“We actually did an evil scale and decided not to serve at all was worse evil.”

– Google CEO Eric Schmidt on the company’s decision to offer a censored version of its search services in China, Jan. 30, 2006

Before reflecting on the latest news, also take some time to watch Kaifu Lee’s presentation on Youtube about Google’s approach to Google, and the Internet landscape in China – to Carnegie Mellon students in Feb 2008. (Kaifu Lee resigned as CEO of Google China in late 2009)

Evidently Google is taking its informal “don’t be evil motto” a bit more seriously these days. The search sovereign threatened late Tuesday to pull out of its operations in China after detecting a “highly sophisticated and targeted attack on [its] corporate infrastructure originating from China.” Targeted in the assault: The Gmail accounts of Chinese human rights activists.

“These attacks and the surveillance they have uncovered–combined with the attempts over the past year to further limit free speech on the web–have led us to conclude that we should review the feasibility of our business operations in China,” Google’s chief legal officer, David Drummond, wrote in a post to the company blog.

“We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all,” Drummond added. “We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China.”

Shut down Google.cn, and potentially our offices in China?

Drummond didn’t directly accuse the Chinese government of orchestrating the incursion, but he certainly seems to be implying there’s a link. And you’d think one would have to exist for Google (GOOG) to threaten pull out of a country that has more Internet users than the total population of the U.S.–even if its efforts to gain market share there haven’t met with the same success as in the rest of the world.

It’s tough to stake your claim in a country where the government favors the local rival and blocks your traffic if you fail to censor. Baidu’s share of the Chinese search market in the third quarter was 77 percent, up from 75.6 percent. Google’s share for the same period? Just 17 percent, down from 19 percent.

The move could have a ripple effect for all corporations with China divisions. Google is the first to publicly protest censorship or openly complain about cyberattacks, which are part of doing business in China, says Alan Paller, managing director of the SANS Institute, a security think tank.

The dust-up touched off a jump in traffic on the subject on Twitter. China started blocking Twitter in early June, along with photo-editing site Flickr and Microsoft’s Bing search service. Yahoo, eBay and Microsoft were among those in tech with high hopes for the world’s most populous nation.

In addition, the 20 or so other companies that may also have been attacked, many of them American, are now in the difficult position of deciding whether to follow Google, whose business in China is small. While it has several hundred employees in China, Google lags far behind the home-grown search engine Baidu.

But Google and other companies like Microsoft of Cisco have plenty to lose if they were to abandon what is rapidly becoming one of the most lucrative technology markets.

So, to some extent, Google can probably threaten to leave China because the country accounts for such a small portion of its revenue. On the other hand, China leads the world in Internet users and presents a hell of a market opportunity–large enough that Google willingly provided a censored version of its services as a prerequisite for doing business there. Or, rather, it used to.

Mr. Drummond said that if the company could not reach an accommodation with the government, it might shut down its Chinese search engine, but it would try to keep some of the 600 or so employees in China.

Yahoo, as well, has come under sharp attacks from activists. Rights groups say Yahoo has helped identify at least four people, including the journalist Shi Tao in 2004, who have since been imprisoned for voicing dissent online. Yahoo, which has since sold its Chinese operations to a local company, Alibaba, did not respond to requests for comment.

At $395.50 Baidu shares are up more than two percent after hours on the news. Google shares are down 1.6 percent at $581.01.

Drummond’s post in full, below, as well as another on the safety of data on Google by Dave Girouard, President of Google Enterprise:

A new approach to China

Like many other well-known organizations, we face cyber attacks of varying degrees on a regular basis. In mid-December, we detected a highly sophisticated and targeted attack on our corporate infrastructure originating from China that resulted in the theft of intellectual property from Google. However, it soon became clear that what at first appeared to be solely a security incident–albeit a significant one–was something quite different.

First, this attack was not just on Google. As part of our investigation we have discovered that at least twenty other large companies from a wide range of businesses–including the Internet, finance, technology, media and chemical sectors–have been similarly targeted. We are currently in the process of notifying those companies, and we are also working with the relevant U.S. authorities.

Second, we have evidence to suggest that a primary goal of the attackers was accessing the Gmail accounts of Chinese human rights activists. Based on our investigation to date we believe their attack did not achieve that objective. Only two Gmail accounts appear to have been accessed, and that activity was limited to account information (such as the date the account was created) and subject line, rather than the content of emails themselves.

Third, as part of this investigation but independent of the attack on Google, we have discovered that the accounts of dozens of U.S.-, China- and Europe-based Gmail users who are advocates of human rights in China appear to have been routinely accessed by third parties. These accounts have not been accessed through any security breach at Google, but most likely via phishing scams or malware placed on the users’ computers.

We have already used information gained from this attack to make infrastructure and architectural improvements that enhance security for Google and for our users. In terms of individual users, we would advise people to deploy reputable anti-virus and anti-spyware programs on their computers, to install patches for their operating systems and to update their web browsers. Always be cautious when clicking on links appearing in instant messages and emails, or when asked to share personal information like passwords online. You can read more here about our cyber-security recommendations.

We have taken the unusual step of sharing information about these attacks with a broad audience not just because of the security and human rights implications of what we have unearthed, but also because this information goes to the heart of a much bigger global debate about freedom of speech. In the last two decades, China’s economic reform programs and its citizens’ entrepreneurial flair have lifted hundreds of millions of Chinese people out of poverty. Indeed, this great nation is at the heart of much economic progress and development in the world today.

We launched Google.cn in January 2006 in the belief that the benefits of increased access to information for people in China and a more open Internet outweighed our discomfort in agreeing to censor some results. At the time we made clear that “we will carefully monitor conditions in China, including new laws and other restrictions on our services. If we determine that we are unable to achieve the objectives outlined we will not hesitate to reconsider our approach to China.”

These attacks and the surveillance they have uncovered–combined with the attempts over the past year to further limit free speech on the web–have led us to conclude that we should review the feasibility of our business operations in China. We have decided we are no longer willing to continue censoring our results on Google.cn, and so over the next few weeks we will be discussing with the Chinese government the basis on which we could operate an unfiltered search engine within the law, if at all. We recognize that this may well mean having to shut down Google.cn, and potentially our offices in China.

The decision to review our business operations in China has been incredibly hard, and we know that it will have potentially far-reaching consequences. We want to make clear that this move was driven by our executives in the United States, without the knowledge or involvement of our employees in China who have worked incredibly hard to make Google.cn the success it is today. We are committed to working responsibly to resolve the very difficult issues raised.

Keeping your data safe

Many corporations and consumers regularly come under cyber attack, and Google is no exception. We recently detected a cyber attack targeting our infrastructure and that of at least 20 other publicly listed companies. This incident was particularly notable for its high degree of sophistication. We believe Google Apps and related customer data were not affected by this incident. Please read more about our public response on the Official Google Blog.

This attack may understandably raise some questions, so we wanted to take this opportunity to share some additional information and assure you that Google is introducing additional security measures to help ensure the safety of your data.

This was not an assault on cloud computing. It was an attack on the technology infrastructure of major corporations in sectors as diverse as finance, technology, media, and chemical. The route the attackers used was malicious software used to infect personal computers. Any computer connected to the Internet can fall victim to such attacks. While some intellectual property on our corporate network was compromised, we believe our customer cloud-based data remains secure.

While any company can be subject to such an attack, those who use our cloud services benefit from our data security capabilities. At Google, we invest massive amounts of time and money in security. Nothing is more important to us. Our response to this attack shows that we are dedicated to protecting the businesses and users who have entrusted us with their sensitive email and document information. We are telling you this because we are committed to transparency, accountability, and maintaining your trust.

Watch the CNBC interview with David Drummond, chief legal officer at Google, who discusses the Internet giant’s reaction to an assault by hackers who sought to penetrate the e-mail accounts of Chinese human rights activists.

Update: Very insightful interview:

What’s really at stake in Google vs. China

Editor’s note: Fareed Zakaria is an author and foreign affairs analyst who hosts “Fareed Zakaria GPS” on CNN

New York (CNN) — Google’s threat to shut down its operations in China might seem like just a dispute between a private company and a government, but the implications are huge for the world’s fastest-growing economy, for the United States and for global relations, says analyst Fareed Zakaria.

With the dispute in the background, Secretary of State Hillary Clinton said Thursday the U.S. is committed to freedom of speech online and to freedom from the fear of cyber-attacks.

The Google-China dispute surfaced January 12 when the search engine company said it and other companies were the target of cyber-attacks originating in China aimed at gaining access to the e-mail of Chinese advocates for human rights.

Google announced that it is no longer willing to comply with China’s requirements that it censor the results of searches in that country. The State Department has told China it is concerned about the issue.

Zakaria, author and host of CNN’s “Fareed Zakaria: GPS” spoke to CNN Wednesday.

CNN: What’s the dispute between Google and China all about?

Fareed Zakaria: At one level, the dispute is about one company and the difficulty it’s having doing business in China, but it’s really a much broader issue. It’s about two things really. The first is the tension between China’s drive for modernity and its attempt to control information.

China has very successfully modernized over the last few decades, but it places unique limits on information. Eric Schmidt, the CEO of Google, told me that China is the only country in the world where they had to basically sign up for a censorship regime.

The second issue: Is China turning inward? Is it beginning to believe it needs the world less than it has in the past few decades? That would have very profound consequences both for China-US relations and for the world.

CNN: What gives you the feeling that China might be turning inward?

Zakaria: It’s not just the problems they’ve had with Google. Over the last few years, there’s been the rise in China of what the Chinese call “The new right,” a group of people, fairly influential in the establishment, who argue that China should be more aggressive toward the West, more aggressive toward America, that it doesn’t need the U.S. as much as it did. There is also the reality that China’s economy, as it has grown, is becoming large enough that China doesn’t depend as much on the rest of the world for exports. It has accumulated huge surpluses of capital.

All of this is producing a China that is more parochial, more inward-looking and potentially more adversarial in its relationships with the West. If you look at the way it handled the Copenhagen summit, it’s really quite striking.

The Chinese are usually protocol-obsessed. And here they had a situation where Obama wanted to meet with Wen Jiabao, the Chinese leader who was there. Now Obama technically outranks Wen Jiabao because he is a head of state. Wen Jiabao is the premier, the prime minister. Ordinarily that would mean that Wen Jiabao would go to see Obama. The reverse happened and Obama attended the meetings. Chinese officials scolded him. All of this is very unusual.

CNN: In a sense Google is raising a broader issue than the immediate issue they uncovered. They uncovered evidence that there was hacking of their sites and those of other American companies. But rather than deal with the hacking issue, they brought up the whole issue of having to have a filtered search engine in China. They’re saying they’re no longer willing to do that. So what’s their real motivation?

Zakaria: Having spoken to Eric Schmidt for years about this, they were always uncomfortable with the system of censorship they had to sign up to in China. But they believed at the end of the day that it was a huge market, and they could do well and it could help open up information in China.

I think they came to the conclusion that China has such an elaborate apparatus of censorship but also an elaborate apparatus of cyber-warfare or cyberattack. They were really not able to have that broader beneficial effect.

Let’s remember that China doesn’t only have what’s called the great firewall of China, the filtering and censoring system. They also have a very aggressive system of cyber-spying and cyberattack, probably the most sophisticated in the world. I should point out there are people who say Google did this because they weren’t doing well in China, that they had lost market share to Baidu, a local Web search engine.

Baidu is definitely the leader, but it doesn’t make any sense to quit a market because you’re not the market leader. By the way, Google is not dominant in other countries and they still participate. I take them at face value, that this was a decision prompted by values. You wouldn’t give up whatever percent of the world’s fastest-growing market for no rhyme or reason.

They clearly were uncomfortable with this tension between their mission — which they see as widening access to information everywhere all the time — and China’s very elaborate set of constraints on information.

By the way there’s a national security component for this for the United States and other countries. Cyber-spying is clearly an effort by the Chinese to move into the information age and adopt a kind of asymmetrical warfare. China is not matching the U.S. military, ship for ship, but if it develops a very sophisticated capability to destroy command and control systems, computer systems, that’s a very potent weapon in any kind of conflict, military or otherwise.

CNN: Getting back to Google’s motivation, you do take their “Don’t be evil” motto at face value?

Zakaria: I don’t know if I take it in all places and at all times, but I do believe in this case they were motivated largely by the sense that they were undermining their values and their mission. I recognize that were this to have been churning out billions of dollars in revenue, they might not have done it. But I don’t think you can make the case that there was a business motivation for this. This will clearly cost them revenue, it may not cost them a huge amount of revenue, but it will cost them.

CNN: How do we know that the hacking is being done by the Chinese government rather than by individual hackers on their own?

Zakaria: We don’t know that for sure. In fact, Eric Schmidt was clear to me about that. The nature of the hacking, the coordinated elements of it, the targets, all suggest that it is something that is being done at the very least with the acquiescence or encouragement of the state. There are very few experts I’ve talked to who doubt that much of this has the backing of the Chinese government, but to be clear it’s very difficult to tell, and there’s no conclusive proof.

CNN: All of this suggests that the U.S. government has a lot at stake, and yet they don’t seem to have been on the frontlines of this issue. It’s a private company dealing with the Chinese government, not a government-to-government issue.

Zakaria: That’s right. Washington is treading very cautiously into this, and I think correctly because this is really a dispute between China and a private company in America. The U.S. government should watch it with great interest and concern, and they should come out in favor of certain broad principles, but I don’t think the U.S. government should be out there trying to open up the market for Google.

CNN: On the national security side, should the government be more active?

Zakaria: It’s trying to figure out how to respond to this kind of attack, but I gather there is a fairly sustained effort now in the government. Obama has made this a top priority.

CNN: What’s at stake for other American businesses that want to serve the Chinese market?

Zakaria: I think a lot is at stake, because what we’re basically talking about is China’s orientation, China’s belief that it has to accept a global system and an open global economy, that it benefits from having foreign companies participate on an equal footing.

The more China turns inward, the more difficult it will be for American companies to find equal footing in China. The Chinese are making it increasingly clear they want to have national champions. Avatar opened in China to great success and two weeks later they basically shut it down [except for 3-D showings] and said that the movie theaters had to make way for a biopic about Confucius, and more importantly keep theaters free for Chinese-made movies.

CNN: So what can the United States do about it?

Zakaria: Washington should try to have a really sustained strategic dialogue with China, but also with our other allies, with the European countries, with Japan, and create a kind of common front for openness and greater engagement with the global system.

One of the things that has helped the global system enormously is that it had two hegemons, two global superpowers — first Britain and then the United States — that were very outward-oriented and shared universal values and similar conceptions of a global system, open liberal values, an open economy, a common understanding of what would make for a good global system.

If China as the great rising power turns out to be much more insular, parochial in its orientation, that would mean a much less stable, much less open world order. Think about the period of American isolationism when the United States was the rising power and it turned inward in the 1920s and 1930s. It was not good for the world.

CNN: Can the Chinese government continue to limit expression of political views as its economy grows and the Web becomes an ever more important medium of communication worldwide?

Zakaria: That’s the trillion-dollar question. So far China has been remarkably successful at maintaining a system that has embraced markets, but also maintained a very controlled political system.

My own view is that that cannot last forever, but that China is still in the early stages of modernization, and it is quite possible that it will be able to continue doing this for several decades. But I think it’s very difficult to imagine China being a truly innovative country at the cutting edge of the information age, of global economics, if it has all these constraints on information, all this political control on human-to-human contact, which is what the next wave of the information age is all about.

Ultimately the question is: Can China be a world leader that is admired, imitated and that shapes the global system and global values? There I have my doubts that an insular, inward-looking China that maintains tight political control over information and human contact will end up being the country that becomes the model for the world.