Wired on Friday: Was the latest Chinese clampdown on internet users more than coincidence? For the past few weeks, the tech corners of the media have roundly criticised the search engine company Yahoo for providing the Chinese government with personal information on a dissident user of their service, leading to the arrest and sentencing to ten years' imprisonment of journalist Shi Tao.

Yahoo's founder, Jerry Yang, said how unhappy he was, but that his company's hands were tied. A few days later, China tied those hands a little tighter: China's Communist Party announced even more stringent controls are to be placed on websites and news services online.

Two battles are going on, one in the largest growing market in the world, and the other in the world's fastest growing medium. There's the Chinese Communist model of authoritarianism versus the free-wheeling distributed nature of the internet. Another quieter tug of war is being played out in the boardrooms of western internet companies. Should foreign tech corporations eager to enter this market work complicitly with the government to place controls on the internet, or should they stand by the unregulated infrastructure that made them billions?

For good or ill, neither battle is as clear-cut as it first appears. After over a decade of breathless explanations of how resilient the internet is, so unfazed by traditional forces of censorship that it will transform every democracy, it's easy to believe that the party will fight an endless, losing battle with the liberalising internet.

By contrast, I don't think many of us could imagine that large corporations would not sell out western values for a quick buck, but the strengths and weaknesses of both sides are not as clear as they first appear.

Can China hold back the net? It can try. Its outer barricades against foreign influence - the "great firewall of China" as it is known - and its internal network are seen as worthy investments, even if they're not perfect. Some say China has 30,000 censors, but that's unconfirmed.

Certainly, every prefecture has its "internet police". Assisted with custom-configured equipment from companies like Cisco, the authorities can peer into almost any part of the network from local ISP to main backbone, and isolate and shut down websites and servers at will, and in real time.

Can these government controls be bypassed or evaded? Yes: enterprising coders have created anonymising software for dissidents, and the mathematics of cryptography has produced codes that even the Chinese government would find hard to crack.

But even if the technology is against your oppressive regime, there are other ways to maintain control. Security experts called it "rubber hose cryptanalysis": in other words, threats, and the appearance of threats.

Chinese dissidents are silenced, not because of flaws in the technical specifications of a free network that they use, but by an atmosphere that makes it impossible to feel safe.

And it's this, more than anything, with which western companies are complicit. Yahoo's e-mail accounts offered no sanctuary to Shi Tao, and China now knows it. Yahoo's Chinese chat rooms have monitors, who keep a stern look out for subversive activity.

Microsoft dutifully removes mention of keywords such as "democracy" and "freedom" in the blogs it hosts. No service is safe. Unless you are a tech savvy dissident, you will never know what is safe.

When asked about this, these corporations make a simple case for their behaviour: they're merely following the local rules and laws. In a country like China, though, that's not quite what they're doing. Rather, companies are attempting to keep up with the multiplicity of varying rules and edicts that are designed to keep them on their toes.

Arbitrarily, new rules are announced. In cases like this week's announcement, very little is changed from previous rulings, but the few changes are not made clear. Eleven different forms of subversion, including new crimes of "encouraging illegal gatherings, strikes, etc to create public disorder" and "organising activities under illegal social associations or organisations" are forbidden online. Websites that exhibit them can be fined up to €3,000.

It's not easy to stand up to these vagaries, but it can be done. A few years ago, the Chinese ministry of information industry abruptly decided that all encryption code was to be centrally controlled. Any company having such potentially dangerous tools in their software was to be obliged to hand over the source code to the authorities and all users of encryption were to be registered.

One software product that uses encryption is Microsoft Windows. In Ethan Guttman's fascinating book, Losing The New China, he describes Microsoft calling the Chinese government's bluff, and declaring that if the encryption protocol was to be enforced, they would leave China. There would be no legal Windows for the Chinese to use.

Windows 2000 was released in China on time, with the full support of the Chinese ministry: the encryption regulations were never enforced.

Guttman himself has worked for the Project For The New American Century, the neoconservative American think tank, but his view isn't a simplistic assumption that western might, backed by capitalism, is always correct. Instead, criticising corporations from the American right, he makes a subtler point.

Companies like Yahoo and Microsoft have the power to stand up for western values and they have an obligation to do so because without the free values and free market that they're based upon, they don't stand a chance of playing the Chinese Communist Party's convoluted games.

It's a pragmatic point that many corporations might consider before doing business in China, and before dismissing their critics as unrealistic, because if you're deciding to play by the rules of authoritarianism, you're not playing by any rules.

Today, it will be the dissident Shi Tao, and the people of China. Tomorrow, who suffers may well be the profits and those aiding and abetting tech companies.