The dragon and the eagle.

In James Kynge's justly acclaimed book, China Shakes the World, the former Financial Times Beijing bureau chief relates a telling story about China and the U.S. companies doing business there. Beijing let it be known that any foreign company hoping to win contracts in the gas-turbine market had to be serious about transferring technology. Such demands ordinarily are met with hand-wringing from Western multinationals, but this product was even more problematic because the technology embedded in gas turbines is close to that of engines for commercial airline jets.

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Kynge picks it up from there: "But for the sake of the market, GE decided to play ball. It would hand over some of the details of how to make its 9F gas turbine, one of a series of generators that had been created by its aircraft engine and power systems divisions in conjunction with the U.S. Department of Energy. The 9F alone had cost around half a billion dollars to develop. In the three months of negotiations with potential Chinese partners, GE's approach, as always, was to offer just enough technology to win the contract, but not enough to allow the Chinese side to build a rival turbine immediately. The Chinese, for their part, wanted the drawings for the entire turbine: the modeling and mathematics behind the shape of the turbine's blades, how the blades were cooled while rotating, and the chemistry of the blades' makeup. A spokesman for GE declined to comment on the details of the deal it had reached, but it did eventually win an order for 13 of its 9F turbines, worth $900 million. Nobody is under any illusions, however, that when the next big contract is up for grabs, the Chinese will be driving an even harder bargain."

The fact that China has world-class ambitions is no secret. What is less appreciated is that while it is a burgeoning force, it cannot rewrite the rules of comparative advantage. As Kynge ably points out, China's prowess in manufacturing comes at the expense of other fundamentals.

In this issue, Dr. Robert Lawrence Kuhn and former USTR China hand Lee Sands argue that, given that globalization is irreversible, there are more subtle ways of dealing with the PRC as a trading partner. Sands, in particular, outlines how Western companies can best protect their intellectual property while using it to gain an edge. Ultimately, however, global advantage goes to those who best understand the global value chain, a concept explored both on page 28 and in this issue's cover story.