Columbia FDI Perspectives

Perspectives on topical foreign direct investment issues

No. 254 June 17, 2019
Editor-in-Chief: Karl P. Sauvant ([log in to unmask]) Managing
Editor: Alexa Busser ([log in to unmask])

Assessing the legality of data-localization requirements: Before the
tribunals or at the negotiating table?*
Marion A. Creach**

The development of digital technologies and the globalization of the
Internet have tremendously enhanced the ability to transfer data across
borders. Trans-border data flows are intrinsic to integrated international
production systems and global value chains established by MNEs regarding
virtually all corporate functions.

Governments, however, are increasingly imposing local data-storage and/or
processing requirements, thereby restricting data transfers. Their concerns
include data protection, national security, law enforcement, and industrial
policy (hence economic development). China and Russia, among others,
enforce such requirements, and India is about to adopt a data protection
bill requiring that a copy of personal data be stored within the country, and
“critical” personaldata be only processed in servers or data centers
located in India.

Data-localization requirements have been labeled as trade barriers and
identified as regulatory protectionism.1

Uncertainty remains in international law about the applicable regime and
its interpretation. Intra-MNE services and services provided locally by
established subsidiaries, associates or branches of foreign-owned or
controlled companies (mode 3 of the General Agreement on Trade in services
(GATS)) exemplify this. Assessing, in these situations, the legality of
data- localization requirements under the GATS and international investment
agreements (IIAs) should prompt investors, decision-makers and engineers to
take action.

Data-localization requirements are comparable to residency requirements,
according to which advantages are conditional upon prior residency of
designated persons within the host country, and thus could violate the GATS
national treatment provisions. Even though residency requirements are
applicable to all “like” service providers regardless of nationality, this
formally identical treatment de facto modifies the conditions of
competition to the detriment of foreign-owned suppliers, as cost-effective
compliance is more demanding for the latter. Therefore, several WTO members
have scheduled residency requirements as national treatment limitations.
Similarly, data-localization requirements can distort the conditions under
which foreign-owned and domestic suppliers compete,2 whenever foreign-owned
service suppliers have to build or purchase—and maintain—(or rent) servers
or data centers locally. Data-
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localization requirements put foreign-owned suppliers at a competitive
disadvantage by requiring them to undertake FDI and subjecting their
activities to additional regulatory constraints and expenses related to
infrastructure, management and compliance that domestic suppliers do not
have to deal with.

Exception clauses are relevant to the analysis, especially regarding data
protection. However, given the stringent conditions for trade restrictions
to fall within the scope of GATS article XIV (especially the necessity
test), one may doubt that data-localization requirements are justifiable.
Less trade-restrictive alternatives may be reasonably available, such as
using encryption technologies. Also, the contribution of particular
data-localization measures to stated objectives may be compromised if they
undermine security.

Likewise, data-localization requirements presumably breach IIAs’ national
treatment protections. If IIAs are available—and considering that
most-favored-nation provisions might be invoked to multilateralize their
content—they could be more efficient tools than the GATS to challenge the
legality of data-localization requirements. The reason is that the national
treatment provisions of IIAs are cross-sectoral obligations that do not
apply only to services inscribed by WTO members in their schedules. Also,
IIAs provide foreign investors with direct access to investor-state
arbitration, while states might be reluctant to resolve disagreements on
the matter through the WTO dispute-settlement mechanism.

It is just a matter of time before investors resort to international
investment law to attempt defeating data-localization requirements, unless
a global consensus arises on the necessity of such measures. In that
regard, the disparities between national treatment standards among IIAs
remain to be studied. The analysis of these requirements through the prism
of national treatment will depend on the creative interpretation of IIAs by
tribunals, on a case-by-case basis. Existing jurisprudence is largely
irrelevant, and expertise on the economic impact of data-localization
requirements and the technical availability of alternative measures is

An international legal framework on restrictions on data flows could ensure
openness, certainty and efficiency, together with data protection, security
and other public policy objectives, and introduce consistency by unifying
national treatment standards. In January 2019, a group of 76 WTO members,
including China and Russia, announced the intention to open negotiations on
“trade related aspects of electronic commerce,”3 which presumably encompass
data localization. Also, plurilateral initiatives are moving forward,
although institutionalizing fragmentation. The Comprehensive and
Progressive Agreement for Trans-Pacific Partnership and the United
States-Mexico-Canada Agreement include provisions that allow data transfer
across borders and prohibit data-localization requirements, but reserve
states wide scope of action and margin of discretion; restrictions are
allowed if strictly required to achieve “alegitimate public policy
objective,” and in absence of “arbitrary or unjustifiable discrimination”or
“disguised restriction on trade.”4 Investors could take the lead and
challenge data-localization requirements, thereby spurring engineers and
decision-makers to work together toward ensuring “public policy by design” in
the open global economy.

* The Columbia FDI Perspectives are a forum for public debate. The views
expressed by the author(s) do not reflect the opinions of CCSI or Columbia
University or our partners and supporters. Columbia FDI Perspectives (ISSN
2158-3579) is a peer-reviewed series.
** Marion A. Creach ([log in to unmask]) graduated from the Global
Business Law and Governance program, alliance between Sciences Po Law
School, Columbia Law School and Paris 1 Panthéon-Sorbonne. The author is
thankful to Peter Muchlinski for his comments on an earlier draft, and to
Rudolf Adlung, Hamid Mamdouh and Pierre Sauve for their helpful peer
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1 E.g., United States International Trade Commission, National Trade
Estimate Report on Foreign Trade Barriers(2018).
2 An analogous assessment for mode 1 services would lead to similar, and
even more cogent, conclusions. WTO members have acknowledged that residency
requirements impinge on cross-border supplies. WTO, “Guidelines for the
scheduling of specific commitments under the GATS,” March 28, 2001.

3 WTO, ”Joint statement on electronic commerce,” January 25, 2019.
4 CPTPP, article 1 (TPP, articles 14.11, 14.13); USMCA, articles 19.11,

The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Marion A. Creach, ‘Assessing the legality
of data-localization
requirements: Before the tribunals or at the negotiatingtable?,’ Columbia FDI
Perspectives, No. 254, June 17, 2019. Reprinted with permission from the
Columbia Center on Sustainable Investment (” A
copy should kindly be sent to the Columbia Center on Sustainable Investment
at [log in to unmask]

For further information, including information regarding submission to the
Perspectives, please contact: Columbia Center on Sustainable Investment,
Alexa Busser, [log in to unmask]

The Columbia Center on Sustainable Investment (CCSI), a joint center of
Columbia Law School and the Earth Institute at Columbia University, is a
leading applied research center and forum dedicated to the study, practice
and discussion of sustainable international investment. Our mission is to
develop and disseminate practical approaches and solutions, as well as to
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*Karl P. Sauvant, PhD*

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*Columbia Center on Sustainable Investment*
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