Investors will be wary of risking investment in countries if economic warfare measures become the norm.

Ayushi Singh

Multilateral trade relations have endured major shifts towards unilateralism and protectionist narratives. There has been a normalization of unilateral strong-arming of trade relations for geopolitical and diplomatic results – in other words, economic warfare has been weaponized for mercantilist ambitions. India has also suffered the brunt of this shift – with the revocation of GSP status benefits by the USA in 2019 and the victim of the infamous national security steel and aluminium tariffs [“US Tariffs”] imposed by the USA in 2018.

The decision to ban 59 Chinese apps [“Notification”] portrays a step towards economic warfare in the midst of “emergent nature of threats” at the Galwan Valley. The apps were found to be engaging in activities “prejudicial to sovereignty and integrity of India, defence of India, security of state and public order.”

China has declared this ban to be in breach of World Trade Organisation [WTO] rules. Officials have hinted at the use of security exceptions of the WTO agreements; reminiscent of the defence taken for US Tariffs. In fact, any measure taken with protectionist inclinations will most likely resort to the security exception enumerated in Article XXI of GATT or Article XIV bis of GATS; along with other general exceptions. In the following discussion, the success of these exceptions will be analysed in the context of the present Notification.

Security Exception

The scope of the GATS is applicable to measures affecting trade in services. Article I.2 foresees four methods of supply of services i.e. cross-border supply [Mode 1]; consumption abroad [Mode 2]; commercial presence [Mode 3] and movement of natural persons [Mode 4]. Article II establishes “immediate and unconditional application” of Most Favoured Nation [“MFN”] treatment for all service suppliers’ i.e. a principle of non-discrimination to accord equal treatment to all countries seeking to supply services.

Additionally, countries may also be subject to other binding obligations of ensuring Market Access {“MA”] [Article XVI] and National Treatment [“NT’] [Article XVII] i.e. assuring non-discrimination between a member state and domestic competitors of like services. MA and NT protection in the GATS is accorded as per the specific commitments made by the Member State in its Schedules of Commitments. In this way, countries can expand or limit MA and NT benefits in some service sectors and for each mode of supply. For illustration, India has taken specific MA and NT commitments for “Communication services” like “voice mail”, “online information and database retrieval”, etc. Apps providing similar services are subject to “no[ne]” limitation in MA and NT as per this commitment. However, no specific commitment to MA or NT has been taken for digital services and apps. Therefore, the Notification is free from scrutiny under these provisions; limiting the scrutiny to violation of MFN.

Article XIV bis:1(b) and Article XXI GATT allow members to take any action for the protection of essential security interests “which it considers” necessary. Such action must be related to the three security interests enumerated, for e.g. (iii): “taken in time of war or other emergency in international relations”. Article XIV bis:1(a) enables protection from disclosure of any information the State considers contrary to essential security interests.

When the US Tariffs were instituted,  it resorted to the prevalent jurisprudence at that time, based on plain reading of the Article i.e. countries had a free run on the “necessity, form, design and structure of the measures” taken under the Article. Russia claimed the same ‘self-judging’ approach to the reading of the Article in Russia – Traffic in Transit where Article XXI measures had been taken in response to the emergency in international relations in 2014 (Crimea).

In Russia-Traffic in Transit, the Panel Report sided with Ukraine to posit the requirement of objective assessment to prove that member states have applied the Article in good faith. The Member State must submit objective facts to display how the measure had been taken due to the situations enumerated in the Article. This includes a submission to establish “chronological concurrence” between the time of taking the measure and the actual event of war or emergency in international relations.

The broad spectrum of what could be called an “emergency in international relations” is hardly objective like an event of war; as the latter can be explicitly proven. However, the objective meaning of an emergency can be gauged by its structural proximity in the phrase “war or other emergency..” – war is a type of emergency in international relations and other instances must also require the same urgency in political and military interests that war does. The emergency must display urgent danger or conflict that can be a threat to public order and law. Therefore, political and economic differences between Members cannot be enough to constitute an emergency.

Russian measures taken during the Crimean occupation is an objective example of such an emergency. When contrasted with the Indo-China border scuffle, the urgency of an objective emergency is absent. WTO Reports aren’t governed by stare decisis, therefore, each instance would have to be judged on its own novel circumstances. The Notification does not make any mention of the border escalation issue, instead of using a vague phrase like “emergent issues”. The threat is causally connected with the activities of data mining carried out by the apps. Activities of data mining are politically threatening but can definitely not be called an “emergency” under Article XIV bis.

General Exceptions

Article XX of GATT and Article XIV of GATS enumerates an exhaustive list of exceptions available to States which can be used to defend such protectionist measures. Article XIV(a) GATS allows measures necessary to protect “public morals or to maintain public order”. The Notification itself has made reference to prejudice to “public order”. Footnote 5 GATS limits public order defence only for “genuine and sufficiently serious threat posed to fundamental interests of society”. In US – Gambling, the Appellate Body refrained from defining these terms and left the determination of the scope of these concepts to the State’s values and other factors like prevailing social, cultural, ethical and religious values.

Article XIV(c) GATS allows measures necessary to secure compliance with laws and regulations relating to the protection of privacy of individuals, dissemination of personal data and protection of confidential information. It will be interesting to see the invocation of this exception especially in light of Members like EU considering limiting Huawei’s investment in its 5G infrastructure.

To prevent Members from mechanically picking a protectionist friendly exception for their measure, any action taken will be subject to a two-tier test as enumerated in the US – Gambling report. This includes:

1. A determination that establishes proximate nexus between the measure and the interest claimed to be used as an exception, and;
2. Fulfilment of the Chapeau test

The Chapeau test targets the application of the measure and rejects actions of arbitrary and unjustifiable discrimination of like products or disguised restrictions. The test will scrutinise the “design, architecture and revealing the structure of the measure” along with the cause and rationale of the discrimination.

The Notification claims to be empowered by Section 69A of the Information Technology Act and the Blocking Rules. Under the Blocking Rules, pre-decisional hearing is given to the concerned party via show-cause notice followed by a legal order. Given that no hearing was given before the Notification, it is a unilateral arbitrary measure taken targeting Chinese services that cannot fulfil the Chapeau Test. The rationale behind the selection process of these apps will be brought to question especially on grounds explicit targeting of Chinese companies. The MHA highlighted data privacy concerns against US company Zoom for similar data privacy concerns; creating more doubt over the data security rationale.

Conclusion

Experts foresee a potential rise in ISDS disputes from the affected investors under the India-China BIT. Though in suspension, the provisions continue to remain enforceable for 15 years for investments made before October 3^rd 2018. India has already lost two ISDS claims for arbitrary cancellation of investor contracts, bringing into question the worth of using unilateral trade measures for geopolitical superiority. Investors will be wary of risking investment in countries if economic warfare measures become the norm.

Enlarging the scope of this discussion beyond the Notification, leveraging supply-chain relationships can have a ripple effect across the world economy; not to mention threaten the basic premise of liberalisation of trade rules-based system. It undermines WTO forums like the Dispute Settlement System, Conferences and Working Bodies as a viable recourse for settlement of economic concerns i.e. in case US Tariffs. Additionally. It rejects the benefits of open, cooperative diplomatic channels for resolution of geopolitical issues, for e.g. Japan and South Korea entered into a string of retaliatory trade measures affecting the global production of semiconductors required for electronic devices when the historical context of their relations was activated.  This displays a shift towards summit diplomacy where impulsive trade measures are often followed by secret, rushed crisis negotiations between world leaders behind closed doors; skipping all mechanisms of transparency and inclusion of affected stakeholders.

Growing discontent against China has been palpable, especially after the devastation caused by COVID-19, the stalemate in US-China Trade relations and its current aggressive stances in the continent. Irrespective of WTO challenge, revocation of trade benefits can invoke equivalent retaliation affecting already disturbed supply chains. Economic Warfare should definitely not become the norm when the global economy is at the brink of the next Great Depression.

The author is a student at the National Law University, Jodhpur.

Picture Credits: The Quint

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