Yahoo came under fire in September for turning over information to the Chinese government that led to the arrest of journalist Shi Tao. Shi had sent an e-mail from a Yahoo address to a New York-based prodemocracy Web site, describing how the Chinese Communist Party warned the local media of the potential risks in covering the 15th anniversary of Tiananmen Square. For that, he was charged with leaking state secrets and sentenced to 10 years in prison.

Will there be any financial fallout for Yahoo? Not likely. The company has received only slaps on the wrist from the media. And shareholders don’t seem to care: Yahoo’s stock price has remained stable.

But China watchers in the U.S. Congress are growing more concerned. U.S. policy toward China has long been predicated on the assumption that economic development would lead to political reform. Some officials are now wondering aloud if bottom-line interests impede that goal. “If we let companies frustrate [political reform],” says C. Richard D’Amato, chairman of the U.S.-China Economic and Security Review Commission, “we’re being duplicitous and inconsistent in our policies.”

D’Amato plans to recommend that congress prohibit companies like Yahoo from disclosing private online content to foreign authorities. Companies might chafe at that action. But if the U.S. government does act, businesses could find it easier to say no the next time Chinese officials turn up the heat. “I think [such legislation] might be very helpful to companies, because it aligns the ethical and mercenary imperatives,” says Harvard...