Fallout from the China-Google fight

As the latest phase of the epic showdown between China and Google headed into its third day, it became increasingly clear that neither party is planning to back down — and in fact, it now looks like Beijing is looking to punish the search company for its insouciance.

For its part, Google seems committed to standing on principle. James Fallows has a good interview with David Drummond, the Google vice president whose been out front on the company’s move of its search portal from mainland China to Hong Kong. And he manages to clear up a mystery: What’s the connection between the hack attack and Google’s decision not to censor search results any more?

This attack, which was from China … was almost singularly focused on getting into Gmail accounts specifically of human rights activists, inside China or outside. They tried to do that through Google systems that thwarted them. On top of that, there were separate attacks, many of them, on individual Gmail users who were political activists inside and outside China. There were political aspects to this hacking attacks that were quite unusual.

?That was distasteful to us. It seemed to us that this was all part of an overall system bent on suppressing expression, whether it was by controlling internet search results or trying to surveil activists. It is all part of the same repressive program, from our point of view. We felt that we were being part of that. 

That was the direct connection with the hacking incident. It wasn’t in isolation. Since the Beijing Olympics, our experience in China has gotten worse. Although we have gained market share, it has become more and more difficult for us to operate there. Particularly when it comes to censorship. We have had to censor more. More and more pressure has been put on us. It has gotten appreciably worse — and not just for us, for other internet companies too.

Rebecca MacKinnon corroborates that  account in comments originally intended as congressional testimony. Money quote:

China is pioneering a new kind of Internet-age authoritarianism. It is demonstrating how a non-democratic government can stay in power while simultaneously expanding domestic Internet and mobile phone use. 

On the business front, the New York Times reports that Google’s partners are swiftly moving to distance themselves from this move (the paper also quotes a number of pro-China scholars who profess confusion at the company’s stance, though another Times story shows more balance).

China’s leaders may think Google is emerging the loser here, and the company’s stock has stagnated over the last few months as investors pondered the impact. "From an industry standpoint, however, Google’s exit will leave more room for international and domestic competitors to tap into the potential of a market with the largest online population," one China Daily article today reads. "Without Google access to pornographic and subversive content, China’s cyber space will continue to grow in a cleaner and more peaceful environment." Uh-huh.

Ultimately, this incident could end up hurting China far more than it does Google — exposing the country’s claims of increased openness as hollow, scaring away potential investors, and taking away a valuable source of innovation and healthy competition.

But it’s not just China that could end up damaged. We’re definitely seeing a tipping point here in the United States, with U.S.-China relations heading into dangerous territory. When you’ve got Paul Krugman calling for retaliatory tariffs on Chinese goods, something is definitely afoot.

A new report from the left-leaning Economic Policy Institute claims that China’s currency policies sucked away 2.4 million U.S. jobs between 2001 and 2008. That strikes me as highly dubious, but many in Washington will seize upon the figure as pressure on the Obama administration to label China a "currency manipulator" mounts. And I think the Google fracas plays into that.

The scary thing is, we all lose if a trade war breaks out. The price of Chinese imports will go up around the world. U.S. consumers will pay more for their iPhones. And China might retaliate, making everyone poorer.

I’m sure Obama’s economic team — committed free traders like White House advisor Larry Summers and Treasury Secretary Timothy Geithner —  knows all this, and is counseling calm. But sometimes the political guys win.