Beyond Tariffs: Why India’s Digital Rules Are Testing U.S.-India Trade Ties 

Beyond Tariffs: Why India’s Digital Rules Are Testing U.S.-India Trade Ties 

The recent high-level trade talks in New Delhi between the United States and India concluded with a familiar tension simmering beneath the surface. While traditional tariffs and market access remain on the table, the most significant friction points are now digital. American negotiators, led by Deputy U.S. Trade Representative Rick Switzer, specifically flagged key provisions in India’s new data and technology laws as non-tariff barriers for U.S. companies. This debate, centering on India’s Digital Personal Data Protection (DPDP) Act and Information Technology Rules of 2021, goes beyond simple trade disputes. It represents a fundamental clash between two competing visions: India’s push for digital sovereignty and regulatory control and America’s longstanding advocacy for unrestricted cross-border data flows as a cornerstone of the modern digital economy. 

The Specific Flashpoints in Delhi 

The talks held on December 10-11 with Indian officials, including Industry Minister Piyush Goyal, focused on operational details that carry major strategic implications. The U.S. concerns are not about the existence of regulation itself, but about specific design features that American trade officials and business groups view as discriminatory and operationally burdensome. 

Data Localization: The Core of the Conflict 

At the heart of the discussions are India’s data localization norms under the DPDP Act. While the final rules are still emerging, the law empowers the government to restrict transfers of personal data to certain countries. This creates significant uncertainty for multinational companies. U.S. firms argue that forcing them to store and process Indian users’ data within the country increases operational costs, complicates global service delivery, and fragments the internet. From the U.S. perspective, this is a prime example of a “non-tariff attack”—a policy that extracts value by compelling expensive local infrastructure investments without a clear, market-correcting purpose. 

India’s stance is rooted in principles of privacy, security, and sovereignty. Indian policymakers contend that keeping citizens’ data within national jurisdiction ensures it is protected by Indian law and is accessible to Indian authorities for lawful purposes, such as investigations. This position has only been reinforced by recent events. Just days before the trade talks, India’s Ministry of Electronics and Information Technology (MeitY) issued a stern advisory to VPN providers and online platforms, ordering them to block websites that unlawfully display Indian citizens’ personal data. This action underscores the government’s serious intent to control data flows and hold intermediaries accountable under the IT Rules. 

The Burden of the IT Rules and DPDP Compliance 

Beyond localization, U.S. companies face a complex web of compliance under India’s digital regulations: 

A particularly unique challenge is the DPDP Act’s requirement for privacy notices and consent requests to be made available in 22 scheduled Indian languages alongside English. For a global platform serving hundreds of countries, creating and managing such a multilayered compliance system represents a significant operational hurdle. 

A Clash of Fundamental Values 

The trade talks in New Delhi are just the latest episode in a longstanding geopolitical struggle over who governs the digital realm. The U.S. position, articulated by think tanks like the Information Technology and Innovation Foundation (ITIF), frames regulations like India’s as “non-tariff attacks” that precisely target successful American firms to extract revenue and erode their competitive advantages. From this viewpoint, fines and forced localization act as a drag on innovation, diverting billions of dollars from research and development into compliance and penalties. 

India, along with a growing number of nations, rejects this characterization. Its regulatory framework is portrayed as a legitimate exercise of sovereignty in the digital age—a necessary means to protect citizens’ privacy, ensure national security, and foster a domestic digital ecosystem. This is not merely protectionism; it is a conscious policy of strategic autonomy in the data economy. The goal is to assert control over a valuable resource (data) and ensure that foreign tech giants operate on terms set by domestic law, not just their global standards. 

This clash mirrors tensions the U.S. is experiencing with other partners. The European Union has flatly rejected similar U.S. pressure to dilute its Digital Markets Act (DMA) and Digital Services Act (DSA), with a top EU official even accusing Washington of “blackmail”. However, U.S. pressure has yielded results elsewhere. For instance, South Korea recently agreed in a joint fact sheet to eliminate barriers like network usage fees and to facilitate cross-border data transfers. The U.S. clearly hopes to bring India into the fold of nations aligning their digital policies with American commercial interests. 

Historical Context and the Global “Chilling Effect” 

The U.S. campaign against digital policies it deems unfair is systematic and has shown results. A comprehensive investigation by the Digital Policy Alert found that U.S. pressure has created a measurable “chilling effect” globally. In the eight months following a key U.S. memorandum, the number of new digital services taxes (DSTs) and data flow restrictions proposed worldwide dropped significantly. 

India itself has already made concessions in this arena, removing its 2% Equalisation Levy on e-commerce transactions in 2024 and its 6% levy on digital advertising in April 2025. Other countries, like Canada and Pakistan, have also rescinded or suspended their digital taxes following U.S. pressure. 

The U.S. strategy involves securing binding commitments in trade deals. As of late 2025, it had successfully obtained pledges from multiple countries—including Cambodia, Malaysia, and Thailand—to refrain from imposing discriminatory digital services taxes and to ensure the free flow of data across borders. The talks with India are part of this broader pattern: an attempt to shape the domestic digital policy of a critical strategic partner through trade diplomacy. 

What Comes Next: Negotiation, Litigation, or Retaliation? 

The path forward for U.S.-India digital trade relations is fraught with complexity. 

• Negotiation and Compromise: The most likely immediate path is continued negotiation. India may seek transitional arrangements or clarifications on specific rules, similar to deals the U.S. struck with other countries on DSTs. In return, the U.S. could offer incentives in other trade areas. However, India is unlikely to abandon the core architecture of the DPDP Act, a landmark piece of legislation years in the making. 

• Litigation and WTO Challenges: The U.S. could initiate a formal dispute at the World Trade Organization, arguing that India‘s rules constitute illegal trade barriers. It has also considered launching Section 301 investigations into major foreign digital regimes like the EU’s DMA. Such an investigation against India’s rules would be a major escalation. 

• Retaliatory Measures and Strategic Decoupling: In a more confrontational scenario, the U.S. could impose targeted tariffs on Indian exports in retaliation for what it sees as unfair digital trade practices. This would severely damage the broader economic relationship. Conversely, continued friction could push India to further diversify its tech partnerships and deepen its digital strategic autonomy, potentially aligning its standards more closely with other major economies that favor data sovereignty. 

The outcome of this digital tug-of-war will resonate far beyond bilateral trade statistics. It will signal whether a major democracy in the Global South can successfully assert its own regulatory framework in the face of pressure from the architect of the global internet. For the United States, it is a test of its ability to defend the interests of its flagship tech industry in a world that is increasingly skeptical of its model of borderless data flow. The negotiations in New Delhi were not just about trade—they were about the future shape of the digital world order.