THE NATIONAL BUREAU OF ASIAN RESEARCH

Informing and Strengthening Policy in the Asia-Pacific

NBR SPECIAL REPORT

Chinas Post-WTO Technology Policy: Standards, Software, and the Changing Nature of Techno-Nationalism
by Richard P. Suttmeier and Yao Xiangkui

No. 7, May 2004

THE NATIONAL BUREAU OF ASIAN RESEARCH Published in the United States of America by The National Bureau of Asian Research 4518 University Way NE, Suite 300 Seattle, Washington 98105 206-632-7370 Phone 206-632-7487 Fax nbr@nbr.org Email http://www.nbr.org

2004 by The National Bureau of Asian Research This report may be reproduced for personal use. Otherwise, its articles may not be reproduced in full without the written permission of NBR. When information from this report is cited or quoted, please cite the author and The National Bureau of Asian Research. This is the seventh NBR Special Report. The views expressed in this publication are those of the authors, and do not necessarily reflect the views of The National Bureau of Asian Research or the institutions that support NBR. NBR is a nonprofit, nonpartisan research institution that focuses on major policy issues in the Asia-Pacific and their impact on the United States. Major themes in NBRs research agenda include strategic and diplomatic relations, regional economic integration and development, trade, globalization, terrorism, energy, and health. Drawing upon an extensive network of the worlds leading specialists and leveraging the latest technology, NBR conducts advanced, policy-oriented analysis on these issues, and disseminates the results through briefings, studies, conferences, television, and email fora. NBR is a tax-exempt, nonprofit corporation under I.R.C. Sec. 501(c)(3), qualified to receive tax-exempt contributions.

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EXECUTIVE SUMMARY

In recent years, through administrative action, legal innovation, and increased support for research and development, China has been actively developing a new technology policy based on the promotion of its own technical standards. These activities impinge upon business decisions and raise questions about Chinas commitment to honor its World Trade Organization (WTO) obligations, and are thus attracting increasing attention from foreign business leaders and government officials. This study reviews the origins and motivations for Chinas standards strategy, places it in the context of Chinas accession to the WTO, and examines the operation of Chinas new standards regime, with particular reference to standards for wireless devices and software. We suggest that the standards strategy is best understood in terms of a neotechno-nationalism, in which technological development in support of national economic and security interests is pursued through leveraging the opportunities presented by globalization for national advantage. Unlike older forms of techno-nationalism, Chinas standards strategy necessarily requires attention to international norms, cooperation with foreign partners, and a recognition of the need for new forms of public-private accommodation. Chinas promotion of its own technical standards grows out of the failures and accomplishments of its technology policies of the past, and its evolving position in the international economy. Over the past 25 years Chinas national system of innovation has been greatly altered as a result of reforms in its economy, its legal system, and its extensive network of research and development institutions. By a variety of measures, Chinas technological capabilities are increasing significantly in ways that, among other things, give it the ability to devise technical standards which warrant international attention. At the same time, its technology policies of recent decades have not yet made China the significant center of technological innovation its leaders hope it will become. Meanwhile, China has become an important player in the global economy, and has reaped significant gainsin absolute termsfrom globalization. However, its participation in the global economy is largely defined by its

Executive Summary

role in international production networks established by others. These networks employ technical standards and technological architectures set by the multinational corporations (MNCs), which are able to capture value from their control over standards and intellectual property. Thus, while Chinas absolute gains have been significant, it remains more than a little dissatisfied with the relative gains it realizes in comparison with international technology leaders often seeing itself, for instance, in a patent trap that requires it to pay substantial royalties to others out of the sales of its manufactures. In anticipation of accession to the WTO, Chinese leaders came to realize that the technological challenges ahead would intensify, while at the same time the more traditional measures of protection for its economy would have to be sacrificed. WTO accession would also require a significant reorganization and modernization of its national standards system. In 2001 and 2002 China thus began to reform its standards regime with an eye toward building standard setting into its national research and development programs as a priority objective. This has now resulted in a system in which policy purposes for the standards regimeexpressed through laws, administrative directives, and policy statementsare increasingly integrated with a research and development (R&D) network characterized by a strong commercial orientation, one involving a proliferation of high-technology start-up companies linked to government research institutes and universities, and a notable expansion of industrial research expenditures. While this new fusion of policy with research is intended to operate within WTO commitments, in particular the provisions of the Agreement on Technical Barriers to Trade, there is concern in the international community that the new standards system is functioning in ways which are not consistent with the spirit, and in some cases with the letter, of WTO principles. This has been especially true with regard to Chinas WLAN Authentication and Privacy Infrastructure (WAPI) standard for encryption technology used in wireless devices, a standard whose political profile has risen rapidly since it was announced in May 2003. Software represents a special case of using the standards strategy, in connection with other policy tools, to enhance the competitive position of Chinese companies. As with other countries, China has been dissatisfied with its heavy dependence on Microsoft Windows as an operating system and on Microsoft applications software, a dependence which ironically has been exacerbated by the widespread pirating of the software. More generally, as illustrated by the piracy, China has tended to devalue software in the course of

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its rapid economic growth over the past 25 years, even as the importance it assigned to an increasingly informatized economy grew. The industry has generally remained inward-looking, in contrast to India, and has been relatively weak in terms of the availability of trained manpower, organizational infrastructure and firm size, and output. As a result, it is an industry that became largely dominated by foreign companies during the course of the 1990s. A major shift in policy attention to the domestic software industry began to occur in 2000, and the industry has been receiving significant government support since then. Policies to support the software industry have also been linked to the broader standards strategy, albeit with the added feature of using government procurement to reinforce the efforts to establish standards. The standards work has focused on establishing Linux-based operating systems as alternatives to Windows and developing domestic office automation (OA) products as alternatives to Microsoft Office and other imported applications software. Procurement policy, mandating the use of domestically produced software in government offices, is being used to reinforce these standards initiatives. With government software procurement expected to grow significantly in coming years in response to e-government programs, the 2008 digital Olympics in Beijing, and a variety of other government initiatives for the informatization of Chinese society, the market pull effects of government procurement are likely to be substantial. Foreign software firms are understandably unhappy about these directions, even though, by not signing the WTO Government Procurement Agreement, China may not be violating the letter of its WTO obligations. Apart from the government procurement issue, standards issues are also likely to remain a central question for the software industry as the importance of embedded software in a whole variety of new digital devices increases. The role of standards is assuming a growing policy importance, especially at the intersection of national technology policies and the norms and practices characterizing international trade and investment in the global economy. While it is tempting to attribute Chinas standards strategy to a narrow technonationalism, sensible policy responses to those strategies require that the complex motivations behind the strategies be understood, and that Chinas capabilities and limitations as a setter of standards be recognized. Chinas market size and increasingly capable technical community give it unique advantages for challenging the established technological architecture found in the international economy. At the same time, however, our analysis indicates that China

Executive Summary

cannot do this alone, that there is substantial foreign participation in the technological development underlying the standards strategy, and that there are multiple interests at stake in standards development. While the standards agenda reflects the realities of Sino-foreign competition, it also reflects the facts that China has become a major arena for global competition among MNCs, that many Chinese firms may actually have interests in the standards established by the global technology leaders rather than in those set by the Chinese state, and that the politics of standards is likely to be characterized by increasingly complex and cross-cutting cleavages. In light of the strength of the motivations, the increasing technological capabilities evidenced, and the complex ways in which China fits into the international division of labor, Chinas standards strategy warrants ongoing attention.

CHINAS POST-WTO TECHNOLOGY POLICY: STANDARDS, SOFTWARE, AND THE CHANGING NATURE OF TECHNO-NATIONALISM
Richard P. Suttmeier and Yao Xiangkui

Sanliu de qiye zuo chanpin; erliu de qiye zuo jishu; yiliu de qiye zuo biaozhun (Third-class companies make products; second-class companies develop technology; first-class companies set standards)1

Are the new standards superior or just gratuitously different? asked a Western consultant in Beijing.... Is this protectionism by another name?2

China Trademarks Astronaut3

Dr. Richard P. Suttmeier is Professor of Political Science at the University of Oregon, focusing on comparative politics with China and Japan, science and technology issues, and public policy. His recent publications include Reform, Chinas Technical Community, and the Changing Policy Cultures of Science, coauthored with Cao Cong in the edited volume, Chinese Intellectuals Between Market and State . Yao Xiangkui is currently a Ph.D. candidate in Computer and Information Science at the University of Oregon. He received his M.A. in Political Science from the University of Oregon, and studied journalism at the Beijing Broadcasting Institute. 1 This is a popular saying in contemporary Chinese business and government circles, thought to have originated with Sony. We are grateful to Peng Yali for calling this to our attention. 2 Kathy Chen, China Sets Own Wireless Encryption Standard, Wall Street Journal , December 3, 2003, p. B4. 3 Recent headline, BBC News, December 9, 2003, <http://news.bbc.co.uk/1/hi/world/asiapacific/3303121.stm>.

Chinas Post-WTO Technology Policy

Over the past few years, there has been growing interest among Chinese technology policy leaders in promoting Chinas own technical standards, broadly understood, and in establishing property rights over Chinese technical achievements. While establishing a trademark for Colonel Yang Liwei and his Shenzhou space mission may not be a technology policy tool that will travel far, it is symptomatic of a new stance in post-WTO China towards capturing value from indigenous innovation through a more aggressive approach to the management of intellectual property, and especially toward the establishment of indigenous standards which reflect accumulated technological capabilities.4 In addition to the attention given to such relatively prominent standards-related cases as third-generation (3G) mobile telephony and the TDSCDMA (Time Division Synchronous Code Division Multiple Access) standard and efforts to develop an alternative to the Windows operating system standard (through the promotion of Linux systems), there are Chinese efforts to develop standards in other areas, including: its own microprocessor (the Dragon Chip); its own successor to DVDs, the EVD (Enhanced Versatile Disc) standard; a new digital audio standard (AVSAudio, Video Coding Standard) for MPEG (Moving Picture Experts Group); a Chinese-developed standard, IGRS (Intelligent Grouping and Resources Sharing) for communicating among digital devices; a new Internet protocol (IPV6); and radio frequency identification tagging (RFID). Of particular recent interest, the introduction of a new security standard for wireless devices, the WLAN Authentication and Privacy Infrastructure (WAPI) standard, has received international attention, and as further discussed below, became a major issue in U.S.-China trade relations. Standards issues have also become prominent in areas ranging from agricultural trade

4 As used here, standard refers both to the products of formal standard-setting activities (the standards and technical requirements which are produced by government standards organizations, by international organizations such as the ISO, IEC, and ITU, or by industrial or professional associations) and to the outcome of market exchanges in which certain technologies, protocols, etc. come to be accepted as the de facto standards of an industry.

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(genetically modified organisms and the safety of aquatic products) to the introduction of new products to promote the efficient use of water.5 Chinese decision makers have turned their attention to standards as part of a strategy for meeting new competitive challenges and obligations resulting from Chinas accession to the WTO. Representatives from the international business community and officials of foreign governments have followed Chinese approaches to standardization with a growing interest since these not only affect business decisions, but also raise questions about the use of a policy tool to unfairly enhance the competitiveness of Chinese industry in ways which would be inconsistent with the spirit, if not the letter, of Chinas WTO commitments.6 Technical standards, in short, are becoming important issues affecting trade and investment relations with China and are seen by many foreign observers as the latest manifestation of a troubling Chinese techno-nationalism, i.e., a commitment to use political means to secure technological progress in the interests of national defense and economic advantage for Chinese industry. This paper explores the logic of a standards-based technology policy and assesses the possibilities for conflict and cooperation arising out of such a policy. It begins with the assumption that Chinas new interest in standards is driven by a complex set of issues growing out of the successes and failures associated with technology policies of the past.

Market Power, Technological Capacity, or National Security?

In the first instance, the new emphasis on standards by the government may be a response to a strong resistance to standardization in Chinese society, one which has worked against Chinese interests in the past. One thinks, for instance, of Chinese interests in acquiring modern telecommunications technologies in the 1980s and early 1990s, and the incompatibilities which resulted from multiple parties pursuing multiple interests in different telecom systems in different parts of the country.7 Strong traditions of localism at both provincial

5 Lester Ross, Regulatory Foundations for Chinese Technological Development: Legal, Financial, Standardization, and Environmental, paper presented at the Conference on Chinas Emerging Technological Trajectory in the Twenty-first Century, Rensselaerville, New York, September 27, 2003. 6 See, for instance, United States Trade Representative, 2003 Report to Congress on Chinas WTO Compliance, <www.ustr.gov>. 7 Professor Erik Baark of the Hong Kong University of Science and Technology in email comments on an earlier draft of this report, December 2003.

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Chinas Post-WTO Technology Policy

and sub-provincial levels, and indeed a tough individualism among Chinese, point to cultural traits supporting resistance to standardization, as do difficulties in realizing consistent local implementation of national intent in a variety of policy areas. A strengthening of a national standards philosophy, with strong central leadership, may thus be a part of a national policy response to address what some might take to be domestic weaknesses impeding the standardization imperatives of modernity. The new interest in standards also grows out of the curiously ambiguous position of China in the international economy and the ways in which its technological levels affect that position. On one hand, the Chinese economy has grown and benefited significantly as a result of its participation in the international production networks associated with globalization. China has become one of the worlds great export economies and has rapidly moved up the value chain in producing and exporting higher value-added products. However, in important respects, it has yet to emerge as a significant force for innovation within production networks and thus continues to be in a subordinate position vis--vis global industry leaders. This leads to an interpretation of its approach to standards which focuses on market power in the face of technological weaknesses; China can use the promise of its huge market as an asset in developing distinctive standards with an expectation that its standards policies will be taken seriously by international business organizations in ways that the policies of other countries would not be.8 On the other hand, Chinese standards policies also seem to be related to perceptions, both inside and outside of China, of a growing Chinese technological capability, a measure of which is having confidence in ones ability to set innovative standards which can positively affect ones international competitiveness. In this interpretation, China shows interest in a standards-based policy because it believes that after 20 years of reforming and nurturing its research and development (R&D) system, it has the ability to set standards. Measures of an increasing technological capability include its large contingent of scientists and engineers working in R&D (810,000 in 2002); its expenditure on R&D, which in purchasing power parity (PPP) terms is

8 See Daniel H. Rosen, Low-Tech Bed, High-Tech Dreams, China Economic Quarterly, Q4, 2003, pp. 2040; see also Barry Naughton, Chinas Economic Growth and Technology Development: International Linkages and Implications for the U.S., testimony presented to the U.S.-China Economic and Security Review Commission, February 12, 2003.

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now third in the world after the United States and Japan; increasing patenting activity; and its fifth-place position in producing published papers for the worlds international science and engineering journals.9 One consequence of this ambiguous position in the international division of laborof having enhanced capabilities for innovation, but not setting the pace for new technologiesis an ongoing frustration with patenting and royalty payments, i.e., being caught in a patent trap set by industry leaders.10 Interest in Chinas own standard for digital videodiscs, for instance, is not unrelated to patent disputes with Phillips, Sony, and Pioneer in 2002, when Chinese-made DVD players (90 percent of the worlds DVD players are now made in China) were impounded at European ports because the manufacturers allegedly had not paid for the patents used. In the legal negotiations which followed in Europe, the patent holders demanded US$20 per machine on equipment with a unit sales price of only US$90. While the settlement ultimately led to significantly reduced royalty payments, the experience again reminded the Chinese of the importance of patents and core technology, and that without independent intellectual property rights Chinese industry is vulnerable.11 More recently, one Chinese DVD manufacturer, operating on very thin profit margins, noted that as much as one-third of the cost of selling a DVD player in the U.S. market (retailing for US$60) went to royalties to the DVD patent holders and led to complaints that the more we sell, the more we lose.12 Unlike other countries offering low-cost manufacturing capabilities to global production networks, however, China already has had ongoing research in support of its own EVD standard for digital video which it is now in the process of introducing. A final consideration affecting the development of Chinas standards policies is that of national security. As further discussed below, security concerns have shaped Chinese thinking about standards for wireless devices and have often been mentioned in connection with Chinese dissatisfaction with Microsoft Windows and its interest in Linux-based systems. Appeals to national security also affect the ways in which WTO provisions concerning

9 Ministry of Science and Technology, China Science and Technology Statistics: Data Book, 2003 (cited hereafter as MOST, 2003), Beijing, Ministry of Science and Technology, 2003. 10 Qin Haibo and Cheng Lilong, Implications of Sino-US Dispute over WLAN Standard, China Economic Net , February 27, 2004, <www.en.ce.cn/insights/t20040227_357006.shtml>. 11 Cong Cao, Technological Capability, Standards, Industrial Policy, and the Market: The Third Generation Mobile Communications in China, paper prepared for presentation at the Conference on Mobiles and Mobility in China, Stockholm School of Economics, May 2002. 12 Anthony Kuhn, China Spins a New Disc, Far Eastern Economic Review, February 26, 2003, pp. 3435.

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Chinas Post-WTO Technology Policy

standards are construed and applied. But, as with the patent trap concerns, Chinas ability to manage the national security issues surrounding standards depends on its domestic capacities for research and technological innovation. It will be useful, therefore, to begin with an examination of some of the factors shaping R&D capabilities and the performance of Chinas national system of innovation.

Trends in Chinese Scientific and Technological Development

The rise of China as a potential high technology competitor and important participant in the worlds scientific research efforts has seemingly come as a surprise to many foreign observers, much as Japans emergence as a technological power did in the 1980s. The surprise is often accompanied either by overestimations or underestimations of Chinas actual capabilities, again, rather like foreign reactions to Japan at an earlier date. While there are many important distinctions to be made between the Chinese and Japanese cases, they are similar in that the development of scientific and technological capabilities in both countries has long been a goal of political, administrative, and industrial elites, and both countries have records of policy intent, planning, and resource commitments for meeting that goal which are available to anyone wishing to examine them. Like Japans,13 the Chinese record of elite intention can be traced back to the nineteenth century. In the Chinese case, however, elite aspirations for scientific and technological development were consistently frustrated by civil war, foreign invasion, and long periods of political instability. With the founding of the Peoples Republic of China in 1949, there was a new commitment to technological development, one which led to the rapid expansion of the higher education system and the building of an extensive network of R&D institutions during the 1950s. By the end of that first decade, these efforts were increasingly harnessed to strategic weapons programs, but had also been disrupted by the radical politics of the late 1950s. By the middle of the 1960s, most efforts at scientific and technological development were sidetracked by the turmoil of the Cultural Revolution.

13 Richard Samuels, Rich Nation, Strong Army: National Security and Technological Transformation in Japan , Ithaca, N.Y.: Cornell University Press, 1994.

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It makes a certain amount of sense, therefore, to locate the origins of Chinas emergence as a potential technological competitor in the period following the Cultural Revolution, more specifically in the policy commitments first made by Deng Xiaoping at the 1978 National Science Conference and reaffirmed, modified, and strengthened in the 25 years since then. This is not the place to review all the twists and turns of Chinas efforts to get its scientific and technological development strategies back on track after 1978,14 but we can note that these efforts involved major reforms of the system of several thousand R&D institutions, the revitalization of the higher education system and the expansion of enrollments in science and engineering fields, the sanctioning of institutional experimentation and innovation leading to the creation of new high-technology enterprises spun off from research institutes and universities, and the introduction of a series of national programs for the support of R&D, technology extension services, and technology incubators. Chinas strategies for scientific and technological development also involved a series of measures to exploit resources available from the international environment. These included the sending of large numbers of students and scholars abroad for advanced training, the purchase of vast amounts of foreign technology, the development of a foreign investment regime intended to exploit financial, managerial, and technological assets held by foreign firms in China, the use of financial and consulting resources available from the World Bank and other international organizations, and the signing of a large number of agreements with foreign governments for scientific and technological cooperation. These interactions with the international community afforded numerous opportunities for learning, not only about technology, but also about policies, institutional designs, and managerial practices necessary for overcoming the principal defects of its pre-reform innovation system, and which would allow China to capture value from its technological progress. These opportunities were seized by Chinese policymakers and policy analysts, both to benchmark Chinas progress and to graft successful foreign practices on to Chinese realities. By the middle of the 1990s, it was becoming increasingly clear, in terms of financial, institutional, and human resources, that China was approaching the point where it needed to intensify its domestic capabilities to match its increasing reliance on foreign technology, now streaming into China as a result

14 See, for instance, Gu Shulin, Chinas Industrial Technology: Market Reform and Organizational Change , London and New York: Routledge, 1999; and Richard P. Suttmeier and Cong Cao, China Faces the New Industrial Revolution: Research and Innovation Strategies for the 21st Century, Asian Perspective, vol. 23, no. 3 (1999).

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Chinas Post-WTO Technology Policy

of the rapid growth of foreign direct investment (FDI) after 1992. This led to a commitment to increased funding for R&D and education, to shift a much greater share of the nations R&D to industry (from only 37 percent in 1996 to more than 61 percent in 2002), and to devote new attention to the softer institutional requisites for successful technological innovation. With the prospects of accession to the WTO looming, Chinas leaders also understood that the presence of foreign commercial interests in China would expand, and new opportunities for technology transfers would increase. At the same time, the dangers of technological dependency would also increase with the risk that Chinas position as a subordinate player in global production networks controlled by multinational corporations (MNCs) would continue. Thus, Chinas attempts to forge a technology policy for the early twenty-first century, post-WTO era, builds on two decades of institutional reform, human resource expansion, and extensive learning from foreign experience, during which rapid economic growth generated the resources that made new policy directions in research and innovation more manageable. We should also recall that this progress came during the longest period of political stability China had seen since nineteenth century elites came to realize the importance of scientific and technological development for Chinas future. Thus, from these longer perspectives, Chinas emergence as a significant factor in the global high-technology industry and scientific research should not be surprising. Active preparations for this role go back 25 years, build on 30 years of accomplishments (and failures) before then, and have been conducted during a period of unprecedented political stability.15

WTO Accession and the Logic of Neo-Techno-Nationalism

Recognizing that WTO membership would have important implications for the nations policies and opportunities for scientific and technological development, Chinese science and technology policy officials have given considerable attention to adjusting policy to post-accession realities. If China had become one of the more important manufacturing bases in the global economy even before entering the WTO, technology policy would need to exploit and

15 For an assessment of the interaction between inherited technological assets developed over these decades and the new influences of the international environment in the reform era, see Gu Shulin and Edward Steinmueller, Getting Access to the Information Revolution: National Innovation System and the Innovative Recombination of Technological Capability in Economic Transition in China, unpublished paper prepared for the UN University project on technological innovation in developing countries, 2002.

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protect this position in the international division of labor by enhancing the capacity of Chinese industry for technological innovation, including the application of new technologies to traditional industries. However, if China wanted to move beyond workshop of the world status, in keeping with its aspirations to become a leader in new knowledge-based industries, it would also require policies that would facilitate leapfrogging into leading roles in emerging technologies. Key elements of a technology strategy have emerged from these considerations. For instance, reflecting the substance of a series of meetings in early 2002 hosted by the Ministry of Science and Technology, science minister Xu Guanhua outlined four critical elements of a policy for the new era. 1. R&D Spending. China would make significant increases in R&D funding during the Tenth Plan (20002005), with a focus on twelve areas of strategically important technology. According to Xu:
The ministry will concentrate on super scale integrated circuits and computer software, information security systems, e-administration and e-finance, functional gene chips and bio chips, electric automobiles, magnetic levitation trains, new medicines and modernization of production of traditional Chinese medicines, intensive processing of farm produce, dairy product manufacturing, food security, water conservation farming, water pollution control and the establishment of key technical standards. (emphasis added)16

Significantly, the ratio of Chinas gross expenditures on research and development (GERD) increased from 0.64 percent in 1997 to 1.23 percent in 2002.17 2. Human Resources. China realizes that in the global knowledge economy there is a fierce competition for intellectual talent, and it will therefore redouble its efforts to repatriate the scientists and engineers lost to the brain drain. 3. Intellectual Property Rights (IPR). China is obliged under the WTO to strengthen its IPR regime, but it will also pay particular attention to the need to strengthen IPR protection for Chinese innovators, and incorporate a sharper focus on the management of intellectual property for Chinas benefit in national research and development programs. 4. Standards. Finally, and related to IPR, Xu indicated that China will pay much more attention to the development of its own technical standards in

16 Beijing Xinhua in English, in Foreign Broadcast Information Service-China (hereafter, FBIS CHI 2002 0109), January 9, 2002, at World News Connection, <http://wnc.fedworld.gov/>. 17 MOST, 2003.

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such fields as IT, telecommunications, and biotechnology by building on distinctive features of the Chinese language, the Chinese business and administrative environments as these pertain to e-commerce and e-administration, and the Chinese biological inheritance and pharmacopeia.18 Even before Xus announcements, the importance of standards in this post-WTO technology policy had been noted on the website of the new Standards Administration of China (SAC) in 2001.19 It indicated that with WTO accession, the challenges facing Chinese domestic industries from globalization and foreign competition have increased. With traditional instruments of industrial promotion and protection (such as tariffs) now limited by WTO obligations, standards would become an effective means to protect and promote national industry within the WTO framework. This point was reiterated more recently by Shu Zhongming, vice director of SAC, who called attention to the need for ongoing research on, and enforcement of, Chinas own technical standards. He noted that the development of technical standards for the high technology industry would be a priority of SAC in 2003, with particular attention given to standards for e-government, information security, and other fields.20 Meanwhile, the Ministry of Science and Technology is supporting a research project on Chinas standardization strategyfocusing on environmental science, information technology, agriculture, and manufacturingdue to be completed in 2004.21 The logic of this line of policy thinking becomes clearer if we again consider Chinas place in the international division of labor. While the technological levels of Chinese enterprises have risen markedly since the early 1980s, principally as a result of massive amounts of international technology transfer, as well as high levels of foreign investment in Chinese industrial modernization and technological development, and in light of the nature of global operations of multinational firms invested in the country, China has become concerned about becoming excessively dependent on foreign technology at the

18 See Xu Guanhua on PRCs S&T Strategies to Cope with WTO, Beijing Zhongguo Xinwen She, translated in FBIS-CHI-2002-0109, January 9, 2002; Chinese S&T Minister on Plans to Launch Research into 12 Key Technologies, Beijing Xinhua in English, in FBIS-CHI 2002-0109, January 9, 2002; and Chinas S&T Minister Xu Guanhua Says PRC to Introduce IT in Traditional Industries, Beijing Xinhua Hong Kong Service, January 10, 2000, trans. in FBIS CHI-2002-0110. 19 Standards Administration of China (SAC), Using Standardization to Protect and Promote the Development of Chinas National Industry, SAC website, November 23, 2001, <http:/ /sac.gov.cn/articles/1351.htm>. 20 Chen Zhigang, China Starts Standardization Strategy: WLAN Standard is the Touchstone, China 21 st Century Economic Report , December 27, 2003, <http://tech.sina.com.cn/it/t/ 2003-12-27/1054274244.shtml>. 21 Ibid.

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expense of the development of a more advanced national innovation system of its own. It has also become increasingly concerned about the flow of benefits to different participants in the international division of labor and about the relative gains accruing to the standard setters in international production networks. In this sense, Chinas interest in developing its own technical standards should be seen as a strategic response to a global economy in which standards have become far more important for determining the gains from globalization. As Sangbae Kim and Jeffrey Hart have put it, technological competition in the global information industriesthe leading sector in the contemporary global political economyis currently moving beyond competition over technological innovation per se. The technological winner is now the one who manages to control de facto market standards while at the same time protecting intellectual property rights.22 Responding to this reality, though, requires deft execution in a global economy where established standards already provide a framework for successful economic activities. As such, it illustrates many of the dilemmas faced by developing countries seeking to upgrade their position in the international division of labor through a national innovation strategy. Deft execution of a technology policy under conditions of globalization thus requires steering between the extremes of a narrow technonationalism likely to cause friction and resentment from trading partners and a possible marginalization of ones own industry, and a techno-globalism insensitive to national economic interests. It involves instead moving towards what Atsushi Yamada has termed neo-techno-nationalism, in which one sees both expanded state commitments to technological development (in keeping with techno-nationalist assumptions), but also active public-private partnerships, a more welcoming openness toward foreigners in national technology programs, and greater commitment to international rule-making and policy coordination. The notion of neo-techno-nationalism accommodates these changes in ways that the more established ideas of techno-nationalism and techno-globalism do not, as seen in Table 1.23

22 Sangbae Kim and Jeffrey A. Hart, The Global Political Economy of Wintelism: A New Mode of Power and Governance in the Global Computer Industry, in James M. Rosenau and J. P. Singh, eds., Information Technologies and Global Politics , Albany: State University of New York Press, 2002, p. 143 23 Atsushi Yamada, Neo-Techno-Nationalism: How and Why It Grows, Columbia International Affairs Online , March, 2000, <www.ciaonet.org/isa/yaa01>. See also Sylvia Ostry and Richard Nelson, Techno-Nationalism and Techno-Globalism: Conflict and Cooperation , Washington, D.C.: The Brookings Institution, 1995; and Sandro Montresor, Techno-globalism, Technonationalism and Technological Systems: Organizing the Evidence, Technovation 21 , 2001, pp. 399412.

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Table 1: The -isms Compared

TechnoNationalism Policy Goal: Promote whose interests and how? Who leads innovation? National interests by preventing globalization Government targeting TechnoGlobalism Global interests, by leveraging globalization Global market forces Neo-TechnoNationalism National interests, by leveraging globalization Private initiative and public-private partnerships Open under certain conditions Cooperation and conflict

Open/closed toward foreigners Prospects for conflict/cooperation

Closed

Open

Conflict

Cooperation

Source: Yamada, see footnote 23.

China has long pursued technological strategies motivated by nationalism, and elements of techno-nationalism are clearly still evident in contemporary research, technology, and industrial policies. At the same time, many of the themes of techno-nationalism from an earlier era have been muted in the internationalization of the past 20 years, and at least some Chinese leaders seem to be genuinely interested in strategies for reconciling technonationalism with techno-globalism, as support for joining the WTO would suggest.24 Efforts to balance techno-nationalism and techno-globalism in todays world involve making global institutions, such as the WTO and international standards bodies such as the International Organization for Standardization (ISO), the International Electrotechnical Commission (IEC), and the International Telecommunication Union (ITU) work in ones favor, and having the capacities for innovation to turn global technological trends to ones advantage. Nowhere is this clearer than in current interest in winning technology

24 The current efforts to solicit opinions and suggestions from the international community on the drafting of Chinas Long-Term S&T Development Plan for 2020 is another interesting example of the attempt at reconciling techno-globalism and techno-nationalism. As Cheng Li has noted, there is a range of elite opinions on the techno-nationalism versus techno-globalism issue. Given the importance of science and technology to the Chinese leadership, the ways in which differences of opinion are resolved should have an important effect on Chinese international orientation. See Cheng Li, Chinas Leaders: The New Generation , Lanham: Rowman & Littlefield Publishers, Inc., 2001.

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wars through the control of architecture, to paraphrase the title of a 1993 Harvard Business Review article by Charles Morris and Charles Ferguson, a war which involves the standards, rules, and protocols which constitute todays technological systems.25 While there is no evidence that Chinese science and technology policymakers have read Morris and Ferguson, there is much in the statements of intent found in Chinas post-WTO technology policy that resonates with their observation that, Simply stated, competitive success flows to the company that manages to establish proprietary architectural control over a broad, fast-moving, competitive space.... An architectural controller is a company that controls one or more of the standards by which the entire information package is assembled.26 Compare this, for instance, with the recent observations of Qin Haibo and Cheng Lilong who complain that foreign industry leaders control the core technologies and are thus on the top of the industry chain, while domestic players can only earn meager assembling and processing charges. What is more alarming is that by harnessing their technology standards, foreign vendors have carved up the circle of the game and game rules. Thus, homegrown vendors cannot but dance to their tune and stand no chance of excelling.27 Interest in technological architecture has grown in recent years in response to the rise of global production networks, new opportunities for modularity in manufacturing, and new approaches to the horizontal integration of production, especially in the information and communications industries. As Kim and Hart have observed, interest in the open ICT architecture and the global dominance of Windows and Intel (Wintelism) have called attention to critical features of Wintel-based international production networks: the importance of having attendant technologies be compatible with Wintel architecture, the positive externalities which redound to the successful first movers once attendant technologies become linked together in a network form, the

25 As employed with reference to ICT production networks, architecture is defined as follows: for each layer of the network there are published standards and interface protocols that allow hardware and software products from many vendors to blend seamlessly into the network. The standards define how programs and commands will work and how data will move around the systemthe communication protocols and formats that hardware components must adhere to, the rules for exchanging signals between application software and the operating system, the processors command structure, the allowable font descriptions for a printer, and so forth. Charles Morris and Charles H. Ferguson, How Architecture Wins Technology Wars, Harvard Business Review, MarchApril 1993, p. 88. 26 Ibid., p. 87. 27 Qin and Cheng, Implications of Sino-US Dispute over WLAN Standard.

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importance for first movers of protecting intellectual property rights in the interest of appropriating profits in the face of a high degree of open standards,28 and the close relationship between the technology and its institutional setting (i.e., its embeddedness).29 With reference to the Chinese telecommunications equipment industry, Alex Tan has argued that Wintelism makes it possible for rising companies in countries like China to participate profitably in the globalized computer, telecommunications, and information industries. At the same time, it is very difficult for them to redefine the architecture itself, and thus to capture the gains from network externalities which are realized by successful first movers.30 While operating within the architecture established by others can be profitable for companies in developing countries, doing so involves costs which many find offensive and would like to avoid. As one recent report on Chinas standard-setting aspirations put it: Todays vital technology standards are largely controlled by companies and consortia from the developed world. China and other nations effectively pay taxes to American, Japanese, and European companies in order to use the standards in a variety of fields including computers, communications, and personal technology.31 These taxes can be substantial and can cut deeply into the profit margins of local companies. One recent report stated that somewhere between 50 and 70 percent of the manufacturing costs of a Chinese-made PC go to license fees paid to Microsoft and Intel.32 A consideration of technological architecture thus implies, in principle, at least two ways that a national technology strategy might reconcile the forces of techno-nationalism and techno-globalism. In one, the fast follower mode, the dominant architecture is generally accepted, and attention becomes directed toward new products and services, offering opportunities for wealth creation, within the spaces provided by the open architecture. In this approach, the

28 Choosing the right degree of openness and the right amount of intellectual property enforcement continues to be one of the most subtle and difficult decisions in the Wintelist world. Sangbae Kim and Jeffrey A. Hart, The Global Political Economy of Wintelism: New Modalities of Technology and Power, article prepared for a symposium on Information, Power, and Globalization at the annual meeting of the American Political Science Association, Boston, Mass., September 2, 1998, <www.vii.org/papers/wintlism.htm>. Cited with permission of the author. 29 Ibid. 30 Zixiang (Alex) Tan, Product Cycle, Wintelism, and Cross-national Production Networks (CPN) for Developing Countries, INFO: The Journal of Policy, Regulation and Strategy for Telecommunications, vol. 4, no. 6 (September 2002). 31 Dan Gillmor, China Tries to Establish Homegrown Tech Rules, Mercury News, December 14, 2003. 32 Sherman So, Low-cost Chip Is Made for China, South China Morning Post , February 17, 2004, <www.chinastudygroup.org>.

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techno-globalism represented by the dominant architecture is not normally challenged, and serves as a type of collective good, infrastructure, or framework within which a variety of attendant innovative technologies can be developed, produced, and marketed, albeit at a price. A second approach, however, would be to challenge the dominant architecture, attempt to replace it with a new one, and bear the costs of providing the collective good.33 The latter is a higher-risk, and often more costly, undertaking which is likely to be chosen only by countries (or firms) with substantial resources deep pockets, large markets which would find a new architecture economically attractive and institutionally or culturally appealing, an innovative research and development system linked to an economy of proven productivity, and substantial political power to manage such large risks. It might also be undertaken by countries which are dissatisfied with the royalties they must pay to the IPRcontrolling first movers, and countries which feel fundamentally uncomfortable with the configuration of structural power or technological hegemony enjoyed by architectural controllers,34 or by dissatisfaction with performance features of the dominant architecture.35 In some but not all respects, China fits the profile of a country seeking to move beyond the fast follower role it has been playing and challenge the dominant architecture. In spite of the considerable absolute gains China has realized from working within the established architecture, the emphasis now placed on the development of distinctive Chinese technical standards in its postWTO technology policy suggests that it is taking tentative steps to initiate such a challenge in light of its dissatisfaction with the distribution of relative gains. As one observer put it, China isnt just reluctant to pay what amounts to taxes to the developed world owners of global technology standards. With the largest domestic market on the planet, at least potentially, plus an increasingly creative and well educated workforce, China is creating its own competitive set of standards for its own market, although the global potential is obvious.36

33 For an interesting discussion comparing Koreas fast follower strategy on 3G telephony with Chinas approach to redefine the standard and challenge the architecture, see Barry Naughton and Adam Segal, China in Search of a Workable Model: Technology Development in the New Millennium, in William Keller and Richard Samuels, eds., Crisis and Innovation: Asian Technology after the Millennium, New York: Cambridge University Press, 2003. 34 Kim and Hart, The Global Political Economy of Wintelism. 35 The current worldwide problems with computer viruses and worms associated with Microsoft products is cited as one reason for a Japanese initiative at the recent ASEAN meeting to launch a new cooperative project involving China and South Korea, as well as Japan, for the development of a new operating system for smart devices. See Martyn Williams, Infoworld , September 2, 2003, Japan, Korea, China to Break Windows Ties, <www.infoworld.com/article/ 03/09/02/HNbreakties_1.html>. 36 Gillmor, China Tries to Establish Homegrown Tech Rules.

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Clearly, however, such challenges do carry risks. National efforts to establish distinctive standards can lead to costly failures and technological dead ends, and could have high opportunity costs for smaller firms which might be led to forego profitable opportunities within the dominant international architecture in order to follow the national guidance in support of new standards.37 As further discussed below, they can also lead to increasing frictions in the international trading system and, by eroding trust among trading partners, be self-defeating.38 Of course, China enjoys an edge as a challenger by virtue of its large population, the market this population represents, and the creative potential of its scientific and engineering manpower. As discussed recently in one report, By creating homegrown technical standards, China is trying to increase the use of Chinese innovations worldwide. And it is using its own large domestic market to help speed up their adoption. By requiring the standards to be used on technical products in China, international companies that want access to that market are forced to make products that use them.39 In a similar vein, Lester Ross has recently observed that market size and conditions where dynamic technological developments threatened to eclipse existing standards are the factors which encourage Chinese policymakers to formulate domestic standards, ....in the expectation that market size may result in international adoption of the PRC standard. Such standards-based trade policy would favor PRC producers, and encourage technology transfer on favorable terms by foreign technology providers, especially second-tier players, and reduce the PRCs obligation to pay license fees and royalties to such providers. In other words, the prospect of local standards becoming the basis for international standards, or alternatively of an extended period in which local standards prevail in the absence of harmonized international standards, will reward domestic producers for their technologies and thereby foster innovation.40

37 Tan, Product Cycle, Wintelism, and Cross-national Production Networks (CPN) for Developing Countries. 38 See US IT Group Protests Chinas Foreign Software Ban, Business Standard, August 26, 2003. 39 Evan Ramstad, In Tech, Chinas Setting the Standard, The Wall Street Journal, September 10, 2003, p. A22. In a recent conference paper, Maximilian von Zedtwitz has suggested that the importance of standards is one of the factors considered when MNCs decide to locate R&D facilities in China. He notes, Since China isa sizable and fast developing market in some product categories, the technical standard that is established in China may have a better chance of becoming a world standard. Maximilian von Zedtwitz, Managing Foreign R&D Laboratories in China (unpublished paper). We are grateful to Professor von Zedtwitz for sharing this paper with us. 40 Ross, Regulatory Foundations for Chinese Technological Development.

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Standards and the Trading System

The relationship between the establishment of national technical standards and the maintenance of an efficient international trading system is not without ambiguity. As economists have long recognized, an effective system of standards serves the public good by facilitating economic cooperation. In this view,
Standards can lower production and usage costs through economies of scale in production, increase the level of competition by promoting interchangeability, compatibility, and coordination, and lower transaction costs by lowering information and search costs.... standards can also have the effect of increasing the level and efficiency of international trade. Using standards, firms can produce goods with internationally recognized weight, size, composition, quality, and performance characteristics or alternatively specify their products characteristics on these dimensions....41

On the other hand, standards can also be used to inhibit trade. A national standards system can negatively affect costs and prices, and thus product availability, either inadvertently or as a result of intentional policy design.42 It was the latter which became a special concern in the 1970s and 1980s, and led to explicit attention during the Tokyo Round of GATT negotiations. Particular interest was directed at the Japanese standards system and allegations that it was being used as a technical barrier to trade (TBT).43 Similar concerns are being heard about the uses of standards in China in the post-WTO period. Under the WTOs Agreement on Technical Barriers to Trade (TBT), which China has joined, formal provisions to discourage using standards as TBTs have been strengthened, but implementation has been difficult.44 The main principles to which WTO members are expected to subscribe, contained

41 Donald J. Lecrew, Japanese Standards: A Barrier to Trade? in H. Landis Gabel, ed., Product Standardization and Competitive Strategy, Amsterdam: Elsevier Science Publishing, 1987, pp. 2946. 42 Ibid. 43 As with other countries, the Japanese system had laudatory objectivesto increase the efficiency and technological progress of Japanese industry by fostering product compatibility, interchangeability, rationalization, simplification and upgrading of products and processes; quality control; export promotion to the development of a quality image for Japanese productsand; protection of the health and safety of workers and consumers, environmental protection, and conservation of materials and energy. Ibid., pp. 3031. Yet, as employed as a tool of industrial policy, standards often took the form of a TBT. 44 Only one case has actually been broughtby Peru, against the EU on the issue of sardines. Timothy Weinland, U.S. Department of Commerce, personal communication, December 2003.

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in the Code of Good Practice for the Preparation, Adoption, and Application of Standards (Annex 3 of the Agreement), include commitments to national treatment, to harmonizing domestic standards (and to the extent possible, domestic standards with international standards) and to principles of transparency in the setting of standards.45 More generally, The (national) standardizing body shall ensure that standards are not prepared, adopted or applied with a view to, or with the effect of, creating unnecessary obstacles to international trade (Provision E). Chinas commitment to these principles is being questioned by interested foreign parties, although with regard to harmonization, China claims that it has become far more active in bringing its standards into conformity with international standards and has become more active in the setting of international standards through the ISO, IEC, and ITU.46 In addition, China has taken a number of steps intended to bring itself into the conformity with the other principles. For instance, at the time of WTO accession, China agreed to make important changes in its standards regime, pledging to give up the system of separate safety certification standards for domestic and imported products (the Great Wall and CCIB marks, respectively) in favor of the new unified CCC standard. It also agreed to reorganize and merge its standards bureaucracy.47

The New Standards Regime

As noted, with accession to the WTO China pledged to reform its standards system and has been doing so over the past few years. These changes in the Chinese standards regime are usefully seen against the evolution of standards institutions and the assumptions underlying these institutions. A strong standards system was characteristic of Soviet-inspired centrally planned economies of the past on the assumption that standards facilitated the application of new knowledge to improve the economy. The relevance of standards for market-based international trade, however, was not prominent.

45 Standards issues also come up in a variety of other WTO agreements and contexts, especially in the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS), in various issues dealing with trade and environment, and in the Government Procurement Agreement. 46 According to a 2001 report, for instance, China is now a member of more than 100 full committees and 500 technical subcommittees of the ISO, and belongs to 85 technical committees (and 124 subcommittees) of the IEC. It has submitted approximately 40 draft standards to ISO and IEC, some of which have been accepted. Of Chinas roughly 20,000 national standards, more than 8000 are said to conform to international standards, <www.eastday.com>, October 14, 2001, at <www.china.org.cn>. 47 Ann Weeks and Dennis Chan, Navigating Chinese Standards Regime, The China Business Review, MayJune 2003, <www.chinabusinessreview.com/0305/weeks.html>.

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The pre-1978 Chinese standards system was influenced by this thinking, but had also been terribly disrupted by the radical politics of the late 1950s and the Cultural Revolution years when technical expertise, so essential for sound standard setting, was devalued as a matter of national policy.48 With the initiation of the reform and open-door policies after 1978, the Chinese standardization system faced new challenges to become more science based, market responsive, and international. Chinas participation in the ISO, the IEC, and the ITU has moved it in these directions but also reinforces its strong tradition of state-directed economic activity, and biases its approach to standards in a direction that favors mandatory standards and the employment of formal international organizations for the establishment of international standards. In this sense, the Chinese approach shows a greater similarity with European and Japanese traditions than with the U.S. system with its preference for voluntary standards generated through market processes and industry cooperation. Cooperation on standards between Europe and China, aided by these similarities in institutional assumptions, has become a matter of concern to some U.S. firms which see it as bestowing advantage to European competitors in the Chinese market. In keeping with its WTO obligations, China established a new ministerial-level body, the Administration for Quality Supervision Inspection and Quarantine (AQSIQ), by merging the State Administration for Entry-Exit Inspection and Quarantine with the State Quality and Technical Supervision Bureau. The new Standards Administration of China (SAC), noted above, was established in 2001 under AQSIQ to develop the Chinese standards agenda and help bring domestic standards into alignment with international standards. It has responsibility for the management and coordination of the 260 technical committees and 422 subcommittees (consisting of 27,800 technical specialists) used for drafting standards, and oversees the standard-setting activities of other central government agencies. A China National Regulatory Commission for Certification and Accreditation has also been established under AQSIQ with responsibility for the administration of the CCC process. In addition, a Technical Barriers to Trade Inquiry Center has been set up under AQSIQ which maintains regular contact with the WTOs TBT office in Geneva, and is intended to be a transparent, ready point of access to companies seeking information on Chinese standards.49

48 For an analysis of this socialist standards legacy in China, see Eric Baark, Industrial Standardization in the Peoples Republic of China, The China Business Review , MarchApril 1978, pp. 1523. 49 Weeks and Chen, Navigating Chinese Standards Regime.

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In their recent review of Chinas post-WTO standards regime, Weeks and Chen note that while the above steps can be viewed as positive developments, foreign companies still express a number of concerns about Chinese standardization practices.50 Some are focused mainly on the use of the CCC mark and relate to the uses of certification to detain ships importing foreign goods, to certification approval processes that are unreasonably lengthy, to the use of testing bodies which are not independent and which may have proprietary interests in the standards for which they are testing, to duplicative testing requirements, and to the high cost of certification. Of greater concern for our purposes here are practices relating to the setting of technical standards, where Weeks and Chen report that foreign companies have concerns that China is not living up to its obligations for transparency and national treatment in its standard-setting practices. Foreign firms complain about not having advanced notice of plans for new standards and observe that the process of drafting standards often remains opaque. To the extent that foreign companies are involved in the drafting of standards, their role is usually that of observer, with the Chinese side being especially reluctant to invite foreign participation in high-tech areas. Reportedly, harmonization of standard-setting activities is weak, both domestically and with regard to efforts to harmonize Chinese and international standards. With reference to the former, standards are being set not only at the national level, but also at the local government level and within different industrial systems. Efforts to bring consistency to these activities have been disappointing, according to reports. Chinese reports that more than 8000 domestic standards have been reconciled with international practices is seen by Weeks and Chen as misleading.51 They are thus led to observe that in spite of considerable change in the Chinese standards regime, the changes are as much about installing a system that bolsters the competitiveness of Chinese products in overseas markets as conforming to international practices.52 Although SAC has formal authority for establishing standards, other actors play more significant roles in the actual development of standards and their use in technology strategies. Perhaps the most active players have been the Ministry of the Information Industry (MII), other central ministries and commissions with portfolios relating to high technology, and offices of the State Council. These agencies sponsor the technical committees which develop stan-

Ibid. Ibid. According to Weeks and Chen, only slightly more than 2000 national standards were identical to international standards, while almost 3800 were not identical. 52 Ibid.
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dards and coordinate R&D activities in support of this work. The China Electronics Standardization Institute (CESI), discussed further below, plays an especially important role in the IT industry. As an umbrella group overseeing a series of technical committees, and sponsored by MII, SAC, the Informatization Office of the State Council, and the Ministry of Science and Technology (MOST), it has coordinated a number of important MII and MOST-supported projects, such as the MOST-sponsored Research on Key Technical Standards for Chinese Information Processing.53 We are also seeing a more active role in standard setting from Chinese companies and industrial associations, a fact which is likely to make the politics of standards more complicated as the number of interested actors increases. The growth of industrial associations in China raises the question of whether these will play a more independent role in standards development and lead to changes in institutional assumptions about the role of the state in standard setting. At the moment, the associations have a very intimate and dependent relationship with the government, and in the short run, the growth of such associations is unlikely to diminish the dominant role of the state in standard setting or signal a move towards a more voluntaristic approach to standards. Over time, though, we may see movement in this direction.

The WAPI Case

The recently issued and controversial security standards for wireless local area networks (WLAN) illustrate the operation of the new standards development system and why it is contributing to concerns that China is not living up to its obligations under the TBT Agreement. According to the USTR, China issued two new mandatory standards for encryption in May 2003 which were to go into effect in December 2003, were delayed until June 2004, but have now been postponed indefinitely as a result of U.S. government and industry protests. The standards apply to both domestically produced and imported equipment such as Centrino notebooks and personal digital assistants (PDAs) and other devices which promise to make wireless technologies the foundation for a multibillion-dollar industry. The WAPI (WLAN Authentication and Privacy Infrastructure) encryption technology, which China is proposing as its standard, differs significantly from the internationally recognized

53 Gao Lin, Chinese Linux Standardization: An Update, report delivered at the Second Asia OSS Symposium, Singapore, November 34, 2003, <www.cicc.org.sg/aoss-2/present/china.pdf>.

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standard that U.S. companies have adopted for global production.54 China has provided the algorithms needed for the encryption to 24 Chinese companies, some of which are likely to be competitors with foreign firms. Foreign companies wishing to gain access to the technology will have to work through these Chinese counterparts. This may entail providing technical product specifications to potential competitors if they want to market their products in China, and seems to be a clear violation of national treatment under the TBT provisions. The new standard is also likely to increase manufacturing costs if it means that foreign companies will have to make one type of device for the rest of the world and a special one for China.55 Thus, from the U.S. perspective, China is denying national treatment to imported products, it is using standards that are more trade restrictive than necessary to fulfill a legitimate objective, and it is adopting a new standard which is not in compliance with accepted international standards. While this case might be actionable under WTO rules, the United States is not at this time planning to bring the case to the WTO.56 As noted above, WTO members may not be bound by Annex 3 provisions if standards pertain to matters of national security, and some of the arguments heard from China on the WAPI case do invoke national security concerns. Representatives of the U.S. IT industry have rejected the national security argument, however, and urged the U.S. government to press China to abandon or modify its policy on the WAPI standard at bilateral trade talks that were scheduled for April.57 In response to continuing pressure from industry, the Bush administration then ratcheted up its expressions of concern about this case to the Chinese government in a letter directed to Vice Premiers Wu Yi and Zeng Peiyan signed by Secretary of State Colin Powell, Secretary of Commerce Donald Evans, and U.S. Trade Representative Robert Zoellick.58 At the April talks, the Chinese side agreed to postpone implementation of the WAPI standard.59 The development of the WAPI standard nicely demonstrates how standards policy builds on and reinforces the trends in the development of Chinas

The existing 802.11 Wi-Fi standard which is being supported by the IEEE. Reuters, US Has No Plan for WTO Case on China Wi-Fi Rules, February 19, 2004. 56 Ibid. 57 Doug Palmer, Business Urges US Turn Up Heat on China Wi-Fi Rules, Reuters, February 24, 2004. 58 Steve Lohr, US Pressing China To Yield on Wireless Encryption, New York Times , March 4, 2004, p. C9. 59 The outcome of the April trade talks indicate that Chinas standards strategy also gives its trade officials new bargaining chips in trade negotiations even if the objective of establishing a new standard has to be delayed for a period. Hence, the Chinese side could give a bit on the WAPI standard in return for concessions from the U.S. side.
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national innovation system noted at the outset. The standard, now also endorsed by the State Encryption Management Committee, grows out of the activities of the China Broadband Wireless IP Standard Working Group (BWIPS) organized by MII in 2001. Membership includes the important China Electronics Standardization Institute (CESI), noted above, and over 20 universities, research institutes, and companies.60 Many of the latter owe their existence to the reforms in the science and technology system which prompted universities and research institutes to spin-off commercial high technology firms. The group leader of BWIPS is one such firm, IWNCOMM Co. Ltd., started by XiDian (Xian Telecommunications) University, which is also a member of the working group. A closer look at IWNCOMM indicates that it has been working on the technology since the early 1990s, initially in cooperation with Japan, that it maintains close relationships with the key national laboratories61 at XiDian from which it was established, and that it has enjoyed important research support from the 863 Program and from Chinas National Science Foundation.62 The WAPI case also illustrates some of the subtleties and implications of the new techno-nationalism. Efforts to explain the genesis of policy supporting the WAPI standard have called attention to the national security interests in the standard, and the likely involvement of Chinese defense and security agencies in its development. National pride and interest in promoting Chinese industry also plays an important role and reinforces the view that China is uneasy about the considerable influence which U.S. companies and government agencies have in international standard setting. In this view, Chinese IT enterprises are already in a position to compete for core technology... and with the Chinese IT industry now ranked third in the world in size, China

60 The Working Group includes the following members: China Electronics Standardization Institute, XiDian University, China IWNCOMM Co., Ltd., Beijing Institute of Post and Telecommunications, Xian Jiaotong University, Xian Institute of Post and Telecommunications, Hanwang Technologies, Inc., Guilin University of Electronic Technology, Research Center for Commercial Key of China, National Radio Monitoring Center, Huawei, Ltd. Beijing LHWT Microeletronics, Inc., Legend, Beijing Digipro Information Technology Co. Ltd., ZTE Corporation, Shanghai Sibo Telecom Co., Ltd., GCI Science & Technology Co,.Ltd., Shanghai Hamm Information Technology Co., Ltd., TCL Communication Equipment Co., Ltd., and Netac Technology Co., Ltd. See <http://www.chinabwips.org>. 61 Key national laboratories are centers of excellence recognized by the national government which receive special funding. Many were established with help from the World Bank. 62 In this sense, the history of IWNCOMMs work in this area illustrates very nicely the ingredients in Chinas technology development strategy: cooperation with technologically sophisticated foreign partners, financial support from targeted national R&D programs, and institutional reforms which have released a new entrepreneurship emerging at universities and research institutes for the creation of spin-off firms, or new technology enterprises, which are helping to bring research results to the market. See Appendix 1.

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has set itself the goal of evolving from a big IT country into an IT power.63 A third explanation calls attention to the fact that the existing Wi-Fi standards coming from the international system leave much to be desired and that much better wireless security for consumers and users of wireless products could be achieved with a new standard.64 There has been a troubling unilateralism, reminiscent of an older techno-nationalism, to the introduction of the WAPI standard that distinguishes it from other high-profile cases of standard setting. One thinks, in particular, of the third-generation mobile telephony case and the introduction of the TDSCDMA standard. In the latter, the technology was developed in cooperation with Siemens, and other MNCs have had a role in its unfolding. Significantly, Chinese efforts were brought to the international standards community and the TD-SCDMA standard was recognized by the ITU. While the Chinese government continues active efforts through research support, licensing, and investment guidance to promote TD-SCDMA as a means to support Chinese telecom firms, it has also been reluctant to select TD-SCDMA as the only permissible technology, as is the case with WAPI.65 Further evidence of the complexities is found in reactions from foreign companies. Most have maintained a united front in opposing the WAPI standard, and most MNC industry leaders would probably agree with George Scalise, president of the U.S. Semiconductor Industry Association, that a unique Chinese national standard will slow the development of Chinas information technology industries because it will hamper the ability of Chinese firms to access the innovations emerging from thousands of companies around the world.66 Yet, we should also consider the possibility that some MNCs will find it in their interest to work with Chinese counterparts on the WAPI matter. Recently, for instance, it was reported that Texas Instruments indicated its intention to support the WAPI standard, with TIs general manager for Asia, Mr. Cheng Tianzong, being quoted as observing that it was reasonable for China to make its own standards in light of its national security concerns and that, furthermore, Texas Instruments needs the Chinese market and wants to cooperate with Chinese enterprises.67 Although this report has since been de-

Qin and Cheng, Implications of Sino-US Dispute over WLAN Standard. Loring Wirbel, Deconstructing Chinas WAPI, EETimes , January 12, 2004, <http:// www.eetimes.com/story/OEG20040112S0046>. 65 Cao, Technological Capability, Standards, Industrial Policy, and the Market: The Third Generation Mobile Communications in China. 66 Cited in Tony Smith, US Chip Biz Tells China to Ditch Local WLAN Standard, The Register , February 25, 2004, <http://www.theregister.co.uk/content/69/35832.html>. 67 Texas Instruments Announces It Will Support Chinese WAPI. Will Come out with Chip by June, NetEase , February 6, 2004, <http://tech.163.com/tm/040206_126124.html>.
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nied by Texas Instruments,68 it does point to the possibility that foreign firms might find a competitive advantage in breaking ranks on a matter affecting access to what promises to be a very large market. If the WAPI standard is the most important test case for the new standards-based approach to technology policy, as some might argue, the defection of an important industry leader would lend support to the view that the size of the Chinese market does indeed provide an important asset in Chinas attempt to alter the structural power relations in the global economy.

Software
As noted previously, one of the more prominent cases of Chinese efforts to alter established technological architecture has been the promotion of a Linux-based operating system as an alternative to Windows. The Chinese software industry is thus another interesting domain for examining the ways in which thinking about standards fits into government policy to encourage the development of new industries. Throughout most of the post-1978 reform era, software has been a generally underappreciated component of high technology industrialization in China.69 Until the mid-1980s, most software was produced by research institutes to serve highly specific functions with specialized hardware. This era of bundled software development began to give way to an era of microcomputer systems with the gradual appearance of PCs in China in the 1980s and the need for operating systems and applications that were suitable to Chinese conditions, especially Chinese language requirements.70 It was in this period that one first began to see the appearance, from universities and research institutes, of Chinas spin-off new technology enterprises (Legend, Founder, Stone, etc.) in the IT field, responding to a growing awareness of the importance of software for achieving the indigenization of IT. An era of IT systems

Sharon Hampton, Texas Instruments, personal communication, March 8, 2004. As late as the year 2000, expenditures on hardware still accounted for about 90 percent of Chinese IT spending. Rethinking China Software Market, report of the SIIA-USITO Trade Mission to China, JuneJuly 2002. Observers of Chinese trading practices have long noted Chinese reluctance to pay for something as intangible as software, a fact which certainly contributes to the well-known piracy problems affecting the industry. Over the course of over twenty years, though, attitudes toward software have clearly changed as part of a changing understanding of technology and technological innovation more generally. This change is marked by more value being placed on intangible know-how as opposed to the hardware- or machine-embodied approach to technology, which characterized much of the earlier reform era. 70 These different eras are outlined in Erik Baark, The Evolution of Chinese Software Industry, paper presented at the Conference on Chinas Emerging Technological Trajectory in the 21 st Century, Rensselaerville, N.Y. September 27, 2003.
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diffusion characterized much of the 1990s as information technology products, and especially telecommunications, grew very rapidly. In this period, one saw both the birth of specialized software firms, and also new software production coming from the vendors of Information and Communication Technology (ICT) equipment, such as Huawei.71 The onset of the era of the Internet and informatization at the end of the 1990s has led to expectations of rapid growth in the software industry, to a significant elevation of the industry in the states policy priorities, and to a much more active export orientation.72 This evolution of the Chinese software industry, at least until this most recent phase, has been quite different from Indias, where the growth of the industry has been export-driven as a result of the outsourcing of services provided by Indian firms to MNC industry leaders. By contrast, the needs of the rapidly expanding domestic market, and in particular the need to make ICT more culturally and linguistically congenial to Chinese users, have been much more important in the Chinese case.73 During the era of IT systems diffusion, between 1992 and 2000, the software market grew at an average annual rate of 30 percent. During this period, international companies established themselves as market leaders in China74 with the result that by 2000, foreign corporations controlled 65 percent of the packaged software sales, with only two Chinese firms among the top ten vendors.75 The continuing strength of foreign software firms in the Chinese market is indicated in the following recent report from MII: Foreign software and software integration still account for 95.3 percent of the Chinese market. Microsoft still has a strong advantage on the desktop and server operating system market, and foreign products hold commanding positions

Ibid. Ibid. Reports of Chinese software exports during 2003 indicate a very rapid increase. Exports from Beijing alone increased almost 49 percent over the previous year to a value of slightly more than US$72 million, of which 90 percent was from foreign-invested firms. Peoples Daily , September 27, 2003, <http://english.peopledaily.com.cn>. The Gartner Group estimates that Chinas software exports will grow from US$ 850 million in 2002 to US$ 27 billion in 2006. Raju Chellam, China Can Become New Software Superpower, Business Times , April 18, 2003. 73 In 2000, only 6 percent of Chinese software output was for export. See Anna Lee Saxenian, Government and Guanxi: The Chinese Software Industry in Transition. Global Software from Emerging Markets: An Engine for Growth? Centre for New and Emerging Markets, London Business School, 2003, p. 17. See also T. Tschang and Lan Xue, The Chinese Software Industry: A Strategy of Creating Products for the Domestic Market, working paper, Asian Development Bank, 2003. 74 For instance, a Chinese firm, Kingsoft, had roughly 90 percent of the word processing market in the early 1990s, but lost most of it to Microsoft after Word was introduced. CNETAsia, August 18, 2003, <http://asia.cnet.com/newstech/applications/0,39001094,39146335,00.htm>. 75 Saxenian, Government and Guanxi.
72

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within the markets for high-end server operating systems, database management systems, and network management software.76 The software industry is also plagued by significant human resource problems. Chinese universities, for instance, do not have well-developed software training programs. Although there have been approximately 500,000 graduates in computer science over the past ten years, only about one-tenth of these have specialized in software development.77 One recent report predicted that China would need over 200,000 new programmers between 2004 and 2006, but that Chinese schools are only capable of turning out 20,000.78 Making matters worse, the better graduates of Chinas computer science programs often seek advanced degrees abroad, and increasingly, are in great demand from MNCs operating in China. Turnover rates of software engineers among Chinese companies are also very high due to fierce competition for their talents.79 With the prospect of further foreign penetration into the software market looming with WTO accession, the future of the software industry began to get new Chinese policy attention in 2000 with the promulgation of State Council Document 18, Notice of Certain Policies to Promote the Software and Integrated Circuit Industry Development, which spelled out a number of tax and other incentives for the industry. This document involved interesting policy initiatives in a variety of areas which reflected not only the growing importance given to software by the government, but more generally an appreciation of the changing nature of innovation in a knowledge-based economy. The first part of the policy package dealt with investment and financing and included measures to encourage venture capital, fund infrastructure development projects needed by the industry (including the establishment of ten national software parks), encourage the establishment of a NASDAQ-type board for start-up companies, and establish new principles for equity contributions for the establishment of new firms, including the offering of intangible assets as equity to the enterprise. The second part dealt with the tax policies, and provides for a variety of tax incentives. The third section provided for R&D support and for policies that make cooperative R&D with foreign partners possible. As part of an effort to move software production into the export sector,

76 MII Department Economic Operations, China Software Industry Development Report, 2002, <http://www.siia.net/divisions/global/MIIsoftwarereport2002.pdf>. 77 <http://www.whsuperich.com.cn/>. 78 Ibid. See also Thomas Brizendine, Software Integration in China, China Business Review, MarchApril, 2002, pp. 2631. 79 Saxenian, Government and Guanxi.

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the fourth section of the policy package addresses export promotion incentives, including central government support for expenses incurred by enterprises in securing ISO 9000 and CMM certification. A fifth part of the package deals with the ongoing accreditation system for software enterprises and identifies the Ministry of the Information Industry and the State Bureau of Quality and Supervision as the bodies responsible for national standardization products. The sixth section deals with a series of measures to strengthen IPR protection in the software industry.80 Further support for the industry was promulgated in 2002 in State Council Document 47, Program of Action for Promotion of the Software Industry, which offered more specific objectives for the implementation of Document 18. Document 47 identifies a series of targets for the software industry by the year 2005. These include the objective that the software market should reach a value of 250 billion yuan (30 billion dollars) by that date, with 60 percent of the value coming from domestic firms. It calls for the building of 20 large software companies with revenue goals of 1 billion yuan, the development of 100 Chinese software brands, and that exports from Chinese companies should reach US$12 billion. The number of software professionals should reach 800,000 and China should have a 3 percent share of the global software market. Software research has subsequently been given an important place in the 863 Program. Importantly, a series of government-directed procurement plans including an ambitious e-government initiative, encouragement of educational software, and preparations for the 2008 Beijing Olympics (the digital Olympics)promise to create a robust demand pull policy for the software industry. In addition, Chinas policy for the software industry also calls for the merging and integration of smaller firms in order to build up national competitors81 to take on the challenges of the multinationals and to make software features responsive to Chinese cultural tastes and organizational practices. As one report put it, as a result of language, cultural habit, government regulation and the individual demand of customers, foreign companies will face some barriers in the application of software telecommunications, finance, taxation and e-government. It goes on to say, however, that stimulated by the countrys

80 ExperExchange, <http://www.china.org.cn/english/features/investment/36736.htm>, accessed October 29, 2003. 81 In 2002, candidates for national champion status might have been found among the ten firms who were singled out as the life and soul of the software industry. These included Neusoft, Ufsoft, Kingsoft, Newgrand, Powerise, AsiaInfo Technologies, Shandong Langchao Cheeloosoft, CVIC Software Engineering, Tongtech, and TRS. See Peoples Daily , March 22, 2002, <http:// english.peopledaily.com.cn>.

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policy of encouraging merger and acquisition of foreign investment, positive participation of foreign investors in these fields is also expected.82 Chinas use of government procurement as an instrument of technology policy is a rather recent phenomenon. In 1998 procurement was 3.1 billion yuan, accounting for a mere 0.04 percent of GDP or 0.29 percent of government expenditure. However, procurement activities have grown rapidly since then, reaching 101 billion yuan (roughly US$12 billion) in 2002, amounting to 9.64 percent of GDP or 4.58 percent of government spending. Although China did not sign the WTO Government Procurement Agreement at the time of accession, it indicated its willingness to do so in the future and pledged in the meantime to gradually bring its procurement practices into rough harmony with international practices. The passage of the Government Procurement Law in 2002 is one important move in this direction; among the reasons for the relatively low level of procurement activity in China in the past had been the absence of a clear legal framework and weak law-enforcement mechanisms, as well as a lack of universal standards. At a time when WTO obligations are constraining Chinas use of older instruments of industrial policy, being formally unconstrained in the procurement area provides an attractive tool for the state to pursue its technological priorities, especially in software. Plans to increase government spending, including plans to promote e-government (e.g., through such efforts as the Government Online Project) and the informatization (xinxi hua) of society more generally (through such programs as Enterprise Online and Family Online), open a number of opportunities for promoting software development through procurement and standard setting for procurement.83 Interestingly, in keeping with our prior observations, the software component of e-government expenditures has only been about 8 percent. This is expected to increase, however, to about 11 percent, or 5.8 billion yuan (US$699 million) in 2004.84 The overall government software market in 2001 was worth 4 billion yuan, which represented slightly over 14 percent of the software market as a whole. Government procurement accounted for 14 percent of the platform software (operating

82 Software Industry Pregnant with Opportunities, tdctrade.com , February 4, 2003, <http:/ /www.tdctrade.com/report/indprof/indprof_030202.htm>. 83 For interesting discussions of e-government in China, see Peter Lovelock and John Ure, E-government in China, unpublished paper; Zhang Junhua, Chinas Government Online and Attempts to Gain Technical Legitimacy, Asien: Deutsche Zeitschrift fr Politik, Wirtschaft und Kultur , no. 80 (July 2001); and Zhang Junhua, A Critical Review of the Development of Chinese E-Government, Perspectives, vol. 3, no. 7 (2002). 84 China Daily, February 12, 2003.

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systems, database systems, etc.), slightly more than 22 percent of the middleware software (i.e., programs that connect two or more otherwise separate applications), and 13.5 percent of the applications software.85 Software promotion via government procurement has been promoted by the Informatization Office under the State Council, the most dramatic case of which to date was the State Councils August 2003 decision to require domestically produced software in all government ministries during the next cycle of software upgrades. The decision is intended to help raise the technical level of the Chinese industry, but it is also expected to help break the hold of Microsoft Windows operating systems and Microsoft Office on the PC environment by encouraging the adoption of Linux-based operating systems and office applications such as Kingsofts WPS Office 2003. The policy, which is intended to raise the percentage of government employees using domestically produced software from 30 percent to 100 percent, is justified as a means to support the domestic software industry86 and to enhance information security in the face of widespread concerns about the level of security offered by Microsoft. As with other standards initiatives, the procurement tool in the standards strategy is backed by the research system. Again, CESI has an important role in linking standard setting at the policy level and technology development at the R&D level in promoting Linux for government software. For instance, with guidance from the Ministry of the Information Industry and the Standards Administration of China, CESI initiated a project through its CLINUX technical working group to establish Linux standards for China. The work was supported by the Ministry of Science and Technology through the Research on Key Technical Standards for Chinese Information Processing noted above (which was designated an Important Standard Special Project), and by a project entitled Chinese Linux and Office Software Related Standards and Specifications under the 863 Program. Participating in the working group were such software producers and research institutes as Sun Wah Linux, Ltd. (a Hong Kong-based software producer), the Software Institute of the Chinese Academy of Sciences, its spin-off company, Red Flag Linux,

China Information World , 2002. According to an official with the State Assets Supervision and Administration Commission, The domestic software industry is very insulated. There is poor interaction and partnership with user companies. The increased use of domestic software will make the Chinese software industry more open. CNETAsia, China blocks foreign software use in govt, CNETAsia , August 18, 2003, <http://asia.cnet.com/newstech/applications/0,39001094,39146335,00.htm>.
86

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and COSIX Linux (an important Chinese Linux developer).87 The goals for this work included efforts to ensure that interfaces used by local companies are similar and that they use the same codes for Chinese characters and for building links between operating systems and applications. Recently, the CLINUX working group reported that they had draft standards for a Linux Applications Program Interface, for Linux desktop and server operating systems, and for a new user interface.88 Understandably, foreign companies were not happy with the State Councils 2003 decision. In the United States, the Information Technology Association of America (ITAA) reacted strongly to the Chinese decision and initially directed their concerns to both Jin Xiaoming, Minister-Counselor for Science and Technology at the Chinese Embassy in Washington, and to the secretary-general of CIITA in Beijing, Liu Chunlu, arguing that the policy was protectionist and that it would be detrimental to software users in government who would be denied access to choices among the best technologies available. The USTR has also flagged this case in its 2003 Report to Congress and indicates that it will continue to press China to change its policy. This State Council procurement decision is usefully seen in a broader context of Linux-related issues and initiatives. First, efforts to shake the dominance of the Windows operating system have been underway for a few years now under the banner of the open-source movement. Chinas problems with Microsoft are not unique, as recent reports of dissatisfactions with Microsoft from the governments of Germany, Brazil, and elsewhere illustrate. China may be more intent on launching a viable alternative to Windows than other countries, but as noted below, its chances may be less with the PC operating system than with software for other devices. Second, it remains to be seen how fully the State Councils decision will be implemented. Given the existing familiarity with Windows, ready availability of pirated copies, and some recognized performance advantages of Microsoft products over the Chinese alternatives, it seems quite likely that those within government offices will continue to use Microsoft products. As one industry observer noted, only partly

87 Gao, Chinese Linux Standardization: An Update. Red Flag is anxious to develop reliable word processors and spreadsheets. Red Flag sold about 1.3 million copies of its operating system in 2002 mainly to PC manufacturers who bundled it with about 10 percent of the machines sold in China. However, since pirated versions of Windows are so readily available, most new buyers quickly install Windows as well. See also Financial Times , August 21, 2003, p. 26, in HOSTINGTECH, October 29, 2003, <www.cicc.org.sg/aoss-2/present/China/china.pdf>. 88 Zhongguo Linux biaozhun hu zhi yu chu si fen guifan caoan yi wancheng, <http:// tech.sina.com.cn/it/2004-03-04/0156300477.shtml>.

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in jest, government bureaucrats are likely to run Microsoft products until they are subject to supervision and inspection, at which point they will reboot to Red Flag Linux and WPS Office 2003 before returning to Windows mode after the inspectors leave!89 A more serious issue in the procurement story, perhaps, is the matter of security. As in other countries, Chinese officials and Windows users have been concerned about the alleged back door security vulnerability of Windows, and the possibility that foreign intelligence services could use this feature of the software to gain access to sensitive data. In recent national security policy discussions in China, much has been made of information security as a critical part of a national defense posture in an age of information warfare, which has led to a series of computer security initiatives under the auspices of the defense and public security systems. In the face of this growing concern, Microsoft has included China in its Government Security Program (GSP) and agreed to cooperate with the Source Code Review Lab of the China Information Technology Security Certification Center (CNITSEC) in providing controlled access to CNITSEC and seven other Chinese entities. Apart from national security considerations, the demonstrated vulnerability of Windows to computer worms and viruses has become a more serious concern over the past year as well, not only in China but among Windows users throughout the world. As noted above, these security considerations have energized the efforts to establish a Linux-based alternative, stimulating among other things the development of new collaborative work among Chinese, Korean, and Japanese researchers. Another issue growing out of Chinas search for an alternative to Windows has to do with the international credibility of Chinas commitment to the open-source movement. While China seems to be anxious to work with international collaborators on Linux systems, and to exploit resources from within the open-source movement to challenge Microsoft, efforts to establish intellectual property rights over Linux-based systems developed in China have raised questions as to Chinas real intentions.90 In many ways, the strong profit-seeking commercial drive one sees in the Chinese high-technology industry, and the more strategic national aspirations to challenge established architectures and set new standards, as described above, seem to be normatively inconsistent with the open-source movement.

89 Personal communication, Beijing, November 2003. Even Sun Yufang, chairman of Red Flag and active Linux supporter, has Windowsas well as Red Flag Linuxinstalled on his laptop, Financial Times, August 22, 2003. 90 G. Pierre Goad and Lorien Holland, China Joins Linux Bandwagon, Far Eastern Economic Review, February 24, 2000.

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The future of Linux-based systems in China is likely to be strongly influenced by foreign companies who also have an interest in seeing alternatives to Microsoft.91 Chinese efforts to promote Linux would be slowed without having access to the technology which such firms can bring to new product development and as a result, we are seeing a variety of strategic partnerships developing between Chinese and foreign entities. Hewlett-Packard maintains technical ties with Red Flag Software, and Dell is said to have certified Red Flags version of Linux for use on some of its PowerEdge servers in China in response to customer demand.92 Red Flag has also teamed up with Oracle on the promise that, in the words of an Oracle promotion:
Oracle is the only company that provides all your enterprise software and full technical support on Linux. The combination of Oracle and Red Flag provides Chinese customers with a world-class Linux operating system tailored to Chinese requirements with full enterprise support for Oracle 9i features including data clustering.... Together, Oracle and Red Flag will enable customers in China to exploit the cost savings, power, and reliability of Linux in their most demanding business applications.93

IBM has also been active in China in promoting Linux, including an agreement with Kingsoft for the development of a desktop operating system. More recently, Sun Microsystems and the China Standard Software Company (CSSC) reached agreement in November 2003 to promote the dissemination of Suns Java Desktop System.94 CSSC is a government-backed consortium of 20 Chinese companies chosen to develop a low-cost open-standards desktop which can then be widely diffused as part of an effort to close Chinas digital divide.95 As noted above, the Linux future is also closely tied to the future of embedded software in China, a segment of the industry which is expected to grow very rapidly as Chinas demands for a variety of digital devices increases, and where savings on royalties on proprietary software could be substantial. A

91 See for instance, Global IT Giants Help China Boost Softwares Application, <http:// w w w. h o s t i n g t e c h . c o m / n e w s / 2 0 0 3 / 1 2 / 1 2 / S t _ N i t f _ G l o b a l _ I T _ g i a n t s _ h e l p _ C h i n a _ b o _ a1211089.0iw.html>, accessed December 20, 2003. 92 Ibid. 93 Kevin Walsh, vice president of Internet technology at Oracle, in GRIDtoday , vol. 2, no. 19 (May 12, 2003). 94 All IT Roads Lead to China: Big Four Hope against Hope, The Inquirer , December 6, 2003, <http://www.inquirerinside.com/?article=13065>. 95 Sun Microsystems, Sun and the China Standard Software Company Partner to Establish the Java Desktop System as the Foundation for Chinas Fast Growing Industry, Sun News, November 17, 2003, <http://www.sun.com/smi/Press/sunflash/2003-11/sunflash.20031117.3.html>.

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number of observers who doubt the effectiveness of the Linux challenge to Microsoft in the area of desktop systems see a much more robust future in the large category of embedded software. The Chinese government has made R&D on embedded systems a high priority, and Chinese firms are moving quickly into this field. In addition, work on Linux-based embedded systems is an important part of the cooperative activities with parties in Korea and Japan. The China-Japan-Korea consortium agreement is one that warrants attention. Again, the incentives for challenging Microsoft are matters of cost, security, and independence. In July 2003 a Consumer Electronics Linux Forum was established by Japanese and Korean companies.96 Subsequently, a Japan-China-Korea Open Source Software (OSS) Promotion Partnership was established with the leading software industry associations of the three countries (the Japanese IT Service Industry Association, the Federation of Korean Information Industries, and the Chinese Software Industry Association CSIA), which together includes some 1000 companies as members.97 The division of labor calls for China to take the lead in developing PC operating systems based on products such as Red Flag Linux. It is not entirely clear whether the consortiums true purpose is to develop a Linux-based PC operating system, or whether it is focused more on the embedded software market associated with advanced digital devices. Within China, there is also a difference of opinion as to what the focus should be. Some hold that the way to establish Linux in China is to focus on desktop applications, while others believe that there is no point in challenging Microsoft in this domain and instead urge that the attention be given to the next generation of digital devices. Some of those who argue in support of the desktop approach are concerned that if the consortium focuses primarily on embedded software, it will mainly serve the corporate interests of the Japanese and Korean consumer electronics giants at Chinas expense.98 In addition to the issues associated with the development of a Linux operating system, standards have also figure prominently in Chinese efforts to encourage the development of office automation (OA) software. Again, government procurement, combined with R&D support, are critical tools. For instance, the Beijing city government in 2001 required all its agencies to up-

96 Peter Clarke, Eight Firms Form Consumer Electronics Linux Forum, Semiconductor Business News , July 1, 2003, <http://www.eetuk.com/bus/news/OEG20030701S0010>. 97 Martyn Williams, Major Asian IT Groups to Collaborate on Open Source, InfoWorld , November 14, 2003, <http://www.infoworld.com/article/03/11/14/HNasianitgroups_1.html>. 98 Global IT Giants Help China Boost Softwares Application.

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grade to Kingsoft WPS2000 instead of Microsoft Office 2000 in spite of the fact that WPS2000 is believed to be less stable than Microsoft Office, and that after-sales service and customer support is said to be quite weak. In the following year, the Guangdong provincial government also made a major purchase of WPS2002 from Kingsoft.99 Chinese government agencies have also used means other than procurement to support domestic office software developers. For example, the Ministry of Education regularly conducts the National Computer Rank Examination, a test that can lead to certificates of proficiency in computer science and software applications and which has become an important credential in China. The examination covers applications of office automation (OA) software, but it is up to the Ministry of Education to determine which products are to be included in the exam. Kingsoft WPS was the product of choice. By the end of 2002, about 8 million people had taken the National Computer Rank Examination.100 Two important objectives in the development of standards for OA software have been to achieve compatibility across platforms (Linux and Windows) and the compatibility of files among different OA software applications. Chinese companies, such as Kingsoft, Evermore, and Red Flag have been working under a directive from MII, and with guidance from CESI, on standardizing these user interfaces. In 2002 Kingsoft also took the lead in establishing the National Association of Office Software Standardization, the first significant standards initiative coming from an enterprise, as opposed to the government. The association is made up of software companies, research institutes, and universities, and works on OA issues and government research projects with an eye towards making recommendations to the government.101 In January 2000 the General Group for National E-government Standardization was established under the supervision of SAC and the Informatization Office of the State Council and has now prepared Tentative Guidelines for Egovernment Standardization and E-government Standards for use in government procurements. Most major domestic OA software producers in China

Saxenian, Government and Guanxi. Kingsoft, Kingsoft WPS Becomes Part of NCRE, <http://www.kingsoft.net/c/2003/ 03/31/69360.shtml>. 101 Dong Jun, Domestic Software Fights Back against Microsoft with Government Procurement, Blogchina.com , August 27, 2003, <http://blogchina.com/new/display/12716.html>; Shen Juan, China National Association of Office Software Standardization Established, International Finance , August 11, 2003, <http://tech.sh.sina.com.cn/it/e/2002-08-13/ 081513832.shtml>; Hu Min, How Far Can Domestic OA Standardization Partnerships Go? China Computer Users , June 6, 2002, <http://www.e-works.net.cn/ewkArticles/Category40/ Article5696.htm>.
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have participated in the drafting of these guidelines, which are based on XML technology, while foreign companies reportedly were not informed of the drafting process.102

Conclusion
The story of Chinas search for an alternative to Windows, and its attempt to establish a strong domestic OA industry, illustrates points made in our earlier discussion of a standards-based technology policy more generally, albeit with the slightly different twist occasioned by the use of what promises to be a powerful procurement tool. As in other industries where we are seeing an appeal to standards, so too in the software industry, China seeks to achieve greater control over a technological future which it now sees as being largely in the hands of the powerful industry leadersthe architectural controllersin the MNC community. However, it faces the problem of wresting that control back to itself with national firms which generally cannot measure up to global industry leaders in either size or technological level. The appeal to new standards is thus an attempt to change some of the rules of the game without changing the game itself. In this, the domestic industry must rely upon the power of the state for assistance, but it is a power which is of only limited effectiveness and which therefore must be used deftly in conjunction with other resources. These include the special market power China enjoys and the dynamics of competition among multinational corporations for access to that market. They also include accumulated domestic technological assets and an increasingly vigorous R&D policy. When combined, these give Chinas standards-based industrial policy a credibility which would not be found in other challenger countries. The Linux case, for instance, highlights opportunities for China to alter the balance of structural power in the international political economy by challenging the architectural leader. By taking advantage of opportunities offered by the open-source movement, which has made Linux both technically advanced and accessible, by teaming up with technologically sophisticated MNCs, and by taking advantage of the size of the Chinese market, China could emerge as a leader in the Linux-based challenge to Windows in commercial markets. We have seen that in Chinese appeals to standards as a tool of industrial policy there is a mix of techno-nationalism and techno-globalism, which

102 Hou Jiyong, Government Procurement Standards Come Out at the End of the Year Reshaping Software Market, China 21 st-century Economy Report , August 24, 2003, <http:// tech.tom.com//1121/1858/2003824-56611.html>.

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makes the crafting of a response to this style of policy a special challenge. Except for the denial of national treatment in the WAPI case, where China does indeed seem to be at odds with WTO rules, it is by no means obvious that China is violating the letter of any of its WTO commitments in using standards in support of industrial policy. Indeed, we have suggested above that attention to standards, and a new appreciation for the power of procurement in advancing technologies, seem to be a response to WTO accession. That said, in execution, some of the standards-based policies could be construed as inconsistent with the spirit of WTO agreements and as narrowly protectionist measures implemented by a strongly techno-nationalist regime. As we have seen, this is certainly how members of the international business community have reacted to the domestic software requirement in government procurement and to the WLAN security protocol. As the scope of Chinas aspirations for its standards policies comes to be better appreciated abroad, concern for its techno-nationalist tone will surely increase. Making the case that China is pursuing a new narrow technonationalism is not a simple, unambiguous matter, however. First, more economically liberal attitudes also seem to be associated with standards policies, including the stepshowever haltingthat have been taken in the direction of transparency, national treatment, and harmonization with international norms. Beyond attitudes, there are also issues of capabilities, as the software case illustrates. While China, in comparison with most countries, is in a relatively good position to challenge established technological architecture, it really is not yet in position to do this on its own in most technologies, and there are good reasons to wonder whether it could be any time in the near future. Hence, the important role of global industry leaders as allies in its architectural challenges, is illustrated most clearly here in the efforts to promote Linux, but is also evident in the role of Siemens and others in the TD-SCDMA case. The latter also illustrates Chinas interests in bringing its standards agenda to international standards bodies for international review and certification. In this sense, China seems to fit the model of neo-technonationalism suggested by Yamada. The standards strategy seems interested, indeed, to advance national interests by leveraging globalization, and shows the influences of public, private, foreign, and domestic initiatives, as suggested by Yamada. Even in the hotly contested WAPI case, the forces of globalization are likely to temper the techno-nationalist inspirations behind the standard, yielding an outcome which is likely to reflect elements of both conflict and

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cooperation.103 In looking at Chinas standards-based approaches to industrial policy in neo-techno-nationalist terms, we come to a more nuanced view of Chinas rise as a commercial competitor. As noted at the outset, it is easy either to underestimate or overestimate the nature of the Chinese competitive challenge, and thus mischaracterize it. The software case illustrates very nicely that the name of the game is not simply Sino-foreign competition; Sinoforeign competition there surely is, but a number of other contingencies must be understood, as suggested by the Yamada argument, if sensible policy responses are to be devised. The first of these, of course, is that Chinese firms, with only a few exceptions, are really not serious competitors with global industry leaders and many Chinese believe that this calls for government intervention in an attempt to right the imbalance. However, the nature of that intervention is increasingly contested in China, between those favoring a more interventionist stance and those wishing to see the market work.104 One way that this contest plays out, it has been suggested, is through flexible policy intervention and implementation, in which a hard techno-nationalist position is enunciated to see what the market will bear, so to speak, followed then by a relaxation of declarative policy or by lax implementation.105 There is a certain pragmatism to this approach which allows the state to pursue its objectives, but at the same time, to allow market-based responses from an increasingly differentiated industrial community which may have rather different interests in particular standards from those proposed by the state.106

103 In addition to signs that Texas Instruments is prepared to work with China on the WAPI matter, Intel also is in discussions with China on the standard and recently sent its chief technology officer, Pat Gelsinger, to China to consult with Chinese officials even as U.S. industry pressures the U.S. government to raise the political visibility of the issue with the Chinese government. For more on the Gelsinger visit, see <http://www.infoworld.com/article/04/03/04/ HNintelchinawapi_1.html>. 104 This basic tension has been nicely described in a recent paper by Edward Steinfeld. See Edward Steinfeld, Chinese Enterprise Development and the Challenge of Global Integration, in Shahid Yusuf, ed., East Asian Networked Production , Washington, D.C., The World Bank (forthcoming); See also Barry Naughton and Adam Segal, China in Search of a Workable Model: Technology Development in the New Millennium, in William Keller and Richard Samuels, eds., Crisis and Innovation: Asian Technology after the Millennium , New York: Cambridge University Press, 2003. 105 Personal communication, Beijing, November 2003. For the student of Chinese politics, this alternating tough/soft approach is reminiscent of the long-standing fang/shou, loosening/ tightening dynamic of political control more generally in which crackdowns and repressions are followed by liberalizations which are then followed by more crackdowns and repressions. 106 As Peter Grindley has argued, keeping a good balance between government initiatives on standards and market forces is an important issue in standards policy. For standard setting to be successful, policies taken by the government must be responsive to markets. Peter Grindley, Standards, Strategy and Policy: Cases and Stories, New York: Oxford University Press, 1995.

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A second contingency to be considered in assessing the challenges of Chinese standards policy is the nature of competition among MNCs themselves within China, as illustrated again by the software case. In this view, China has become the most important new field of competition for the playing out of global competitive strategies among MNCs.107 This fact, combined with the significant organizational changes in commercial life in China resulting from economic reforms, points to a far more complex competitive environment. While simple Sino-foreign competition may still be one dimension of this environment, the game is now characterized by multiple players (different units of government in China, Chinese companies with different ownership and reporting relationships and different commercial objectives, competitive multinational corporations, their home governments, etc.) with multiple interests and objectives. Thus, in some cases, we might find a high coincidence of interest among the Chinese players on standards issues, but in other issues, the interests of Chinese firms may overlap more directly with those of foreign firms, rather than with the Chinese government. In the area of process maturity standards used in the software industry, for instance, some Chinese companies have complained that new standards initiated by the Chinese government which deviated from internationally recognized standards have done nothing but cause considerable confusion.108 China is neither the first nor the last country seeking to use standards policies to enhance the competitiveness of its firms and national economy. Responses to these efforts, however, should recognize the contingencies identified above. While we can expect self-interested strategic behavior from all of the players in this game, we should also recognize that Chinas neo-technonationalism permits the search for principles which can contribute to the resolution of conflict over standards. In the final analysis, if the global economy is to function, all parties will have an interest in embracing ideas of transparency, harmonization, and national treatment in the setting of standards, and all will have an interest in standards which contribute to principles of economic efficiency and technological progress. This said, it is also likely that conflicts over Chinese standard-setting propensities will not disappear. China has both motivation and capabilities to pursue an aggressive standards-based policy. The

107 Denis Fred Simon, presentation made at the Conference on Chinas Emerging Technological Trajectory in the Twenty-first Century, Rensselaerville, N.Y., September 47, 2003. 108 Xiangkui Yao, China Software Industry: Techno-nationalism and Chinas National Innovation System , unpublished masters thesis, Department of Political Science, University of Oregon, 2004.

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Chinas Post-WTO Technology Policy

motivation comes from commercial, security, and cultural interests in standard setting which, as suggested at the outset, have roots that are deep in modern Chinese history. In dealing with the conflicts which will inevitably arise, it will be important to understand both the capabilities and the diverse motivations behind Chinese actions in this increasingly important area of technology policy.

Suttmeier and Yao

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Appendix 1: Recent History of IWNCOMMs R&D Projects

19921994 Development of the Wireless IP (with Japanese partner) 19941995 Development of Wireless Bridge (with Japanese partner) 19941995 Development of Key Chips for High Speed Wireless Net (with Japanese partner) 19941995 The Design and Implementation of the Campus Network for XiDian University 19951996 Research into Nomadic Network System and Key Technologies (supported by the National Natural Science Foundation of China) 19971998 Mobile Management of Mobile Network (supported by the National Natural Science Foundation of China) 19971998 Technology and Equipment for Wireless LAN (supported by 863) 19971999 The Router Technology of Satellite Internet (with U.S. partner) 19962000 High Speed Grouping Wireless Net 19962000 Research Into Short Wave Self Organized Net 19992001 Research Into the Connecting Technology of High Speed Information Net (with support from the National Natural Science Foundation of China) 19992000 Broad Band Wireless IP System (with support from 863) 1996present Research into IPV6, and the establishment of a Northwest IPV6 node.