Introduction
Foundational semiconductor chips, produced primarily using mature-node technologies, form the backbone of modern infrastructure across consumer, industrial, and defense applications. Despite comprising over 95% of the global semiconductor market and enabling 99.5% of the U.S. Department of Defense’s mission-critical capabilities, these chips have historically been overlooked in policy and investment debates, which tend to prioritize advanced-node technologies. However, the COVID-19 pandemic highlighted the vulnerabilities of foundational chip supply chains, and the PRC’s rapid expansion—driven by state subsidies and industrial planning—now poses strategic risks. With PRC-based firms projected to account for nearly half of global mature-node capacity within the next decade, this growing dominance threatens the resilience and security of U.S., Taiwanese, and allied supply chains.
Part I Lack of Global Action, the PRC’s National-Scale “Pseudo-IDM,” and the New Frontier of Foundational Chips
The first part examines the strategic significance of foundational chips, the evolution of U.S. industrial policy to support domestic semiconductor capacity, and the geopolitical implications of the PRC’s rising dominance in this space. By analyzing these developments through the combined lens of economics, innovation, and security, we seek to clarify the stakes involved and the structural vulnerabilities facing democratic economies.
Part II Case Studies – How the PRC’s State-Driven Model Undermines U.S. and Allies Industries
The second part presents three case studies that illustrate how the PRC’s state-led industrial strategy is reshaping the global competitive landscape in foundational chips:
- Wafer Manufacturing: Only Chinese Firms Can Profit in China
- Silicon Wafer: State-Led Long-Term Investment Despite Losses
- Compound Semiconductors: How China’s Strategy Is Squeezing Out a U.S. Company
Part III Policy Recommendations
Our policy recommendations are centered around proposing a strategic toolkit to counter the PRC’s Pseudo-IDM system.
This frame of two main pillars:
- Strengthening export controls to disrupt the “Red Supply Chain” and reduce the operational efficiency of the PRC’s Pseudo-IDM system.
We identify two key approaches to achieve this:
- First, designating photoresists and laser light sources as chokepoint items for export control. These two categories remain essential inputs that the PRC cannot yet domestically produce at the required quality, and are therefore critical leverage points to prevent China from manufacturing mature-node semiconductors at scale.
- Second, systematically targeting PRC national champions by adding them to the U.S. Entity List. These firms, hand-picked and promoted by the Chinese government, serve as pillars of the Pseudo-IDM model. Whenever a new champion emerges, it should be precisely sanctioned to undermine internal market efficiency and neutralize Beijing’s industrial intervention.
2. Implementing a market denial strategy.
This begins with transparency measures that identify and trace the presence of PRC-origin legacy chips in global supply chains, followed by efforts to gradually extract and remove these “Red Chips” from end products in international markets.
Key transparency mechanisms include a HTS-based import disclosure requirement and mandatory SEC filings.
Market denial, in turn, should begin with core sectors, including:
- Defense and critical infrastructure
- Network-connected chips, due to cybersecurity risks
- PRC Military-Civil Fusion champions at the terminal brand level
Together, these actions aim to reduce global reliance on the PRC’s Pseudo-IDM system, starting with the most sensitive and security-critical segments of the supply chain.
Given the accelerating risks and narrowing window of strategic opportunity, urgent policy action is needed, urgent policy action is needed. The PRC’s Pseudo-IDM model, built through non-market practices and industrial coercion, poses a direct existential threat to semiconductor firms in democratic countries. The next four years will be decisive. Without immediate countermeasures, we risk witnessing the financial collapse and disappearance of key American and Taiwanese semiconductor players—undermining the very foundation of free-market innovation. The window to prevent the PRC from using its growing supply chain leverage to dominate next-generation technologies such as AI is rapidly closing.
