The International Implications of China's Fledgling Regulatory State: From Product Maker to Rule Maker

Abstract

The principal analytical lens through which Western decision makers and commentators have viewed China’s rapid rise in the international economy is the country’s impact on global market prices. China is already the world’s fourth largest trading nation and has the world’s biggest labour force, and the prospect of a possible consumer base of over a million people makes it the most attractive emerging market. Because of this economic might, in both production and consumption, China has begun to shape prices for a large array of goods and services. While analysts disagree about the specifics, no-one fundamentally disputes that this ‘China Price’ effect exerts considerable influence over current international economic dynamics. This article’s main thesis is that the ongoing transformation of the Chinese state is empowering the country’s leaders to influence the non-market environment of business as well, and that this route of influence has the potential of being at least as important as changes in relative market prices. A series of domestic institutional reforms have provided Chinese policy makers with the tools to shape the rules and standards that underlie international markets and the terms of competition within them. We show that the particular importance of foreign direct investment (FDI) as a driver of China’s economic development amplifies the effects of ongoing domestic institutional capacity building. Having established itself as a global ‘product maker’, the next round of competition could see China establish itself as a potent ‘rule maker’ in the global economy. Indeed, evidence is mounting that Chinese policy makers are beginning to deploy their expanding regulatory capabilities to set clear market rules at home and leverage the Chinese market to export them internationally. While China’s already impressive domestic market plays a critical role in this strategy, market size alone is insufficient. We argue that China’s ability to influence international market rules depends on policy makers’ ability to employ new regulatory capabilities that are the result of a political transformation initiated more than two decades ago. Through a series of administrative reforms, China has constructed a fledgling regulatory state that gives policy makers new