This is a partial transcript from "The Journal Editorial Report," April 22, 2006, that was edited for clarity.

PAUL GIGOT, HOST: With trade topping the agenda, Chinese President Hu Jintao made Seattle the first stop this week in a four-day visit to the United States, who met with Microsoft Chairman Bill Gates, who's company, like Google and Yahoo, has been criticized for complying with the Chinese government's efforts to censor its citizen's Internet use.

Former Wall Street Journal China Bureau Chief James McGregor is the author of "One Billion Customers: Lessons of from the Frontlines of doing Business in China." He joins me now in the studio.

Jim, welcome.

JAMES MCGREGOR, AUTHOR AND FORMER WSJ CHINA BUREAU CHIEF: Thank you.

GIGOT: Interesting to see the Chinese president stop, not in Washington, D.C. first, but in Washington state, visiting Boeing and Microsoft. What message was he trying to send?

MCGREGOR: Well, I think he gets along with business people better than he does other politicians. He doesn't have any real strife with the business community other than various trade issues.

And Boeing is always a stop for the Chinese leaders. They all like to do what the other leaders did. And everybody stops at Boeing.

Microsoft is a new edition because they want to say we're going to do something about IPR, intellectual property rights.

GIGOT: Intellectual property rights.

MCGREGOR: Yes.

GIGOT: And this was a message that China is going to try to get something done. Because that is one of biggest complaints that American businesses have in China.

MCGREGOR: It's terrible. Intellectual property rights enforcement and copied products and theft are terrible in China. The business community's fed up and Congress is getting very unhappy about this.

So what China did is they made a concession, this time, that they are requiring computer makers to install software at the factory.

What they've been doing is, the computers, including Lenovo, the IBM merger, puts their computers out with no software, and mysteriously software ends up on them. And they say, "Geez, we have nothing to do with that." But now, they're going to require it to come out of the factories. The U.S. should hold their feet to the fire and make sure they do this.

GIGOT: One line in your book that's really interesting, you said, in China, a contract is no guarantee of anything. Is it getting at all better or...

(CROSSTALK)

MCGREGOR: Well, yes, contracts have gotten better in China. If there's a part of the contract that helps the Chinese partner, they will enforce it. But if it's the foreign partner side on the contract, it doesn't matter.

GIGOT: What American companies have succeeded in China and what's the secret of success there?

MCGREGOR: Well, in fact, most of them are doing pretty well right now. Because they went in '90s with way too much money and ambition and desire to get that market overnight. And they lost a lot of money.

Now, they have slowly built. They've built Chinese staffs. And really American business is part of the social fabric in China now.

GIGOT: No kidding?

MCGREGOR: Yes. You arrive in China; you come in on a Boeing. You take a GM car to the Sheraton Hotel. And you can stop for a Starbucks and go across the street and go to McDonald's, and buy all kinds of American goods. So it's more open market than Japan.

GIGOT: No kidding?

MCGREGOR: Yes.

GIGOT: What about this issue of the Internet companies, who are growing enormously around the world.

And in China, Google, Yahoo, Microsoft have been criticized because they've agreed to Chinese government censorship. Microsoft, for example, has agreed to take the word democracy to be filtered out of web searches. Was this a good decision for these companies to make?

MCGREGOR: Well, these people are damned if they do and damned if they don't. They have to be in China. China's the number two Internet market in the world.

But China censors. So what do you do on your servers in China? Go ahead and censor, but label it like a warning on a cigarette pack, saying cigarettes will harm your health. Say this search has been censored according to Chinese law.

GIGOT: Now, Google does that.

MCGREGOR: Google does that. And they have kept their blogs and their e-mails and other products that would gather Chinese user information, out of China. They've have tried to do the honorable thing.

And if Congress tried to keep the American Internet companies out of China, well, then, their Chinese competitors, all of whom are listed on NASDAQ — Sina, Sohu, NetEase. Baidu is the No. 1 search engine in China.

GIGOT: NASDAQ being the American stock exchange.

MCGREGOR: Yes, the American stock exchange. So Chinese companies can use our capital to build their Internet. But our Internet companies can't go, "That's wrong."

But these companies have to keep pushing the envelope. Yahoo has been way too compliant. I mean, if I was running Yahoo and the Chinese came and wanted user information. I'd say, "Yes we've got it around here somewhere." And I'd look around for a while and off the estate and take my time, and try to keep as much information as I could offshore.

GIGOT: But there's an argument that you hear the companies make, which is that just going in there, even if some of their searches are censored, just being there it will provide more information to the Chinese public than they would otherwise have received, and open them up to the world. And that, in and of itself, subversive of the government. Do you agree with that?

MCGREGOR: The Internet has changed China. I have been involved with Internet companies from the beginning there. And people have access to all kinds of information.

Eight-five percent of Chinese users go on the Internet for news because their traditional media is government controlled.

And the news sites in China are always pushing the envelope, staying ahead of the censors. And they put it out there and then censors will take it down. And then they'll put something else out there. It's a game of cat and mouse that the government can't keep up with.

GIGOT: Just to finish, talk about the policy choices here in Washington. Because a lot of people are saying, look, we should impose tariffs on China because of the big deficit. What reaction do you think that would have inside China? And would American businesses welcome that?

MCGREGOR: No. I mean, Washington has to get it straight on China. No. 1, the currency issue is the wrong issue. It's not going to make a difference. No. 2, the deficit is structural and will always be there.

What we need to do is focus on intellectual property protection and be ruthless in how we enforce that. Because this is a knowledge-based economy. And that is our advantage. And that's what we have to protect.

We also have to do trade promotion. We've got to promote our products in China.

When the chancellor of Germany goes to China he brings 200 business people. When the prime minister of Canada goes to China he brings a couple hundred business people.

The American president comes, he's talking Iran, Iraq and every other issue and has no business agenda. I understand he is a busy man, but we've got to get out and sell in the world. People aren't automatically going to come to us.

GIGOT: All right, Jim McGregor, thanks very much.

MCGREGOR: Thanks for having me.

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