China’s Claim concerning App Ban Under International Investment and Trade Law – Part II

[Angeline Priety and Rohin Goyal are fourth-year law students at Gujarat National Law University]

In Part I of this post, we explained the possible recourse that Chinese investors may have against India’s app ban under the Indo-China Bilateral Investment Treaty (“BIT”). In Part II, we shall first examine India’s possible defence against claims by Chinese investors under the Indo-China BIT and then analyse India’s obligations towards China under various agreements of the World Trade Organization (“WTO”) and its dispute settlement body.

Whether the recent border dispute amounts to an essential security exception

The recent app ban undoubtedly has implications on the Indo-China BIT due to the sunset clause that allows the BIT to operate for 15 years after its termination, and the fact that many of the banned apps were investments in India before the date of termination. However, apart from the privacy concerns, the app ban has also been seen as a political move against the raging conflict between Indian and Chinese armed forces in the Galwan Valley. Subsequent to the clash between the Indian and Chinese armed forces on May 5, 2020, India banned 118 Chinese apps, citing national security concerns.

Armed conflicts between nations tend to have significant impacts on all kinds of treaties. The ILC Draft Articles, however, state that the outbreak of an armed conflict does not ipso facto terminate or suspend the operation of treaties. The Draft Articles also provide a list of treaties which will continue operation during armed conflicts, which includes “treaties relating to commercial arbitration”. However, if the treaty itself provides for provisions for situations of armed conflict, those provisions shall apply.

It is important to note that the intention of termination requires a notification and that the dispute settlement clauses between states, or between states and individuals would survive such termination.Thus, from a perspective of international law, BITs (since they deal with protection of foreign investments) continue to apply during periods of armed conflict, except where the BIT contains explicitly contrary provisions.

Article 14 of the Indo-China BIT contains a security exception clause which reads: 

Nothing in this Agreement precludes the host Contracting Party from taking action for the protection of its essential security interests or in circumstances of extreme emergency in accordance with its laws normally and reasonably applied on a non-discriminatory basis

An analysis of cases, which interpret security exceptions alongside Article 25 of the ILC Articles on State Responsibility, reveals that if a security exception applies, the investor is deprived of the protection of the BIT as well as the security standard. For instance, the 2004 US Model BIT’s security exception clause was held to be a ‘self-judging provision’ that requires only the discretion of the host state.

In the Nicaragua Case, the ILC held that the ‘non-precluded measures’ clause included in the 1956 Treaty of Friendship, Commerce and Navigation between the U.S. and Nicaragua was a “non-self-judging” clause as it merely spoke of necessary measures and not as to whom these measures would be considered necessary by. On the other hand, a “self-judging” clause gives the host state power to unilaterally decide whether a national security interest exists.

Based on the drafting of the clause in the Indo-China BIT, an argument can be made that the provision is a “self-judging” provision as it deals primarily with the security concerns of the host state to take measures necessary to protect essential security interests. If the Indian Government were to invoke Article 14 of the BIT, any Chinese entity which may have fulfilled the conditions of foreign investment, would not be able to invoke the protection of the ‘Most-Favoured Nation’ or the ‘Fair and Equitable Treatment’ clause, as Article 14 gives the Indian Government the power to suspend these provisions to protect its essential security interests. Hence, the Chinese entities would have to rebut this strong case of armed conflict along with privacy concerns amounting to an essential security concern.

Can China bring a claim against India under GATS?

On April 20th, 2020, China claimed that India’s action was ‘inconsistent with global trade rules, limiting cross-border trading services and breaching the basic principles and objectives of the multilateral trading system.’ This raises the question as to whether China would have a valid claim against India if it attempts to initiate proceedings under the Dispute Settlement Body (“DSB”) of the WTO.

China may bring a claim under the General Agreement on Trade in Services (“GATS”), 1947 which governs the production, distribution, sale, and delivery of a service. Though the definition seems expansive, there is a central product classification list which narrows the application of GATS. It would govern only those services mentioned in the list and the list does not sport digital services as an entry. This is primarily because internet-based services and traditional services have been placed on the same footing and GATS is considered technologically neutral.

China may bring a claim against India for violating the ‘Most-Favoured Nation’ (“MFN”) obligation under Article II:1 of GATS. To do so, it will have to prove that India’s move affects trade in services and that the impact is adversarial to Chinese apps in particular.

A measure is considered to affect ‘trade in service’ when it has an impact on the supply of a service, regardless of whether such measure directly governs the supply of a service or whether it regulates other matters but affects supply in services. Since India’s blocking order has significant implications on the formalities and procedures of functioning of apps in India, it may amount to a violation of MFN obligations under GATS. China may also argue that US-based digital mogul apps which have faced similar allegations as Chinese apps continue to operate freely. On the question of impact, the market valuation and share value of apps such as PubG have plummeted since the blocking order. Tik Tok (one of the most popular apps among those banned) attributed 10% of its revenue to Indian users of which it is now deprived. However, an independent examination would need to be conducted by the Appellate Body of the WTO to truly determine if the app ban fits the ambit of ‘affecting an unfair treatment’ to the developers who are Chinese entities.

The WTO provides scope for regulatory autonomy in the international trade law framework. Invoking this, India may justify its app ban as a measure in national interest and to preserve national security. China may quote the decision in Russian Measures Concerning Traffic in its response where the panel stated that “political or economic differences between the members would not be sufficient to itself constitute an emergency”. Though decisions of panels do not have precedential value, it would be a persuasive argument. However, this argument would fail if India establishes that the perceived threat is reality.

As per the WTO DSB case of United States- Certain Measures Affecting Imports of Poultry from China, MFN obligations mandate that the Indian Government treat Chinese investors no less favourably than any other foreign investors, subject to certain exceptions. India can attempt to claim an exception from this obligation in order to protect national policy objectives under Article XIV (GATS). Such a claim may be justified on the basis of the global political turmoil and backlash against the Chinese Government’s manner of dealing with protection of public morals and public privacy. However, this basis is highly political in nature and its acceptance would rely on China’s relations with other member states.

While India may defend a claim for exception from MFN obligations of GATS, if the Panel finds that the blocking order affects supply of goods or services or that the app ban does not have reasonable distinguishing factors between neighbouring countries, China may have a valid recourse set out against India.

Despite this discussion, the authors opine that a claim by China against India at the WTO cannot realistically be contemplated. Given China’s record of being a data protectionist regime, it is unlikely to bring a claim in WTO which would prejudice its own practices and its defence for having a legislation like the National Intelligence Law.

Conclusion

China has claimed that it will take legal action against India but has yet to either approach an investment arbitration tribunal or the WTO DSB for resolution of the dispute. The success of its claims depends on whether these bodies will admit such claims in the first place. In both the forums, India could adopt the forceful stance that these bodies do not have jurisdiction over the dispute at hand. However, if admitted, India’s actions may prove to be an MFN violation under both the BIT and WTO agreements such as GATT and GATS. What action China will take and how India will respond is yet to be seen.

Bringing claims against the app ban will be hounded with jurisdictional hurdles. However, with current trends of countries resorting to this mechanism as a display of soft power, it is highly likely that such platforms will meet the jurisdictional challenges. Given the blanket nature of the app ban which would have a long-lasting impact on trade, Chinese entities may succeed in establishing a claim of expropriation. However, the decision would hinge on whether this form of social media censorship could be characterised as a valid and essential move to protect national security.

(concluded)

– Angeline Priety & Rohin Goyal

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