Wouldn't it be better to maintain dependence on Chinese capacity than to force them to build their own capacity? Let's look at advanced chips, for example, the US is doing the same thing and China is now building its own capacity.
In the long term, that may be true, but the situation is a bit more nuanced than that. First off, it's a matter of economics. Even though the rare earth restrictions has been big news, the actual monetary value of what the US buys is very little: just $150 million a year. That means that it would be very easy to stockpile large quantities if they were given unlimited access. Another big consideration is that these critical materials are used in both military and civilian applications. Some of these materials are dual use, but quite a bit of it only has a military application. China is thus able to ban these military materials altogether while still making civilian materials available.
And then there's the matter of timing. Right now, there's an arms race going on between China and the US but the Americans haven't fully realized that they're in a race yet. Because of that, American weapons stocks are probably at their lowest point in decades, having expended much of it on Ukraine, the Red Sea operations, and on Israel. To rebuild these stocks, they need more production and more production means more critical materials. With the materials ban in place, the US has very little reserves and that's going to be a hard limit on what they can make. Currently, the biggest need is for munitions, but it also impacts all sorts of military vehicles and other equipment as well.
Next is the question of the West building its own critial material capacity. While most of these materials are available all over the place, it's not easy or quick to implement any of the stages of making production-ready components: mining, refining, and processing. Theoretically, some amount of materials can be made ready within 5 years, but because of the lack of financial incentives and technical expertise, it's more realistic that the wait will be 10 years at the earliest for most materials. Some key materials might be 20+ years away. This next decade is where the Chinese MIC has the chance of surpassing the Americans. If the American MIC is crippled during this period, then it might give China an advantage that might be unsurmountable for decades.