By Dieter Ernst

HONOLULU (Nov. 24, 2010)—China's approach to innovation and standardization hardly played a role in international economic diplomacy until a few years ago, but with China's economic power on the rise, that has changed dramatically. Today, Beijing's innovation policy and its perceived threat to American innovation and competitiveness are a hot topic in U.S.-China economic relations, adding to contentious disputes over exchange rates, trade and foreign direct investment. The role of standardization, together with intellectual property rights and government procurement, are at the center of this conflict.

Since the U.S. and China have fundamental differences in their levels of development and their economic institutions, they pursue quite different approaches to standards and innovation policy. The consensus in the U.S. is that market forces and the private sector should play a primary role in innovation and standardization. China, on the other hand, relies more on the government to define the strategic objectives and key parameters.

In the U.S., there is widespread expectation that further reform of China's standards system will "naturally" converge to (almost) full compliance with a U.S.-style market-led voluntary standards system. That expectation can be found, for instance, in the American National Standards Institute's "United States Standards Strategy" document, which proposes the "universal application of the globally accepted principles for development of global standards” – principles that are based on the U.S. voluntary standards system.

Yet China's evolving standards system provides little evidence that convergence with the U.S. system is likely to materialize. When Chinese reformers argue for a transition to a more market-driven standards system, they emphasize that the government will continue to play an important role as a promoter, enabler and coordinator of an integrated standards and innovation policy.

China's primary concern is to develop as rapidly as possible, and to catch up with the productivity and income levels of the U.S., European Union and Japan. Strengthening China's domestic innovative capacity is considered the key to a sustainable transformation of its economy beyond the export-oriented "global factory" model. To achieve this goal, China's government is very serious in its aspiration to move toward becoming a co-shaper, and in some areas a lead shaper, of international standards.

But China's indigenous innovation policy and its entry into the global standards game as a new contender have raised concerns in the U.S. that this may erode American leadership and hasten the decline of the U.S. economy. The U.S. government considers China's innovation policy to be "discriminatory," implying that this policy is used as a trade-distorting ploy to challenge American supremacy in the global knowledge economy. A recent report by the U.S. Chamber of Commerce alleges that China's innovation policy is "a blueprint for technology theft on a scale the world has never seen before."

As for China's standardization strategy, it is viewed in the U.S. as a critical weapon of China's "neo-mercantilist policies" to keep U.S. companies at bay.

Perceptions in China are very different. China's leadership considers the American critique of its innovation policy to be unfair and hypocritical, and suspects that the U.S. is trying to contain China's rise.

From the Chinese perspective, reducing dependence on manufactured exports will only be possible if China succeeds in strengthening its domestic innovative capacity. To achieve this objective, China seeks to upgrade its standards system to lessen the control of foreign advanced countries, especially in the area of high and new technology, and increase the effectiveness of Chinese technical standards as important protective measures or barriers to relieve the adverse impact of foreign products on China's market.

A document issued by the Standards Administration of China says Beijing's standardization strategy needs to fill a policy vacuum because its accession commitments to the World Trade Organization have substantially reduced the use of most other trade restrictions such as tariffs, import quotas and licensing requirements.

China seeks to develop a "two-track" approach. On one hand, it is working within the international system with the long-term goal of creating patent-worthy technology essential to global standards. By including Chinese technology into global standards, China seeks to strengthen its bargaining power and reduce its exposure to high royalty fees. On the other hand, China seeks to use its increasing geopolitical influence to promote new sets of rules for international standardization, and hence to transform the international standards system.

On a global scale, this process is still in the initial stages. But there is little doubt that in the medium term China is going to change not only the international approach toward standardization, but also the rules of broader frameworks that govern international trade. The emergence of common global challenges like climate change creates conflict wherein sub-systems such as standardization, intellectual property rights and trade rules are exposed to strong scrutiny, and where the status quo may no longer be sustainable.

In short, there are vastly different perceptions in the U.S. and China of what constitutes legitimate goals of innovation and standards policy. Proper analysis and compromise are sorely needed to help avoid a vicious circle of escalating trade conflicts and regulatory confrontations, with each country's public posture on innovation and standardization increasingly becoming harder, while frantic negotiations try to mitigate the damage in the background.

Dieter Ernst is a senior research fellow in economics at the East-West Center in Honolulu, Hawai‘i. A version of this commentary first appeared in China Daily on Nov. 24, 2010