Critics have denounced China's standards as a covert form of protectionism for the country's high-tech sector, replacing the import tariffs that the country dropped as a condition for joining the World Trade Organization in late 2001. Chinese officials retort that the critics are hypocritical—that the United States protects its own industries by imposing environmental standards on home appliances and electronics.

There is a grain of truth in the charges of protectionism, particularly when the Chinese government acts to put the force of law behind its national standards.

ILLUSTRATION: ERIC BOWMAN

As we will show, China is nothing like a monopoly, nor are its policies monolithic. But first, we need to explain the standards themselves and how China is using them to shake up markets throughout Asia, Europe, and the Americas.

No other example better illustrates the world's reaction to China's recent forays into the standards world than WAPI, its proposal for Wi-Fi security. This initiative has sparked volley after volley of action, reaction, and confrontation that has strained the necks of many observers.

Chinese manufacturers developed WAPI in 2003 to address security weaknesses in the original IEEE 802.11 protocols, on which Wi-Fi is based. The weaknesses allowed almost any savvy individual within range to read data packets out of the air. In 2000, the IEEE had begun developing more reliable encryption methods. A new protocol, 802.11i, would eventually be approved in 2004.

In November 2003 the Chinese government announced that its WAPI protocol would have to be included in all Wi-Fi products in China by June 2004, and that all such products would be reviewed for compliance. Many international companies—particularly those that are members of the Wi-Fi Alliance, a global industry consortium—reacted to the news with dismay, as they believed that the review and approval process would be biased in favor of domestic Chinese companies. The authorities might, for instance, wave Chinese products through while nit-picking foreign ones, or tell Chinese firms what they need to do to pass inspection, while making foreigners learn the lesson by trial and error.

In fact, the Chinese authorities declared the necessary WAPI algorithms secret, and provided them to just a select few Chinese companies, meaning that only those so blessed could then license the new technology (or not) and control the market by fiat. Such crude favoritism harked back to China's old planned economy, and it wouldn't wash with trade partners. Eventually, through bilateral U.S.–China negotiations, the Chinese agreed in April 2004 to "postpone indefinitely" their WAPI compliance requirements.

Nonetheless, by February 2005, the WAPI dispute had heated up again. A delegation of representatives from China went to Germany to discuss the status of several competing standards for wireless Internet communications, including IEEE 802.11i. The meeting was organized by the International Organization for Standardization (ISO), in Geneva. The Chinese delegates had hoped that WAPI would be fast-tracked for approval, as 802.11i had been. However, after two days of contentious negotiations, the Chinese walked out, claiming that the ISO had treated them unfairly.

At the time, the Chinese press was rife with reports that the ISO had favored rival groups to stymie China's economic development. Some reports even stated that WAPI would be implemented immediately in China. As it turned out, that didn't happen, and it appears that the ISO incident in Germany might in fact have been a political move by a faction in China that wished to change the government's decision to postpone WAPI's implementation. At press time, the postponement is still the status quo.