Writing about business in a foreign nation is impossible. None of the usual rules apply and none of the typical conclusions can be drawn, but there are a few things that should be said about Google's decision to get out of China.
First, this move is definitely a Good Thing. I'm not ready to declare this a principled stand on Google's part, but rather a calculated cost-benefit analysis. Let's not forget that less "controversial" American internet companies Ebay and Amazon are currently staying away from China. What this market is currently offering Google is simply not worth the cost of implementing whatever filters the Chinese government wants. Creating artificial restrictions on search results is not how Google became a search giant - they became popular because their searches were the most relevant! Baidu, on the other hand, is willing to quickly censor results at the request of the government, and is now essentially the major search engine in China (Yahoo and Bing remain little more than afterthoughts).
The reality is that the size and projected growth of China make it a tempting and difficult market to crack. International trade with China has been going well, as long as you're on the purchasing end of the deal. As for parting the populace from their disposable income, I'm unaware of any non-Chinese company that has moved in and made significant money in China, other than perhaps globally-recognized behemoths like Coke and McDonalds. Any other company that thinks they can sell products in China is facing a state-subsidized competitor with unique knowledge of Chinese culture and government and a disregard for IP law. Until the framework for what Americans call "business" is in place, you can safely ignore modern capitalist economic tendencies ("first-mover advantage" being the important one in this story), and accept that they don't apply here.
Despite what one of Google's legal eagles has to say, I doubt China is going to enter negotiations with Google after this public scolding. There won't be any "negotiations for an unfiltered search engine." I expect Google to keep their offices open, and to continue to invest in R&D in China by hiring homegrown Chinese engineers (unless the Chinese government takes an especially strong stance against Google after this incident). Google will still utilize the local knowledge that Chinese engineers can offer, as well as technical skill.
Also remember that Google means something completely different to Americans than it does to Chinese. The series of well-integrated webapps that Google pushes here in the US have no bearing on the reality of internet culture in China. I could be wrong on this, but I don't think people in China are using blogger, picasa, gmail, google docs, etc. on the same scale that we are in the United States. In the US, Google is nearly synonymous with "the internet" while in China there are plenty of other copycat services to fill the void. A website disappearing in China isn't exactly earth-shattering news, though not many Americans could comprehend an internet without YouTube, Facebook, etc. The Chinese internet has places for social networking and sharing videos, of course, but the companies that run them are willing to remove controversial content at the drop of a hat.
In the end, this event is more about espionage than it is about censorship. Google removing the filters from their search results was just their only retaliation. From additional details today, it sounds like some malware was able to access Google's email intercept systems, which are provided to US law enforcement and contain subject lines and dates (and possibly more). Adobe confirms that this malware may have been installed via a zero-day exploit which took advantage of their PDF Reader software. A zero-day exploit is basically an unpatched vulnerability that allow unauthorized code to be executed on your computer; discovery of a new zero-day exploit on a piece of popular software (like Word, or Adobe Reader) can net a hacker upwards of five figures.