HOW CHINA DOES IT

The Rogue That Plays by the Rules

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By Edward S. Steinfeld
Sunday, September 2, 2007

SHANGHAI Tainted Chinese goods flooding international markets. Effluents from Chinese factories polluting the oceans and the air. Pirates in the Chinese marketplace running roughshod over global intellectual-property standards. The list goes on and on.

As many Americans understand the country, China is trouble for its own people and all the rest of us. Its government is hell-bent on development but provides none of the checks expected of a healthy market system: a free press, an independent judiciary, meaningful property rights and a real legislature. Institutionally deficient and stuck in the past, China is unprepared to deal with the future and to work within the rules of fair play that bind the world's most advanced economies -- or so the conventional wisdom suggests.

As a China-focused academic, I know these arguments abound. I have made them myself for years. Like many China-watchers, I can give myriad reasons for China's current shortcomings and almost certain future stagnation. But the problem is that the Chinese system has done anything but stall. Instead, over the past two decades, it has integrated itself into the global economy and enmeshed itself in the most technologically complex international supply chains. Its lure as a production site, even for multinational companies with sensitive intellectual property, continues to grow, and as of this summer it boasted a $24 billion trade surplus with the rest of the world.

Time and again, China has navigated problems that appeared insurmountable, then pressed on to new levels of economic growth. Looking out my window today upon the roiling metropolis of Shanghai -- a place utterly different from what it was on my first visit 18 years ago -- I increasingly find myself puzzling not over what is wrong with the Chinese system but over what keeps it chugging through its head-spinning transformation.

The answer lies neither in some unique Chinese recipe for growth nor in some savvy dodging of global market norms on Beijing's part. The real story isn't about "China Inc." or "state mercantilism." The heart of the matter is outsourcing -- not multinational companies' outsourcing of jobs and manufacturing to China, but China's outsourcing of rule-making authority to the rest of the world. At each historical bottleneck in its transformation, China has ended up delegating to outsiders the power to design the rules by which its internal market operates.

Accession to the World Trade Organization, for example, granted foreign firms unprecedented entr?e into China's domestic market. The self-induced competitive threat then forced the restructuring of thousands of Chinese firms and the elimination of socialist-style guarantees of lifetime employment. The listing of Chinese companies on overseas stock exchanges exposed those firms to supervision by stringent watchdog agencies such as the Hong Kong Monetary Authority and the U.S. Securities and Exchange Commission. The integration of Chinese producers into global production chains subjected them to the quality standards of brand-conscious global multinationals, scrutiny by the foreign press and the sensitivities of informed global consumers.

The recent scare surrounding "Made in China" products illustrates how outside pressure forces China to clean up its internal act. For years Chinese citizens have suffered from unsafe products, including deadly pharmaceuticals, and Chinese regulators are notorious for corruption and kickbacks. Change has come only since foreigners -- or their pets -- started dying.

The former director of China's food and drug administration was convicted of corruption and executed -- the highest-ranking official to receive such a sentence in years. Chinese commerce officials entered negotiations and consultations with the U.S. Consumer Product Safety Commission, and the head of China's product-quality agency publicly acknowledged the scope of product-safety deficiencies. On Aug. 15, Beijing committed to state inspections of all food-related exports leaving Chinese ports. Sure, the state-run Chinese media did its usual thing: It lashed out about the foreign criticism. But behind the scenes, the Chinese seem to be taking significant steps.

Of course, the process is rarely smooth or entirely predictable. Beijing remains sensitive to issues of sovereignty. Chinese officials agreed to state inspections of food exports -- a commitment that will require a substantial increase in agency funding, personnel levels and supervision -- but appear unwilling to allow U.S. toy or food inspectors into the country.

The Chinese government has also proved reluctant to share information or outsource regulatory authority in the areas of public health and disease control. With the SARS outbreak of 2003, its growing AIDS problem and the current spread of the blue-ear pig virus across its swine farms, China seems to share information (if at all) only when foreign media, commercial monitors or global agencies leave it no choice. Yet the Chinese government frequently turns to multinational commercial players -- global pharmaceutical companies, investment banks and consulting companies -- for advice. Moreover, companies such as Mattel and Wal-Mart routinely inspect Chinese suppliers on their own.

Time and again, China has effected significant reforms within its system by subjecting itself to rules originating outside its shores. And it has carried out these reforms without a free press, a civil society, an independent judiciary, clear property rights or representative government -- elements considered critical to the creation of a modern, successful economy.

So what is the point?


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© 2007 The Washington Post Company

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