Are Data Protectionist Measures Trade/Investment Barriers?

By: Priyadarsini T P

Of late, many countries including India have brought in or are going to bring in data localisation laws – laws that require maintaining a copy of all data relating to their citizens within their borders and other measures of a similar nature that are aimed at restricting cross-border transfer of data. These tactics are essentially data protectionism. While some nations justify these measures on the grounds of privacy and security of their citizens’ data, some measures might be an attempt to promote the local hardware and software industry as localisation boosts domestic cloud storage businesses. These laws have been touted as restrictions on market access for foreign entities to the extent that it requires businesses to build physical infrastructure in the country where they operate, which in turn increases costs for them, while not affecting domestic players. In this backdrop, this article seeks to examine the viability of remedies that might be sought for violations of obligations under Investment Law such as expropriation, legitimate expectation, non-discrimination and those under Trade Law such as market access and national treatment.


Expropriation is understood to be taking of foreign property by the State. Indirect expropriation occurs when the State takes effective control over property or does something that substantially interferes with its economic value even in the absence of a direct taking.  Studies conducted on individual businesses relying solely on cloud computing show both immediate and long-term losses in economic value as a result of Data Localisation. Albeit the loss in economic value is indeed a significant determinant of expropriation, whether a mere adverse effect can be regarded as sufficient to constitute an expropriation is debatable. A test laid down by Investment Tribunals to determine whether there has been expropriation is to see if there has been substantial deprivation of the investment. The businesses, at best, might incur costs to erect the additional infrastructure necessitated by localisation, which may not be regarded as ‘substantial’ deprivation. Further, the Methanex Tribunal has held that non-discriminatory regulation for a public purpose, which is enacted in accordance with due process may not amount to expropriation. This factor along with no substantial deprivation can weaken an allegation of expropriation via data localisation laws. 


While an investor can legitimately expect a stable legal and business framework for the investment, no investor can reasonably expect that the circumstances prevailing at the time of the investment will remain totally unchanged. The host state is not liable to pay compensation to a foreign investor when they enact bona fide laws in a non-discriminatory manner to respond to changing circumstances in the public interest. The same justification can be accorded to the case of the enactment of data localisation laws. In the event of coming into force of many data protection measures such as the General Data Protection Regulations, which has been heralded as a landmark development in the protection of privacy, investors may no longer be able to insist that such measures were not reasonably expected by them.


Investment treaties generally provide guarantees of protection against discrimination on the grounds of nationality to foreign investors in the form of National Treatment and Most-Favoured-Nation treatment clauses. Data Localisation measures may be regarded as discriminatory because it puts additional burden on businesses that operate remotely and process their data outside the country to keep a copy of the data in the Host State. This discrimination might become more evident in certain markets populated effectively by only one enterprise, such as the social media service market, dominated by Facebook, a foreign entity in an Indian context. While seeking remedy against discrimination may seem like a viable solution, a NAFTA tribunal’s decision, however, begs to differ in as much as it stated that States can ‘pursue reasonable and non-discriminatory domestic policy objectives through appropriate measures even when there is an incidental and reasonably unavoidable burden on foreign enterprises’. 

Trade Law: The Way to Go?

As is evident from the above analysis, Investment Arbitration Tribunals have generally leaned in favour of the Host State while examining the legality of measures alleged to be in violation of Investment Law obligations. This is why it is pertinent to examine alternate remedies such as the ones available under Trade Law. 

Article XVI of the General Agreement on Trade in Services (hereinafter ‘GATS’) provides that where a country has made market access commitments in its GATS schedule, then that country is prohibited from imposing limitations, through any means, on the number of service suppliers, unless the country has included such limitations in its GATS schedule. Further, Article XVII requires members to accord services and service suppliers of other countries’ treatment no less favourable than that it accords to its own like services and service suppliers. Treatment that modifies the conditions of competition in favour of services or service suppliers of the Member may be regarded as less favourable under Article XVII. In this regard, imposing obligations to erect physical infrastructure on foreign players in the territory of the Member State could be regarded as less favourable treatment.  

Further, restrictions on cross-border transfer of data might have the effect of limiting suppliers, especially in single entity dominated online markets. This might amount to a breach of Market Access obligation under Article XVI of GATS. For example, the WTO Appellate Body found, in the U.S. Gambling case, that a prohibition on the remote supply of gambling and betting services online through restrictions on data transfer was in breach of Article XVI of GATS.

Article XIV(c) of GATS deals with these general exceptions from commitments under GATS. The exceptions include the adoption of a measure necessary to secure compliance with laws relating to the protection of privacy of individuals in relation to processing and dissemination of personal data. A three-part test has been laid down in order to determine whether the State measure constitutes a justifiable exception. Firstly, it has to show that the measure is intended to achieve an objective that is recognised as a ground for exception in the trade agreements. Further, it will have to demonstrate that the said measure is ‘necessary’ to achieve the objective. The degree of necessity should be almost indispensable in nature to the extent that it should be the only way to achieve the objective. 

It is pertinent to note, in this context, that researchers have opined that localisation does nothing to enhance privacy, but even takes away the security advantages conferred by the distributed infrastructure of the Internet and processes such as sharing by which several parts of a database are held in different servers across the world. Therefore, it is difficult to state that localisation enhances the privacy of the citizens. Further, even if it is established that localisation measures somehow achieve the stated objective, existence of other less trade-restrictive measures which are also capable of achieving the objective can be examined by the WTO. Therefore, it is open to the complainant state to argue that the trade-restrictive measures cannot be allowed to continue under the guise of privacy protection measures.  

Last limb of the test is the chapeau test, the analysis of which is not relevant to this particular article. 

Claiming that an exception under GATS justifies a certain trade-restrictive measure has not been very easy for the Member States. So far there has been only one successful instance of a State establishing that its measures satisfied the three-part test and hence constituted a justifiable exception from its obligations under GATS. Therefore, the success rate is definitely higher in comparison to Investment Law. 

Some issues are of concern even while approaching the WTO. The relevant trade agreements were concluded at a time predating the recent technological developments that led to a significant increase in cross-border transfer and consumption of services. In this backdrop, determination of the relevant mode and sector might prove to be difficult. For example, the relevant mode for transfer of data via the Internet across borders service could be either Cross-Border Supply Mode (Supply of a service from the territory of one Member into the territory of any other Member) or Consumption Abroad Mode (in the territory of one Member to the service consumer of any other Member). In the U.S. Gambling case, the Panel and Appellate Body addressed the cross-border supply of online gambling services from Antigua to the U.S. under the first mode.

Similarly, it is difficult to identify the relevant service sector under the United Nations Central Product Classification as the services offered over the Internet cannot be put in straitjacket categories. For example, services offered by Facebook may come under both ‘telecommunication’ services and ‘computer-related services’. The Appellate Body had to deal with such an issue in China Publications and Audiovisual Products. In this case, the service sector was found to be sound recording distribution services even though the distribution was by electronic means.

India has opted to be Unbound in the Cross-Border Supply Mode under the GATS Schedule for Specific Commitments in the Computer-Related services, meaning that it is free to introduce restrictions that may be in violation of its obligations of market access and national treatment otherwise. However, it has committed to not introduce any limitations on market access or national treatment in the telecommunication services sector. As mentioned above, different kinds of business might entail an interplay between different service sectors. Bringing a claim under the either of these sectors may not be a suitable recourse for all kinds of businesses that rely heavily on data transfer as they may be engaged in a plethora of services such as cloud storage, data processing, e-commerce, etc. which can no longer be confined to any one of the presently recognised service sectors.  

Given the multiplicity of applicable modes and service sectors, members may have differing commitments under different modes and service sectors which might lead to difficulties in delineating the specific commitments applicable. Members can pick and choose between the ones in which they have not made any commitments and the ones where they have, to avoid/lessen liability. In such a scenario, adjudication will prove to be difficult. Further, there is the issue of the investors not being able to directly approach the WTO.

The above analysis is overwhelming evidence of the fact that the law requires a revisit to be in consonance with the rapid developments that have transformed international trade and supply of services. However, the success rate in defending against a claim of exception by States is indeed hopeful and makes trade law a better alternative in comparison with Investment Law. The latter may not be the best course of action for an investor aggrieved by data localisation laws, particularly in India, where the Model Bilateral Investment Treaty of  2015 does not incorporate the Fair and Equitable Treatment clause or even the MFN clause.

(Priyadarsini is currently a law undergraduate at National University of Advanced Legal Studies, Kochi. She may be contacted at

Cite as: Priyadarsini, ‘Are Data Protectionist Measures Trade/Investment Barriers?’ (The RMLNLU Law Review Blog, 31 October 2019) < > date of access.

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