(FORTUNE Magazine) – Just try to find an area of science and technology that isn't already feeling the huge shadow of China. It is now the world's technology manufacturer of choice, siphoning jobs not just from the United States but also from Mexico, Thailand, Singapore, and other low-cost labor centers. Each year China produces as many engineers and scientists as the United States does--and while its numbers are going up, America's are going down. The Chinese government is pouring the equivalent of tens of billions of dollars into education and R&D facilities for science and medicine, while R&D spending in the U.S. has been stagnant.

For the tech industry, it's China--not Europe, or Japan, or other Asian countries--that will soon be its main rival. The implications are profound. No longer content to cheaply make other people's products, a task it has clearly mastered, China wants to be a global standards setter. In recent months it has moved to define its own standards for office software, operating systems, mobile phones, wireless computing, Internet protocols, DVD players, video compression, RFID, and other important technologies. China argues that by dictating standards it avoids potential national security risks. Of course, it could also potentially save the billions of dollars a year in licensing fees that it now shells out. Tech giants are bowing to its demands despite China's blithe attitude toward intellectual-property rights. The country recently insisted on, and won, permission to inspect Microsoft's Windows source code.

Over the next few years, the standard-setting drive cannot help but fracture, or at best confuse, the global tech market. China's economy is growing 8% to 10% a year, and its consumer market is growing even faster. No CEO is willing to ignore that.

One place to watch the flexing of power is in mobile phones. China already has more cellular users than any other country. For the next generation of mobile technology, the government is throwing its weight behind a home-grown phone service called TD-SCDMA. Any company wanting to do business in China will probably have to embrace it.

Now duplicate that scenario for software, microchips, consumer products, and other technologies. The message: Just as the U.S set tech standards in the 20th century on everything from the phonograph to the PC, China could set the agenda in the 21st. But hey, that's capitalism. --Peter Lewis