Much has been made of the fatuous notion that the Chinese government is hesitant to kick Google (GOOG) out of the country. Nothing could be further from the truth. Indeed, the notion that the Chinese absolutely need American search technology is an ethnocentric bias which says more about our own arrogance than it does about Chinese motivations.
The number one thing to understand about the Chinese is that they look out for their own. Indeed, as has often been said, there is nothing free about free trade. They sell us T-shirts and pirate our software. When they cannot pirate something, such as Visa (V) or Mastercard (MA) services, they seek to set up their own domestic monopolies, such as China UnionPay.
The same thing is happening with search. Baidu (BIDU) could become, in essence, a Chinese search monopoly free from serious foreign competition. That has been the goal all along. Like Japan with their national champions, Honda (HMC) and Toyota (TM), the Chinese seek to help their companies in any way they can (underhanded or not), rather than tear them down, as we do in the U.S.
Which brings us to the second major dynamic in China's national strategy. The Chinese remember something very primal about capitalism that we have forgotten in the U.S. For them, the goal is not to compete. Their goal is to win. As basic as it sounds, in the U.S., for too long, we have believed the fairy tale that we can have perpetual competition without winners or losers. The Chinese have no such illusions. Unless we embrace reality, we will go the way of the British Empire and collapse from the soft decadence of low expectations.
What should we do? Google should fight to the bitter end. That means forcing China's hand and making the government forcibly shut down Google in China. For too long (as Google itself might admit), Google has showed no backbone when it came to complying with the censorship dictates of the Communist Party. Google should engage in a three step plan which would show solidarity with the Chinese people, while maintaining management's fiduciary duty to shareholders to maximize long term profits.
I. Rather than using non-compliance as an excuse to gracefully pull out of China, Google should be openly defiant.
II. Second, if the Chinese did forcibly shut down the site, Google and the U.S. should use such an action to demonstrate to the WTO that China is using censorship, and in effect, human rights violations, to hinder free trade.
III. Third, the WTO would be pressured to tie the issues of human rights violations to free trade, since Google would be able to show that since it didn't comply with human rights violations, that it wasn't allowed to compete.
Google's situation in China highlights a very basic question. Can countries use human rights violations as a pretext to constrain free trade? If the WTO rules that they cannot, it will set a very important precedent which ties the privileges of free trade to responsibilities as a full member of the international community. But first, Google must show some backbone and force the issue. Doing so is the only way they can make up for past complicity with Chinese Communist Party oppression.
Disclosure: Long BIDU