The Philippine government’s efforts to implement a data localization policy for national security purposes could backfire and ultimately hurt the economy, with billions of United States (US) dollars in potential investments at risk, according to an influential American business lobby group.

Data localization refers to the mandatory storing and processing of data within the country where it originated, especially those involving highly sensitive information.

In an Oct. 30 position paper submitted to the Office of the US Trade Representative (USTR), seen by Manila Bulletin, the United States Council for International Business (USCIB) flagged ongoing developments in support of such a policy in the Philippines.

USCIB, whose members include multinational companies, law firms, and sectoral business associations, stated that there is “increased pressure” within the Philippine government to pursue data localization.

The industry group cited the appointment of Henry Aguda as Secretary of the Department of Information and Communications Technology (DICT), as well as increased investments in data centers, for intensifying the push for the policy.

USCIB said recent legislative developments have further exerted pressure for the realization of the measure, particularly with the signing of Republic Act (RA) No. 12234, otherwise known as Konektadong Pinoy (KP) Act.

A provision in the new law empowered the DICT to “formulate policies to safeguard local data, when necessary to advance national security and public interest, with primacy given to cross-border data flows as a key enabler of the global economy.”

Without providing additional details, USCIB noted that certain “proponents” succeeded in inserting this provision at the “last minute.”

The American industry group claimed that the DICT is using this provision as the basis for its draft executive order (EO), which outlines the “policy guidelines on data residency and data classification for government agencies.”

Under this EO, data localization would be required in multiple sectors, while also supposedly excluding US cloud service providers (CSPs) from three of the four tiers of public sector data.

The group said two other draft measures, reportedly linked with the Private Sector Advisory Council (PSAC), further limit what US CSPs could provide to local private and public sector clients through the imposition of new compliance requirements.

USCIB said these policies, if implemented, could deter investment, reduce productivity, and undermine the export competitiveness of the Philippines.

Citing studies, the group estimated that a restrictive data policy could reduce the country’s gross domestic product (GDP) by up to 1.7 percent, “equating to billions of dollars in lost growth.”

“Recent regulatory developments... have suggested that there is significant momentum building for formal data localization requirements in the Philippines,” USCIB said.

“Any changes mandating that foreign companies store data physically within the Philippines, which we understand is under discussion, pose a significant threat to the country’s economic competitiveness, risk derailing the Philippine government digital transformation agenda, and could significantly diminish the country’s position as a regional leader in the digital landscape,” it added.

Based on the draft policies USCIB has seen, the primary beneficiaries of data localization would be local conglomerates and telco companies, as well as Chinese CSPs.

While it did not provide a basis for the claim, USCIB took note of the ongoing expansion of cloud services by Chinese companies Huawei and AliCloud in the country.

The group added that US CSPs, despite being active investors, continue to face constraints that limit their expansion plans. These restrictions cover both government procurement and ownership concerns.

USCIB told the USTR that its opposition to data localization is supported by influential business groups and foreign chambers based in the Philippines.

In February this year, members of Joint Foreign Chambers of the Philippines (JFC), along with EU-ASEAN Business Council (EU-ABC), US-ASEAN Business Council (USABC), and IT and Business Process Association of the Philippines (IBPAP), wrote to then-leaders of Congress to oppose the inclusion of data localization in KP Act while it was still a legislative bill.

The groups said the policy would increase barriers to innovation and investment since it would mandate significant compliance costs on businesses.

They also said this would negatively impact the country’s business process outsourcing (BPO) industry, which ranks among the country’s top economic drivers.