The US Congress has proposed that every US company with a website in China will have to relocate or its executives could face up to one year imprisonment.
The tough legislation drafts are expected to be introduced this week, representing the first serious attempt to control how US internet companies interact with foreign governments.
If put in place, the legislation will affect US internet companies' business in other "internet restricting" countries like Iran and Vietnam.
The proposal, formed by Christopher Smith, chairman of a human rights subcommittee, comes after mounting reports of censorship in China.
It follows a hearing yesterday, chaired by Smith's committee, in which the four main protagonists Yahoo, Google, Microsoft and Cisco faced a grilling over their dealings in China.
The proposals makes it unlawful to filter search results or hand over information about users to certain governments unless approved by the US Justice Department. It would further impose new export restrictions to those nations.
"For the sake of market share and profits, leading US companies like Google, Yahoo, Cisco and Microsoft have compromised the integrity of their product and their duties as responsible corporate citizens," Smith said.
However, the outlook for the proposals is unclear as it puts US firms at an unfair competitive disadvantage compared to Chinese firms.
The clause about website relocation is written in very broad terms, which means that any business with a site that responds to a query by displaying " information available on the internet" is liable.
The draft also proposes that search engine companies must provide the Office of Global Internet Freedom, a new federal bureaucracy to be formed,with a list of verboten search terms "provided by any foreign official of an internet-restricting country".
Also, any website with operations in the US must regularly provide the Office of Global Internet Freedom with a list of content deleted or blocked at the request of an internet-restricting country.
It further set out new regulations on the export of software and hardware, stating that exports would no longer be permitted if software or hardware is exported for the purpose of "facilitating internet censorship" and that infractions can be punished, depending on the exact prohibition violated, by fines of up to $2m and criminal penalties of up to five years in prison.
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