Lu Feng: "Industrial Socialism vs. Financial Capitalism" Part One

Most Gym readers should know by now that the deindustrialization of the Collective West is due to the morphing of Industrial Capitalism to Financial Capitalism as Capitalism sought to increase its profits by moving its industrial plant to lower cost locations which resulted in the replacement of most industrial manufacturing jobs with service industry jobs, all of which was greatly facilitated by financial interests who sought to increase the level of rents they obtained. The major geopolitical contest as with the Cold War continues to be between two different modes of political-economy which is announced in the title: China’s Industrial Socialism versus the Collective West’s—primarily the Outlaw US Empire—Financial Capitalism. I’ve not included Russia in this, although its system is rather similar to China’s, plus the author of this long translated article tells everything from China’s perspective, and the saying in the title is his. His image and short bio:

Dr. Feng Lu is now an emeritus professor of economics at the National School of Development (NSD) at Peking University, China and once served as a former Deputy Dean of the School. He has studied extensively on the issues regarding China's open macro-economy, including exchange rate, external imbalance, capital return, food security and agricultural development etc. He published more than 40 academic papers in both Chinese and English journals, 6 academic books and numerous magazine articles in these areas.

Dr. Lu serves as an advisor or member of expert groups for various government agencies in China such as Ministry of Finance, Ministry of Human Resources and Social Security, Ministry of Agriculture etc. Dr. Lu was the founding editor of “China Economic Journal”, the official English journal for China Center for Economic Research at Peking University. He is now a member of Advisory Panel of ASEAN+3 Macro-economy Research Office (AMRO). Once being selected as one of “the Best Annual Professor in Peking University Campus” by students, Dr. Lu teaches the courses of Macroeconomics, Principles of Economics, and Managerial Economics at Peking University in recent years.

A short bibliography follows at the above link. He’s published many papers in English and has been interviewed by Guancha and its Observer companion several times over the years, a few of which you’ll see referred to in the text. The title of the article translates as if the contest is a done deal: “Lu Feng: The United States launched a showdown, what did China rely on to win the challenge of the century?” It ought to read, … What will China do… The article is very long and must be divided into two parts. I found the historical POV very refreshing and important since most of us in the West have been unexposed to other views for most of our lives. The insight into industrial economy is also fascinating as it details both the West and China. Here’s a key excerpt before we get into the text:

Once the concept of industrial socialism is placed in the context of the transformation of industrial capitalism into financial capitalism and the suppression of China's rise by US hegemony, its significance of the times is immediately revealed, a bit like suddenly defining China's position in the "blank" of world historical evolution.

The Observer begins with a long prologue with an odd intro sentence I tried to make sense of before the text of the interview begins. Bolded italics are my emphasis:

China's economy in 2025 has started with a post-pandemic [growth rate similar to that] before the start to the pandemic: GDP growth of 5.4% in the first quarter, 0.1 percentage points higher than in the first quarter of 2024, and at the same time, China's technological innovation has stirred up the global technology wave, pushing the balance of global power competition in China's favor.

In the face of Trump's crazy moves since taking office, especially the global stick of "reciprocal tariffs", technology embargoes, and more geopolitical moths that may emerge in the future, is China's economy, especially China's industry, ready? In the final year of the 14th Five-Year Plan, in the accelerated stage of economic transformation, how well has China's economic development, especially industrial development, been cultivated?

The Observer recently visited Professor Lu Feng of the School of Government of Peking University again to find answers to these questions. Starting from 2023, Professor Lu Feng, who has been focusing on the research of China's industrial and technological innovation mechanism for many years, will exclusively share his profound and incisive views on China's economy, China's industrial development and China-US competition with readers and friends of Observer.com every year.

These views not only come from profound theoretical deduction, but also from the visits and research of first-line industrial enterprises. Although it is not gentle and drizzly at times, it hits the nail on the head and is related to the trend and future of the country's economy. The following is a transcript of the conversation.

The discussion lasted about three hours and was about 28,000 words. For the convenience of readers, this article is divided into four parts:

1. What are the challenges facing China's economy?

2. Why can't Trump do the reshoring of manufacturing?

3. Why do you emphasize that China's industry cannot tie its own hands and feet?

4. Who will win the showdown between industrial socialism and financial capitalism?

1. What are the challenges facing China's economy?

1. The challenge we face: A new round of shocks may be coming

Observer.com: Let's start with the external environment of China's economic development, which mainly involves China-US relations. As soon as Trump took office, he pursued a dizzying variety of policies at home and abroad, especially the so-called "reciprocal tariffs" implemented around the world, which finally came to an end due to China's countermeasures and the United States' attempt to ban China's advanced computing chips globally. There is a lot of information on various interpretations at the moment, how do you judge it?

Lu Feng: Although I knew that Trump was not playing according to the rules, there were still surprises in what he did after taking office, such as making Canada the 51st state of the United States, annexing Greenland in Denmark, and regaining control of the Panama Canal. Then, while everyone expected Trump to wield the tariff stick again, when he put it into effect, the scope and rate of the U.S. government's import tariffs were so large that the whole world, even America's closest allies, was shocked.

Regardless of how different Mr. Trump's approach and style may be, his strategic goal is essentially the same as that of previous U.S. administrations: to preserve American hegemony. It's just that at a time when America's power is declining and in crisis, Trump's task is characterized by rebuilding American hegemony. How to reshape? My observation is that he first wants to smash the existing world economic system (which was also shaped by the United States) and pass on the cost of economic adjustment to all other countries, including allies; and then through high tariffs and other means to reverse the trend of deindustrialization in the United States, the so-called "reshoring of manufacturing"; At the same time, it is concentrating its efforts on suppressing the greatest "threat" to US hegemony – in the eyes of some US political elites, this "threat" is none other than China.

Mearsheimer, an American scholar of international relations, once said that there are only three places in the world that the United States is willing to shed blood for: Europe, the Middle East, and East Asia, because these are the three key regions that have a bearing on US hegemony. When Trump first took office, he did not immediately take action against China, as many people had speculated, but first proposed his solution to the Gaza problem, especially the direct holding of US-Russian talks, hoping to end the Russia-Ukraine conflict bypassing Europe.

Of course, what Trump thinks is one thing, and whether he can do it is another. But from a structural point of view, if the Middle East and the Russia-Ukraine conflict are resolved, then the United States can free up its hands to deal with the remaining one - East Asia, that is, to concentrate on dealing with China.

As soon as the Trump administration took office, in addition to increasing tariffs on Chinese goods and announcing a new round of export control measures on semiconductors to China, it also imposed fees and restrictions on international maritime transportation services related to Chinese ship operators and Chinese-built ships. Therefore, it seems to me that Trump's main direction of attack is China. To put it simply, the United States has opened up its posture to become an enemy of China, and this is the international background we are facing, and it is not diverted by our wishes.

Second, why can't Trump do the reshoring of manufacturing?

2.1 Manufacturing reshoring Trump can't do it: a generation can't make an industrial jump

Observer.com: Trump's core goal in office is to make America great again, and to use the tariff stick to promote the reshoring of manufacturing. Do you think he will be able to reach his goal?

Lu Feng: This question is related to the basic motivation of the United States to suppress China. The Trump administration (including the previous Biden administration) believes that the United States cannot reindustrialize without containing China's development. But the historical fact is that the industrial decline of the United States is recognized by academic circles as having begun in the early 70s of the 20th century, and it has been more than 50 years now. This process is driven by the United States itself, and no one else is to blame. Let's take a brief look back at history.

There are two stages in the process of becoming a world hegemon in the United States. The first stage was from 1870 to before World War I, when the United States rapidly became an industrialized country in the last three or four decades, and it was very large (if you only use the analogy of industrialization, this stage is equivalent to 40 years after China's reform and opening up). By the turn of the century, the United States was the world's largest industrial producer (and largest agricultural producer), surpassing the leader Britain (and subsequently Germany).

Driven by industrial power and interests, the United States launched a war against Spain in 1898 and occupied Spanish colonies such as Cuba, the Philippines, Puerto Rico, and Guam. The Spanish-American War marked the emergence of the United States on the global political stage as one of the world's great powers (imperialist powers). The First World War ended in 1918, and the United States only entered the war in 1917, although it was very late, but as soon as it entered the war, it was decided that the Entente led by Britain and France would defeat the Central Powers led by Germany and Austria, because the United States was too big.

Before World War I, Britain had been the hegemon of the whole world, as well as the financial hegemon. However, after the First World War, Britain changed from a creditor country to a debtor country, which shook the position of the pound, because Britain, which was already backward in industry, had to borrow money from the United States to buy arms. However, after the end of World War I, the European powers at that time did not recognize the status of the United States and considered it a hillbilly. The United States, which "can't play" the European powers in international politics, has retreated to isolationism.

The second stage was from World War II to the beginning of the Cold War, when the United States became the world hegemon. After the Japanese attack on Pearl Harbor, the United States declared war on Germany and Japan, and that day British wartime Prime Minister Winston Churchill said, "I can sleep well tonight." "Because for him, the entry of the United States into the war is a matter of victory. After entering the war, the United States mobilized its huge industrial system to switch to munitions, known as the "arsenal of democracy", and enabled the allies to crush the German-Italian-Japanese Axis with its astonishing industrial capacity. Therefore, industrial strength determines the outcome of modern warfare. Today, the US political circles are revisiting the past, hoping to restore the status of one dominant family.

An important historical fact to consider here is that until the outbreak of World War II, the United States lagged behind Europe in science, although it had long since had the largest industry in the world and was highly capable of engineering.

One of Hitler's "gifts" to the United States when he came to power was to force a group of European scientists into exile in the United States, and the war also caused many new European inventions to flow into the United States. For example, theoretical research on atomic energy was done in Europe, and the first experiment to prove nuclear fission was carried out in the United States by exiled European scientists, and finally the United States built the atomic bomb through the Manhattan Project. The aviation jet engine was first invented by Germany (Germany was far ahead in aerodynamic research) and the United Kingdom, during the war, Britain transferred jet engine technology to the United States in order to win the support of the United States, but the United States took a lot of effort to master, and it was not until the post-war that it was applied to aircraft. Radar technology was also transferred from the United Kingdom to the United States, after which the United States established a radiation laboratory at the Massachusetts Institute of Technology (MIT) to study the application of radar technology. The ballistic missiles developed by the United States after the war were designed by German scientists who designed the V1 and V2 rockets for Nazi Germany.

This fact reflects a historically proven sequence of development, and only by becoming an industrial power can it become a scientific power. This order has never been reversed in history, because only industrialization will create a demand for science and technology and the ability to invest.

Another historical fact that can attest to this sequence of development is that every wave of industrialization in the world begins with the production of products that already exist, and not with the production of new products that did not exist before.

The most iconic product of the British Industrial Revolution is cotton textiles, but cotton textiles were not invented by the British and have existed for a long time, and the innovation of the British is to produce cotton textiles with machines. In fact, the British Industrial Revolution began with the production of traditional products with machines. When the United States experienced large-scale industrialization in the late 19th century, major products and technologies such as steel, chemicals, and automobiles produced in the United States were invented by Europeans, and American innovation was the use of mass production methods, including the Ford assembly line. When Japanese industry began to hit the world market in the 70s and 80s of the 20th century, all the products it produced came from European and American inventions (although improved), and Japan's competitive advantage also came mainly from innovation in production methods (i.e., process or process technology), such as the Toyota production method.

This is not to say that completely new products will not appear, but that the invention of completely new products will not appear long after the industrialization of a country has begun. For example, the United States used the technological capabilities accumulated during World War II to develop new technology industries such as computers, semiconductors, and software in the 50s of the 20th century, and then Silicon Valley was born. It was the golden age of the American economy, with the advantages of traditional industry coexisting with the advantages of high-tech industry, and experienced a high rate of economic growth from after World War II until the early 60s.

Why does a country only produce completely new products long after industrialization? The reason behind this phenomenon is actually very profound: any major technological innovation that produces a completely new product, no matter what field it appears, needs the support of the entire industrial system. Thus, the precondition for major technological innovation is the formation of an industrial system, including the corresponding educational, financial and other supporting systems, and it takes time for these conditions to mature. Of course, initiating industrialization itself is not an easy task, and it often requires backward countries to make innovations in production methods, organizational forms, and systems in order to compete with leading countries in existing product markets.

2.2 Manufacturing reshoring Trump can't do it: The root cause of the decline of American industry is the pursuit of world hegemony

Observer.com: It is very interesting to find that from an industrialized power to a scientific and technological power, and then to de-industrialization, is this the inevitable law of the development of a large country? Why is America's once-powerful manufacturing sector in decline?

Lu Feng: To put it bluntly, the fundamental reason for the decline of American industry is the pursuit of world hegemony. Of course, this is a "long" process, and we can only briefly review it.

After the end of World War II, the United States set out to establish a liberal international economic order with the aim of ensuring that other countries would open their markets to the United States. After the start of the Cold War with the Soviet Union, this order or system had a strong geopolitical element, thus forming two pillars.

The first pillar was to help revive the economies of the Allies through the Marshall Plan, while also reversing the early postwar plans to turn West Germany and Japan into an agrarian nation. Although the Marshall Plan was intended to deal with America's postwar surplus of supplies or production capacity, all of America's allies at the time were in debt to the United States, and the only way to repay the debt was for those countries to be able to export to the United States and earn dollars to pay off the debt. As a result, the United States reversed its pre-World War II policy of high tariffs and protectionism and opened its domestic market to its allies. Of course, these allies must also open their markets to the United States. The second pillar was to provide security guarantees to the allies against the "threat" from the Soviet camp.

At this point, we must explain the US "grand strategy" thinking. The pursuit and maintenance of hegemony is the basic goal and logic of the US grand strategy after World War II, and all the debates among the US elite are not about this goal per se, but about which hegemonic strategy the United States should pursue. Among the different "versions" of the strategy, the "main theme" has always been the "primacy", which has the basic position that the United States can guarantee peace only if it maintains its overwhelming superiority over all other countries, because peace is the result of an imbalance of power. 【1】

The supremacy of the United States consists of four elements: 1) overwhelming military superiority, deep involvement in world affairs, ensuring that the oceanic regions on both flanks of the United States remain internally divided, and preventing the emergence of regional powers in Europe and Asia or Eurasia. 2) Provide security guarantees to allies and dissuade them from pursuing the path of independent development, in order to eliminate their incentives to rearm and re-emerge as challengers or competitors. 3) Integrate the world with the American system, continuously expand the scope of the liberal economic order, integrate more countries according to the conditions of the United States, and create optimal conditions for the penetration of American capital. 4) Strict prevention of the proliferation of nuclear weapons in order to guarantee the freedom of action of the United States (because the emergence of nuclear weapons has changed the nature of warfare). 【2】

In the liberal international economic order dominated by the United States, because the allies are dependent on both the American market and the United States for security, the United States has obtained "privileges": First, once those allies join the system, they cannot develop independently, which enables the United States to subdue countries such as West Germany and Japan, which have waged wars. Second, those allies have had to absorb the dollar, so that the United States, by virtue of its dollar hegemony, can pass on the costs and costs of any domestic economic adjustment to the allies.

By the 60s of the last century, the industry of Europe and Japan was rebuilt and began to compete with American industry. At that time, the United States made a big "stupid move", that is, to get involved in and expand the Vietnam War. This unpopular war greatly depleted the national strength of the United States, not only led to rising unemployment and inflation at home, but also fattened Japan through massive material purchases. In the end, the war was not won.

Beginning in 1968 (during the Vietnam War), the United States ran a trade deficit not seen since industrialization in the 19th century. In order to get rid of the dilemma of widening balance of payments deficits, plummeting dollars, and gold outflows, the Nixon administration announced in August 1971 that it would abandon the gold standard, stop converting dollars into gold, and impose a 10% import surcharge, which led to the collapse of the Bretton Woods system. The unilateral actions of the United States caused huge losses to the allies, which is known in history as the "Nixon Shock".

At a meeting, in front of the stunned Allied Treasury Ministers, then-US Treasury Secretary Connally uttered the "famous phrase": "The dollar is our currency, your problem." Looking back at history, the Nixon shock that smashed the Bretton Woods system started the process of financializing the American economy. In order to maintain its overwhelming global presence, the United States is increasingly spending more on military expenditures than the American economy can afford, and increasingly dependent on debt growth supported by the hegemony of the dollar.

By the 70s of the 20th century, Japan gradually gained an advantage over American companies in industrial fields such as steel, shipbuilding, machine tools, automobiles, semiconductors (memory chips), and consumer electronics. In the face of unfavorable competition, the U.S. industry experienced a wave of mergers and acquisitions and factory closures in the so-called "Rust Belt" starting in the late '70s and continuing throughout the '80s.

However, at that time, the new high-tech industries represented by Silicon Valley and the Boston area in the United States were also in a stage of vigorous development, and there was hope that new industries would replace existing industries. As a result, the appellations "sunset industry" and "sunrise industry" appeared in the American media, and these two concepts evolved into the concepts of the "old economy" and the "new economy" by the 90s.

There is no shortage of people in the United States, and I quote a best-selling American book published in 1982:

"Despite the controversy, the substance of the U.S. economy can be traced in the direction that capital, in the form of financial resources and physical plant and equipment, has shifted from productive investment in our nation's basic industries to unproductive speculation, mergers and acquisitions, and overseas investment. What is left behind are closed factories, laid off workers, and many new ghost towns.”

The authors also call for:

"If the U.S. economy is to maintain a certain level of economic dynamism, especially leadership, for the remaining 20 years of this century, it will have to undergo a fundamental change. The goal must be the reindustrialization of the United States. In the face of the rapid decline in competitiveness over the past 15 years, most vividly expressed in the wave of factory closures that swept the country this year, a conscious effort to rebuild America's production capacity is the only real option. ”【3】

However, the political elite of the United States and the capitalist elite did not make such a choice, the former wants to maintain the hegemony of the United States in the world, while the latter wants to make more and faster money with the help of the hegemony of the dollar. Recently, Observer.com published an article by former Greek Finance Minister Yannis Varoufakis that recalls that incident very poignantly.

He wrote the central question facing the Nixon team was: "How can the United States maintain its hegemony when it is reduced to a deficit country?" To address this paradox, instead of adopting austerity policies that could trigger a recession and weaken the U.S. military, the Nixon team widened the fiscal deficit and trade deficit and made other countries pay for the U.S. deficit by reconstructing the cyclical system of global capital flows. This will require breaking the stranglehold on Wall Street since the New Deal, the wartime economy, and the Bretton Woods system, and loosening financial controls to avoid a repeat of the Great Depression. [Essentially what Hudson described in his Super Imperialism.]

The Carter administration continued this policy, while the more neoliberal Reagan administration deregulated finance across the board. As a result, American financial capitalists have found that they can use hundreds of billions of foreign capital to play a financial game, and the more the new system of supporting the export needs of Eurasian countries with the US deficit develops, the larger the scale of trade required to maintain this deliberately unbalanced global system. This is the impetus for American-led globalization. 【4】

Financial liberalization under the hegemony of the dollar has made the United States the only country in the world that does not have to make a difficult choice between "guns and butter", but it has also made the influence of finance, including the stock market, on the economy more and more, and the operation of American enterprises more and more subservient to the rules of the financial market, and the financial logic must disintegrate the industry that requires long-term investment. Thus, the financialization of the economy became a decisive force in the decline of American industry.

One only needs to look at the trajectory of the U.S. trade deficit to understand: the U.S. trade deficit was initially tens of billions (all denominated in dollars here), and then rapidly expanded to 100 billion after entering the 80s, and the trade deficit of U.S. manufactured goods also appeared during this period; Since then, the trade deficit has continued to widen, exceeding the trillion level by 2021.

Neoliberalism has given rise to the ideology of "maximizing shareholder value" in terms of corporate governance. As a result, the tide of economic financialization reversed the trend of separation of management and ownership in American industry since the end of the 19th century, with capital owners (shareholders) seizing corporate control from "insiders" who were originally independent of management rights (including leveraged buyouts, equity incentive plans, etc.), and Wall Street was busy with corporate mergers and spin-offs, and laying off employees in restructured companies to improve profits and stock prices.

At the same time, the 1980s saw the re-expansion of the United States in armaments (the Star Wars program) lead to the development of new high-tech industries, and the dollar became more and more powerful after decoupling from gold. After the collapse of the Soviet Union, the neoliberal international economic order expanded to the whole world, entering a period of globalization dominated by the unipolar hegemony of the United States. In an economic order that requires all countries to open their markets to American capital, American companies, in the form of multinational corporations, are increasingly outsourcing manufacturing operations to places with low production costs as long as they can increase profits. At that time, the United States had nothing to fear, anyway, it had the world's strongest military, the most advanced high technology and the omnipotent dollar, and it was good for the world to work for itself.

The 2008 global financial crisis, triggered by the subprime mortgage crisis in the United States, exposed the fundamental flaws of this model. Americans themselves have discovered the fragility of the American economy, including the polarization of rich and poor in society caused by financialization and deindustrialization. It is in this context that Trumpism emerged and gained a social basis, and its appeal lies in acknowledging that the fundamental problem of the US economy is industrial decline, but its fallacy is to blame others for the cause of its decline: all other countries in the world – including China and America's allies – have taken advantage of the United States (quite the opposite).

The truth of history is that the decline of American industry was of its own infliction. It is important to note that if the diagnosis of the problem from the hegemonic position is wrong, then the prescription is unlikely to be effective either. Today, Trump wields the tariff stick from the standpoint of maintaining American hegemony, but if this alone can revive American industry, the rooster will surely lay eggs.

2.3 The reshoring of manufacturing to Trump cannot be done, and China's industrialization did not develop through "industrial transfer".

Observer.com: Trump's plan is to raise tariffs to bring manufacturing back to the United States, and do you think this plan is unlikely to succeed?

Lu Feng: First of all, I think that the so-called "reshoring of manufacturing" is a loose concept, just like the "industrial transfer" that is popular in China. For many years, there has been a popular saying in Chinese society that China's astonishing development after the reform and opening up is due to the "international industrial transfer", which is wrong. Wrong concepts lead to wrong thoughts.

For example, the 2018-2019 U.S. trade war against China caused panic among the "elites" of Chinese society, and some economists discussed the "terrorist" prospect of the U.S. forcing industrial chains out of China. Only a few years later, it turned out that this fear was only the psychological feeling of these "elites": China is the main body of the world's industrial chain, and the trade war has made China's industrial chain more complete and powerful.

Industry or industry is not a movable object (such as plant, equipment, and production lines), but is essentially an organizational and social capacity, and capacity determines the effectiveness of physical capital. The key issue is that organizational capabilities are always endogenous and non-transferable. Therefore, any industry with a national character is developed, not "transferred".

Yes, investment from enterprises in developed countries can bring some "knowledge", but whether or not they can learn something from foreign capital depends entirely on whether there are national enterprises in the local countries that independently participate in competition and cooperation, that is, whether they have the ability to have a foundation. Otherwise, the establishment of local factories by multinational companies is nothing more than an "enclave", which has little to do with the local economic development except to provide some employment and tax revenue.

The late famous development economist Amsdam pointed out that foreign capital has never initiated the industrialization of a country, and they only enter after a country has developed to a certain extent, and the purpose is nothing more than to compete for the market. 【5】

After the reform and opening up, China also introduced technology and foreign investment, and later multinational companies set up factories in China. However, the key factor in China's ability to resist the negative effects of foreign investment (such as destroying local businesses) and to learn from it and turn it into its own competitiveness is that China is open to foreign investment on the basis of a nearly complete industrial system, which is the basis of China's capabilities.

Reform and opening up is a great cause, but there has never been a good thing in the world that you can develop and everything will be fine once you open up (otherwise the Philippines should be a developed country). Openness is a double-edged sword, which can promote one's own development, or it can be controlled by outsiders and hinder one's own development. Therefore, openness itself is at best a necessary condition for development, but it is not a sufficient condition. What are the sufficient and necessary conditions for development? What is the key to using openness for better development: The ability to grow on the basis of autonomy. Those who are capable can take advantage of the benefits of openness, and those who are incapable can be strangled to death by openness.

China's industrial system is endogenous, not "transferred". Having experienced China's "century of humiliation" and revolutionary wars, the founding generation of leaders knew the importance of industrialization to maintain national independence and economic development. Therefore, starting from the 50s of the 20th century, New China promoted industrialization in accordance with the requirements of a big country that can "stand on its own feet among the nations of the world," and its basic characteristic is to establish a complete industrial system.

What does "complete" mean? At that time, whatever industry in the world was going to be built, China was going to build any industry, including the semiconductor industry that was still in its infancy. The goal of industrialization also determined the direction of social development in China, such as China's comprehensive scientific research and the higher education system that today "produces" the world's largest number of science and engineering graduates.

In the 60s and 70s, China experienced twists and turns such as the Sino-Soviet split and the "three-front construction". During that 20-year period of self-reliance, despite all kinds of difficulties and mistakes, China continued to expand its industrial system and achieved technological achievements marked by "two bombs, one boat, one satellite". Of course, the Chinese have sacrificed the economic welfare of two entire generations in order to build a complete industrial system at a very low level of economic development. However, it is precisely because of this foundation that the economic development after reform and opening up has been able to achieve the achievements we see today.

Of course, some people do not understand or do not recognize the connection between the industrial foundation laid in the "first 30 years" and the economic development after the reform and opening up, especially when they think that China's development is based on "industrial transfer".

To demonstrate this connection, I will give a "small" example. Today, China's largest semiconductor equipment company, NAURA not only accounts for half of the industry's operating income but also has the widest product line. Among the 10 categories of integrated circuit equipment, it can provide almost all types of equipment except lithography machines and test equipment, and its product line is comparable to that of Applied Materials, the largest semiconductor equipment company in the United States, and more than any other domestic and international manufacturers.

In 2017, on the eve of the U.S. trade war against China, NAURA generated 2.223 billion yuan in revenue, what is the revenue in 2023? It is 22.079 billion yuan, which is almost 10 times that of 6 years ago (that is, before the trade war)! According to the performance report released by NAURA a few days ago, it will achieve a total operating income of 29.838 billion yuan in 2024, a year-on-year increase of 35.14%; net profit attributable to shareholders of listed companies was 5.621 billion yuan, a year-on-year increase of 44.17%.

In just 6 years, it has gone from being unknown to being among the world's top 10 semiconductor equipment companies (ranking 7th), where did such a company come from? The predecessor of NAURA was Qixing Huachuang, which was established by merging the equipment manufacturing department spun off from 6 factories (originally scheduled to be 7) in the process of state-owned enterprise restructuring at the end of the 90s of the last century. These equipment departments come from several electronics factories established by the Ministry of Electronics Industry in the Jiuxianqiao area of Beijing in the 50s of the last century, among which Factory 774 (the former Beijing Electron Tube Factory, the predecessor of BOE) has been developing and manufacturing semiconductor equipment since the early 60s. In 2017, Seven Star Huachuang merged with North Microelectronic Equipment Base to become today's North Huachuang.

Semiconductors are an industrial industry that has gone through detours in China, but it has a long history and its own heavy accumulation. Today's NAURA is a fact that all the employees from the chairman to the employees have been making semiconductor equipment since they joined the work, which reflects the "gene" of the company, which contains the knowledge, experience, skills and behavioral habits that can be formed after decades of accumulation. It is precisely because of such a capability base that once the blockade of the United States forced chip manufacturing companies to open their doors to domestic equipment suppliers, NAURA broke out. Therefore, even for industries that have been abandoned, the Chinese industrial system has always left a spark for them, and when the conditions are ripe, they can rekindle the flame. This is true for semiconductors, and it is also true for large aircraft.

Let me give you another example in passing. In February 2023, we interviewed a Korean semiconductor materials expert, Mr. Han (pseudonym), who was invited to work for a Chinese company after retiring in South Korea. I asked him if China could continue to produce large silicon wafers if the supply of equipment from abroad was completely cut off. He replied that if China does it itself behind closed doors, uses domestic equipment that still has a gap, and supplies it to Chinese customers, then there will be no problem; However, if it participates in international competition, it will lag behind the world's advanced level by about five years. I then asked, does he mean that he thinks China can make all the semiconductor equipment? His translation retells his answer in the third person:

"Mr. Han's observation is that China is doing the localization of equipment at every node of the process. It's just going to take a little longer to do it, but it's definitely going to be done, because China already has the capacity and conditions to do that. Therefore, Mr. Han believes that China is the only country in the world that can independently develop the semiconductor industry.”

Mr. Han explained that the industrial chain of the United States is incomplete, but there is no supply problem for the allies who rely on it; Japan is no longer good at chips, but it is strong in terms of equipment; South Korea's Samsung and Hynix are very strong in the field of chips, but South Korea has no strength in materials and equipment, and needs to rely on the global supply chain. He believes that South Korea has made strategic mistakes and is overly dependent on Japanese equipment. Therefore, his conclusion is very certain: China is the only country in the world that is localizing all equipment and all processes, and it will definitely be able to do so. The basis for the localization of all semiconductor equipment is China's independent and complete industrial system. In fact, more than two years have passed since that interview, and China's semiconductor industry has progressed faster than expected.

Back to the issue of reindustrialization in the United States. The U.S. government forced TSMC and South Korean companies to build factories in the United States, which is not industrialization. In 2017, during Trump's first presidency, Foxconn announced that it would invest $10 billion in Wisconsin to build a giant LCD panel factory and create 13,000 new jobs. Trump personally attended the groundbreaking ceremony at the time and called the Wisconsin campus invested by Foxconn the "Eighth Wonder of the World", but the project was later "unfinished", which fully shows that the industry cannot be "transferred".

After more than 50 years of decline, the social conditions of the United States industry–-the industrial structure, the employment structure, the infrastructure, the behavior of investors and workers, the corporate governance model, and the relevant laws–-have changed dramatically and can no longer meet the requirements of industrialization.

According to media reports, the conflict between TSMC and American employees is manifested in the fact that American employees have higher wages than Taiwan, but their skills and discipline are worse than Taiwan's. When a large number of people lose the social experience base of industry, except for high-tech, finance and other industries that require highly educated personnel, the general characteristics of the American working population for the manufacturing industry are high cost and low skills. In contrast, in China, during the booming stage of industry, the industrial labor force (including engineers and managers) was generally characterized by low cost and high skills, and at the same time, the social experience base of industry was constantly expanding.

As long as industry is not lost, when labor costs rise, it can still be offset by product innovation and technological advancements (such as the adoption of automation and intelligence), as many Chinese industries are doing.

What does it mean to lose industry? I'll give you an example. A few years ago, I read an article by an American scholar saying that twenty or thirty years ago, the United States abandoned the production of printed circuit boards (originally invented by Americans) because of its pollution and low added value. However, no one could have foreseen that today's circuit board would become a high-tech product because it would become so complex as the end product changed (think of today's precision multilayer circuit boards for smartphones).

The American scholar lamented that when the United States interrupted the process of participating in the technological advancement of circuit boards for a long time, it was almost hopeless to enter the industry—what kind of capital would be willing to endure recruiting high-cost, low-skilled personnel to learn to make circuit boards from scratch? In addition, if you do so, you will face an overwhelming advantage from strong competitors.

It is now clear that it will be more difficult for a deindustrialized country to re-industrialize than it was for the first time. Trump's four-year term alone will not solve the problems that have accumulated in the United States for more than 50 years, and no amount of higher tariffs will solve the fundamental problems.

Of course, China cannot afford to make fundamental mistakes on its own, especially not to tie its own hands and feet.

3. Why do you emphasize that China's industry cannot tie its own hands and feet?

3.1 China's industrial development can no longer tie its own hands: the development of emerging industries cannot replace traditional industries

Observer.com: Why do you keep emphasizing that China's industry "can no longer tie its own hands"?

Lu Feng: This brings me to the theme I want to talk about: if the United States wants to confront China, we must let go of its self-imposed restrictions on industrial development and economic growth -- China can only overcome the economic and technological suppression of the United States by relying on the overall strength of the industrial system.

When I say "self-restraint", I mean a system of limiting production formed under the influence of the "dichotomy" thinking. In last year's Observer.com article, I criticized the "dichotomy" thinking in detail, and I will briefly repeat it here.

The "dichotomy" thinking began to influence public opinion at the end of the high-growth phase (2000-2013), led by liberal economists. Their position is to view China's high economic growth in the first decade or so of the 21st century as "investment-driven," "extensively developed," and "overcapacity," and that high growth has hampered liberalization and marketization, which they consider more important than growth.

In order to negate high growth, they divide China's industrial system, which has made great contributions to high growth, into two parts: the first part is the traditional industry, which accounts for about 90% of the industrial added value, which belongs to the "old kinetic energy" that should no longer be developed; The second part is scientific research, informatization, and services, which should be the focus of future development, because that's what they see in the U.S. industrial structure. Therefore, the "dichotomy" thinking holds that the central issue of China's economy is no longer growth, but a "transformation" from an industrial structure dominated by the first part to a "transformation" dominated by the second part. In fact, the "dichotomy" is an anti-industrial current.

Under the influence of various factors, the "dichotomy" thinking has profoundly influenced economic policy in the past decade or so, and the transformation of replacing "old kinetic energy" with "new kinetic energy" has become the policy language. Once such a policy is put into practice, China has formed a system of limiting production, which uses administrative means to require "all localities to clarify specific tasks and specific goals, increase environmental protection, energy consumption, quality, standards, safety and other thresholds, system construction and law enforcement", and implement "de-capacity", production restrictions and shutdowns and transfers for traditional industries.

The "performance" of the extreme production restriction system is to brew the power rationing that affected the whole country in September 2021, but fortunately it was stopped by the Party Central Committee in time, and put forward the policy of "establishing first and then breaking". Even though the top management stresses that "the development of new quality productive forces does not mean ignoring or abandoning traditional industries," to this day, many traditional industries, especially basic industries, are still operating under the constraints of limited production (for example, the output of a certain product in the whole country must not exceed how much).

End Part One

It seems clear that US miseducated economists brought back the Neoliberal model with them and tried to apply it to China. The demands made by Treasury Secretary Yellen for China to cease its “overproduction” comes from the same source. The fact that Classical Economics is no longer taught at US Universities means that students have no way of understanding how Capitalism actually evolved and certainly know next to nothing about Marxism except perhaps the negative narrative spun about him. I emphatically suggest reading or watching “Marx was a Free Marketeer” for it tells the truth about what was actually meant by the term free market and what Classical economists strove to attain.

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