A Congressional human-rights panel could prove a hostile audience for U.S. Internet companies on Feb. 15, as they explain their reasons for complying with China's demands to censor information and hand over user data. Execs at these companies, which include Google (GOOG

), Yahoo! (YHOO

), and Microsoft (MSFT

), will likely respond to criticisms much as they have in recent weeks and months: by painting their China conundrum in the starkest black-and-white terms. They must toe the party line of the repressive regime, say the companies, or be banished -- robbing the Chinese people of the rich array of Internet services that they provide.

Trouble is, this is a vastly oversimplified argument, shielding the much more subtle and debatable tradeoffs being made by these companies. In the end, the experience and interests of Internet users, which all of these companies claim to hold paramount, may be taking a back seat to smooth and unfettered access to China's booming Internet market -- already the second biggest in the world.

A CAREFUL BALANCE. "[U.S. Internet] companies are bending over too much to please Chinese authorities and to gain an advantage," says Xiao Qiang, professor of journalism at University of California at Berkeley and director of the China Internet Project, a program that explores the impact of digital communications in China.

Few are advocating that U.S. Internet companies turn their backs on China. By offering everything from Internet searches to e-mail and blogs, these companies are contributing to an increased flow of information and communication, which even critics admit could have a positive effect on China's society. Moreover, these are for-profit corporations that have an obligation to pursue China's huge and expanding market, with its population of 110 million Internet users growing at 18% a year.

But these companies need to strike a much more careful balance between tapping Chinese profits and looking out for their users' need for open and unbiased information. Often, it comes down to nitty-gritty issues such as the location of a server. Placing a server inside China's borders can mean speedier performance for users there, but it also puts that server within easy reach of China's government. Companies have an obligation to be straightforward with their users about the risks involved.

The Internet bigwigs, however, have tended to avoid this level of disclosure, preferring to tell their side of the story in broad, simplistic, and somewhat misleading terms. Take Google, which opted in January to move its operations into China and adhere to government requirements that it censor its search results there.

FOREIGN DOMAIN. Google CEO Eric Schmidt, speaking at the World Economic Forum in Davos last month, defended Google's decision and explained that executives had performed an "evil scale" to help reach its decision. "We concluded that although we weren't wild about the restrictions, it was even worse to not try to serve those users at all," Schmidt told the audience.

Google, however, was already serving China's market -- and, arguably, doing so quite competently. For years, Google has offered a Chinese-language search site, powered by computers based outside of the country and not censored for users inside of China. This service had become very popular inside China, garnering 33% of the market and trailing only local competitor Baidu.com (BIDU

), according to an August report by China Internet Network Information Center. Moreover, despite the latency caused by housing its servers in a different country, Google's uncensored search site performed better than all of its rivals inside China, including Baidu, according to a January study from Keynote Systems.

Sure, people accessing this Google site from inside China would still have difficulty reading up on taboo topics, such as Falun Gong, Tibetan independence, or the Tiananmen Square massacre. All of the search results would show up, including links to pages that embrace views unpopular with the Chinese government. But banned sites return an error message when clicked, since they're blocked inside China.

DODGING THE ISSUES. Still, users of Google's uncensored site could at least glimpse the variety of content that exists on sensitive topics -- something Google's new China site won't allow. "The real problem is not knowing what you don't know," says Tim Wu, professor of law at Columbia University and co-author of the forthcoming book Who Controls the Internet?

So Google's efforts to paint this as a choice between ignoring the people of China or adhering to local law are off the mark. A more accurate discussion would revolve around degrees of speed and service vs. the free flow of information -- or perhaps around where Google would have a greater chance of enticing Chinese advertisers: inside or outside of the country.

Still, Google deserves some credit. It clearly thought through the issues and ramifications of running an Internet operation from inside China. It has pushed the envelope slightly by putting a disclosure at the bottom of search pages where results have been removed. And the company's well-founded misgivings about retaining user information inside China sparked its decision to refrain from housing its e-mail or blog services there.

SERVING TIME. Such issues of server location and transparency to users appear to have been less thought through by Yahoo and Microsoft. Yahoo first cracked the China market in 1999. About two years later, the company moved e-mail servers to China to provide speedier service to users there.

The decision had major ramifications, since Yahoo would be compelled to hand over information on its Chinese e-mail users to government authorities when ordered. In recent months, it has come to light that at least two Chinese dissidents have been sentenced to lengthy prison sentences in part because of e-mail information supplied by Yahoo.

Yahoo has since sold its China operations to Alibaba. But Michael Callahan, the company's general counsel, says it had no choice but to supply the user data, and no way of knowing the circumstances behind the case. "We didn't know the information was being used for that purpose until [the news] broke in the press," says Callahan.

Still, given China's shoddy track record in human rights, such an outcome shouldn't have been too hard to foresee. And the company clearly should have done more to regularly update users on the movement of its servers -- and their e-mail data. Indeed, Yahoo could have offered an e-mail service to users in China without putting their data in jeopardy simply by powering the service from computers outside of China's borders.

BEIJING'S REACH. Microsoft, too, has blundered on this front. In December, the company sparked a storm of protest when it removed a Chinese blogger at the government's demand. Trouble is, Microsoft removed the blog for all viewers, not just inside China. And it offered no notification to readers as to what had happened. Since the incident, the company has revised its policies, promising to be more transparent.

But Microsoft has yet to answer other pressing questions. The blog it removed at the Chinese government's request was actually hosted on a computer inside the U.S. Microsoft says it doesn't go by location of servers when determining a government's jurisdiction, but rather how a user sets his or her profile on its MSN sites.

Does this mean that a blogger inside China can set their nationality and residence as something other than China and operate completely beyond the reach of China's censors? On the flip side, if Chinese authorities can order a blogger off of a U.S. server, how far can their tentacles reach when it comes to more sensitive areas, such as e-mail info?

TALKING POINTS. Microsoft officials say they're currently working on these issues and point to their recently released guidelines for how they will handle censorship requests for its blogging service. That, however, should be the type of thing an Internet company in China has completely thought through and disclosed to users before diving headlong into this market.

Despite the public rhetoric, the debate about U.S. Internet companies in China goes well beyond the poles of adhering to local laws or spurning China altogether. In between the two, there are rich and interesting possibilities -- starting with better transparency, smarter location of servers, and a more honest debate about the trade-offs at hand.

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