China’s VPN Crackdown May Violate WTO Rules, U.S. Says

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By Bryce Baschuk

China’s regulatory crackdown on virtual private networks and leased telecommunications lines will harm U.S. businesses and may violate World Trade Organization rules, the Trump administration said.

The U.S. on Feb. 23 criticized a new regulatory proposal from the Chinese Ministry of Industry and Information Technology titled “Cleaning up and Regulating the Internet Access Service Market,” which would impose new restrictions on the use of virtual private networks (VPNs) and leased lines.

“The potential impact of the [proposed regulation] both on foreign service suppliers and their customers in China appears to be quite severe,” the U.S. said in a notice published by the WTO.

The proposal would establish “significant new constraints on market access opportunities for cross-border service suppliers” and would hamper cross-border services provided by travel agents, accountants, and software developers, the U.S. said.

Leased lines and VPNs are private telecommunications connections used to ensure the security and confidentiality of information and are often used by U.S. service suppliers to protect the transfer of data into and out of China.

GATS Violation?

The U.S. said China’s proposed restrictions could violate the terms of the WTO General Agreement on Trade in Services (GATS), particularly with regard to the treatment of cross-border data processing services.

Article 5(c) of the GATS telecommunications specifies that WTO members “shall ensure that service suppliers of any other member may use public telecommunications transport networks and services for the movement of information within and across borders, including for intra-corporate communications of such service suppliers.”

The U.S. asked China to clarify the purpose of the proposed regulatory shift and whether it intends to notify WTO members of the measure, which is scheduled to enter into force on March 31.

Chinese Cybersecurity Law

China’s proposed legislation would exacerbate the negative impact that Beijing’s 2016 cybersecurity law has had on U.S. service suppliers with operations in China, such as Amazon.com Inc. and Microsoft Corp., the U.S. said.

The Trump administration also criticized China’s cybersecurity law, because the U.S. said it forces companies to store their data on servers based in China and subjects them to overly burdensome security restrictions. The cybersecurity law went into effect last June.

“U.S. industry is particularly concerned that the measures contemplated by China would disrupt communications between a company’s China facilities and its other global operations, increase costs, and reduce rather than enhance data security,” the U.S. said in the WTO notice.

“Industry has emphasized, and we concur, that there are other, more effective ways of achieving legitimate policy objectives without disrupting commercial operations and that global best practices provide a clear way forward,” the U.S. said.

National Security Exemption

China previously told WTO members that its data security restrictions adhere to WTO rules because they “protect the interest of the general public”—a regulatory right that it said is granted to each WTO member.

Various WTO rules, such as Article 14 of the GATS, contain broad exemptions that permit WTO members to take “any action which it considers necessary for the protection of its essential security interests.”

The WTO’s dispute settlement system is already grappling with an influx of national security disputes that will determine, for the first time, the extent to which WTO rules permit a country to impose trade restrictions in order to protect its national security.

Last year the United Arab Emirates claimed its economic blockade of Qatar complied with the WTO’s national security exemptions and said the WTO has no authority over the matter.

Russia subsequently cited the WTO’s national security exemptions in separate dispute case with Ukraine, according to officials familiar with the matter.

The WTO’s national security debate could reach a fever pitch in April if President Donald Trump decides to impose national security tariffs on steel and aluminum imports under section 232 of the Trade Expansion Act of 1962.

To contact the reporter on this story: Bryce Baschuk in Geneva at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Jerome Ashton at jashton@bloomberglaw.com

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