NDS, the United States should encourage semiconductor companies to maintain their own stockpiles. This would ease the reverberations of unexpected disruptions in the materials market and give breathing space for supply chains to reorient. The United States can also provide financial incentives for companies to increase their own stockpiles, such as by offering tax credits on the value of excess minerals purchased but not consumed in a given production year. There may even be potential for the U.S. government to offer to buy excess minerals supply from semiconductor manufacturers to contribute to a revitalized National Defense Stockpile.
Identifying new sources of minerals for semiconductors demands continued focus. In the Western Hemisphere, countries are investing growing sums to better understand the potential resources beneath their feet, a push that has led to impressive discoveries in both North and South America. This includes one of the world’s largest lithium deposits in the world in the U.S. Pacific Northwest, new REE finds across Brazil, and a rare nickel find in Canada. Nevertheless, gaps persist, especially in South America, where many surveys are either outdated or incomprehensive. The more countries conduct geological surveys, the more likely they are to discover further important reserves. Identifying these and bringing them online will be an important complement to increased processing capacity and help weaken China’s predominance in global minerals markets.
Ryan C. Berg is director of the Americas Program and head of the Future of Venezuela Initiative at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Henry Ziemer is a research associate with the CSIS Americas Program. Emiliano Polo Anaya is a former intern with the CSIS Americas Program.
The authors would like to thank Sujai Shivakumar and Hideki Tomoshige for their thoughtful comments and review. The authors also thank the CSIS publications team—especially Katherine Stark, Phillip Meylan, Kelsey Hartman, and Julia Huh—for editing, design, and production. All opinions and errors should be understood to be solely those of the authors.
This brief is made possible through the generous support of Scotiabank.
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