China Tightens Regulations on Foreign Internet Services

Published June 9, 2010

New laws by the Chinese government increasing its regulation of Internet Service Providers are causing increased concern and some embarrassment for U.S. companies operating there.

Amendments to the Law on Guarding State Secrets passed this spring force ISPs to cooperate with Chinese officials during investigations regarding state secrets and trade secrets of state-owned enterprises. The amendments become active October 1 of this year.

News of last year’s Llhasa riots in China’s Urumqi province was slow to emerge because Chinese authorities had stepped up efforts to censor Internet reporting of the events. Chinese Internet users who typed “Urumqi” into their search engines netted no results, and readers of online news stories permitted by the government to be published were prevented from adding comments.

Ethical Dilemma

The additional regulatory measures in recent months present an ethical dilemma for American companies that want to do business in the world’s fastest-growing technology market.

An earlier crackdown on political opponents caused search engine Google, whose corporate motto is “Don’t Do Evil,” to close down its offices in China this year. China’s new, broader measures to pry into the email accounts and track the Web searches of dissidents as well as the strengthening of its Law on Guarding State Secrets are further complicating the government’s relations with U.S. telecommunication companies that do considerable business in China. These firms are wary of further damaging their marketing brands in America and elsewhere in the West by divulging personal information to authorities that may result in the imprisonment of human rights activists

‘When in Rome’
Marketing expert and Harvard Professor John Quelch says U.S telecommunication companies are facing a complex challenge in attempting to protect their reputations in the developed world while conducting business in authoritarian countries.

“The problem here is twofold,” Quelch said. “The first side argues the ‘When In Rome’ principle; that is, engaging a regime on their terms [will] eventually effect positive change. This was the justification for doing business in South Africa during the apartheid years. Many companies compromised their values and stayed in South Africa during that period, arguing the ‘When In Rome’ excuse.

“However, remaining in such countries damages the company’s pristine reputation in the developed world. So, valuing your pristine reputation in the developed world can undermine your company’s ability to be flexible in doing business in emerging countries,” he added.

Google Violated Own Principles
Quelch cites Google’s decisions in the run-up to leaving the Chinese market as missteps because the company waited until it was obvious it was compromising its values in order to China stay in the potentially lucrative Chinese market.

“Google had this very public set of principles that was readily available to see on their Web site, and obviously they had the ‘Do No Evil’ philosophy. Of their 10 public principles, doing business in China easily violated seven. I think long-term they made a serious blunder in going public with their complaints regarding the manner they perceived they were being treated in China: That really gave the Chinese little option but to take actions that were not going to be what Google was looking for,” he said.

‘A Tough Choice’

Berin Szoka, a telecommunications analyst at the Progress and Freedom Foundation in Washington, DC, commends Google’s decision to abandon the Chinese market. He says Google was helping spread freedom in China by working in the country despite Beijing’s strict censorship rules.

“Google’s compromises with the Chinese regime may have actually helped spread freedom in the country because though they abide by the Chinese censorship requirements, they would also still list the censored pages that appeared on their search engine but would put a line through them saying, ‘No, these results are censored.’ What they did was a tough choice,” Szoka said.

According to Szoka, “American companies that deal with authoritarian regimes have always had to make difficult decisions in balancing their reputations in the West with the compromises they have to make with these regimes. The Internet, however, has made these decisions and tradeoffs much clearer to the public, highlighting the tradeoff,” he said.

Stay or Go?

Quelch agrees, noting some at Google favored staying in China because they believed they were making a difference in favor of Internet freedom in the country.

“I think that the Internet and globalization mean that it is now difficult to—in President Lincoln’s words—give one speech in northern Illinois and a different speech in southern Illinois. Before globalization and Internet communication it might have been possible to adopt different approaches and not have the linkage of information that would not undermine [a firm’s] brand reputation. But that is much more difficult to do nowadays.

“Nike is a case in point as well,” Quelch added, referring to revelations the company employed overseas sweatshop labor to manufacture athletic shoes. “There was an internal debate at Google where I am sure a certain number of people at the company were of the opinion that engaging China was the best way, in the long-term sense, to help change and improve Internet freedom and privacy rights.”

“Of course, from a business point of view they did not do the right thing, and Google is still in China—they are still dithering. They … are still trying to balance having their cake and eating it too,” he said.

Thomas Cheplick ([email protected]) writes from Cambridge, Massachusetts.