Supply Chain Archives - WITA http://www.wita.org/nextgentrade-topics/supply-chain/ Tue, 28 Jul 2020 16:45:04 +0000 en-US hourly 1 https://wordpress.org/?v=6.6.1 /wp-content/uploads/2018/08/android-chrome-256x256-80x80.png Supply Chain Archives - WITA http://www.wita.org/nextgentrade-topics/supply-chain/ 32 32 A TRANSATLANTIC DIGITAL TRADE AGENDA FOR THE NEXT ADMINISTRATION /nextgentrade/a-transatlantic-digital-trade-agenda-for-the-next-administration/ Tue, 30 Jun 2020 16:27:27 +0000 /?post_type=nextgentrade&p=22172 CAN A NEW DEMOCRATIC ADMINISTRATION RECONSTRUCT DIGITAL TRADE POLICY WITH EUROPE FROM THE ASHES OF TTIP? As the global leader in digital trade, the United States has a big stake...

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CAN A NEW DEMOCRATIC ADMINISTRATION RECONSTRUCT DIGITAL TRADE POLICY WITH EUROPE FROM THE ASHES OF TTIP?

As the global leader in digital trade, the United States has a big stake in ensuring that international rules facilitating its continued expansion are put in place.

The Obama Administration’s bold agenda to establish these rules across Europe and the Asia-Pacific did not yield lasting success, with the failure of the Transatlantic Trade and Investment Partnership (TTIP) negotiations and the Trump Administration’s withdrawal from the Trans-Pacific Partnership (TPP). Nonetheless, the key elements of US digital trade policy enjoy bipartisan policy support, providing a promising basis for the next Democratic administration to re-engage with Europe, our biggest digital trading partner.

Part 1 of this issue brief explains why international rules are needed to protect and facilitate digital trade. Part 2 describes the turbulent past decade in transatlantic trade relations and the growing importance of US digital trade with Europe. Part 3 explains why the US government and the European Union (EU), during TTIP negotiations, were unable to agree on a digital trade chapter, including a key provision guaranteeing the free flow of data. Finally, Part 4 suggests how two parallel sets of trade negotiations beginning early this year — between the EU and the United Kingdom (UK) and between the United States and the UK — may help a future US Administration end the transatlantic stand-off over digital trade.

PPI_A-Transatlantic-Digital-Trade-Agenda-for-the-Next-Administration

To view the full report at Progressive Policy Institute, please click here

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The Impact of COVID-19 on the Future of Advanced Manufacturing and Production: Insights from the World Economic Forum’s Global Network of Advanced Manufacturing Hubs /nextgentrade/the-impact-of-covid-19-on-the-future-of-advanced-manufacturing-and-production-insights-from-the-world-economic-forums-global-network-of-advanced-manufacturing-hubs/ Thu, 04 Jun 2020 23:31:38 +0000 /?post_type=nextgentrade&p=21000 While powerful megatrends like global trade tensions, climate change, new technology innovations, and the current COVID-19 crisis impact all parts of the globe, the reality of those impacts – and...

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While powerful megatrends like global trade tensions, climate change, new technology innovations, and the current COVID-19 crisis impact all parts of the globe, the reality of those impacts – and therefore the necessary responses to them – are inherently driven by unique regional characteristics and the regional enabling environments. The Global Network of Advanced Manufacturing Hubs (AMHUBs) connects regional manufacturing ecosystems to help rapidly transform manufacturing to keep pace with the global megatrends that might otherwise create disruptions for manufacturers around the globe.

With the arrival of the coronavirus pandemic, there is a need for the industry to move faster than ever to support the response to this international health crisis while mitigating its impact on manufacturers and their respective supply chain networks around the globe. This paper reflects an aggregate of voices from the Global Network of AMHUBs and focuses on COVID-19’s impact in each region; response efforts from manufacturing and governments; and best practices to achieve rapid results and mitigate repercussions to subsequent regions by learning from those affected earlier. The World Economic Forum is committed to enabling and amplifying cross-AMHUB collaborations that accelerate the industry’s ability to adapt to the current crisis while ensuring future resilience through advanced manufacturing technologies and processes.

WEF_AMHUB_Insight_Paper_2020

To read the full report, please click here

 

 

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Why 5G Requires New Approaches to Cybersecurity /nextgentrade/why-5g-requires-new-approaches-to-cybersecurity/ Tue, 03 Sep 2019 18:59:02 +0000 /?post_type=nextgentrade&p=17392 “The race to 5G is on and America must win,” President Donald Trump said in April. For political purposes, that “race” has been defined as which nation gets 5G built first. It...

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“The race to 5G is on and America must win,” President Donald Trump said in April. For political purposes, that “race” has been defined as which nation gets 5G built first. It is the wrong measurement.

 

We must “fire first effectively” in our deployment of 5G. Borrowing on a philosophy Admiral Arleigh Burke coined in World War II: Speed is important, but speed without a good targeting solution can be disastrous.[1]

5G will be a physical overhaul of our essential networks that will have decades-long impact. Because 5G is the conversion to a mostly all-software network, future upgrades will be software updates much like the current upgrades to your smartphone. Because of the cyber vulnerabilities of software, the tougher part of the real 5G “race” is to retool how we secure the most important network of the 21st century and the ecosystem of devices and applications that sprout from that network.

Never have the essential networks and services that define our lives, our economy, and our national security had so many participants, each reliant on the other—and none of which have the final responsibility for cybersecurity. The adage “what’s everybody’s business is nobody’s business” has never been more appropriate—and dangerous—than in the quest for 5G cybersecurity.

“As we pursue the connected future, however, we must place equivalent—if not greater—focus on the security of those connections, devices, and applications.”

The new capabilities made possible by new applications riding 5G networks hold tremendous promise. As we pursue the connected future, however, we must place equivalent—if not greater—focus on the security of those connections, devices, and applications. To build 5G on top of a weak cybersecurity foundation is to build on sand. This is not just a matter of the safety of network users, it is a matter of national security.

HYPERFOCUS ON HUAWEI

Effective progress toward achieving minimally satisfactory 5G cyber risk outcomes is compromised by a hyperfocus on legitimate concerns regarding Huawei equipment in U.S. networks. While the Trump administration has continued an Obama-era priority of keeping Huawei and ZTE out of domestic networks, it is only one of the many important 5G risk factors. The hyperbolic rhetoric surrounding the Chinese equipment issues is drowning out what should be a strong national focus on the full breadth of cybersecurity risk factors facing 5G.

The purpose of this paper is to move beyond the Huawei infrastructure issue to review some of the issues that the furor over Huawei has masked. Policy leaders should be conducting a more balanced risk assessment, with a broader focus on vulnerabilities, threat probabilities, and impact drivers of the cyber risk equation. This should be followed by an honest evaluation of the oversight necessary to assure that the promise of 5G is not overcome by cyber vulnerabilities, which result from hasty deployments that fail to sufficiently invest in cyber risk mitigation.

Such a review of 5G cyber threat mitigation should focus on the responsibilities of both 5G businesses and government. This should include a review of whether current market-based measures and motivations can address 5G cyber risk factors and where they fall short, the proper role of targeted government intervention in an era of rapid technological change. The time to address these issues is now, before we become dependent on insecure 5G services with no plan for how we sustain cyber readiness for the larger 5G ecosystem.

The after-the-fact cost of missing a proactive 5G cybersecurity opportunity will be much greater than the cost of cyber diligence up front. The NotPetya attack in 2017 caused $10 billion in corporate losses. The combined losses at Merck, Maersk, and FedEx alone exceeded $1 billion. 5G networks did not exist at that time, of course, but the attack illustrates the high cost of such incursions, and it pales in comparison to an attack that would result in human injury or loss of life. We need to establish the conditions by which risk-informed cybersecurity investment up front is smart business for all 5G participants.

China is a threat even when there is not Huawei equipment in our networks. From the successful exfiltration of highly sensitive security clearance data in the Office of Personnel Management breach commonly attributed to China, to the ongoing China-linked threat actor campaign against managed service providers, many of China’s most successful attacks have taken advantage of vulnerabilities in non-Chinese applications and hardware and poor cyber hygiene. None of this goes away with the ban on Huawei. We cannot allow the headline-grabbing focus on Chinese network equipment to lull us into a false sense of cybersecurity. In a world of interconnected networks, devices, and applications, every activity is a potential attack vector. This vulnerability is only heightened by the nature of 5G and its highly desirable attributes. The world’s hackers (good and bad) are already turning to the 5G ecosystem, as the just concluded DEFCON 2019 (the annual ethical “hacker Olympics”) illustrated. The targets of this year’s hacker villages included key parts of the 5G ecosystem such as: aviation, automobiles, infrastructure control systems, privacy, retail call centers and help desks, hardware in general, drones, IoT, and voting machines.

5G EXPANDS CYBER RISKS

There are five ways in which 5G networks are more vulnerable to cyberattacks than their predecessors:

  1. The network has moved away from centralized, hardware-based switching to distributed, software-defined digital routing. Previous networks were hub-and-spoke designs in which everything came to hardware choke points where cyber hygiene could be practiced. In the 5G software defined network, however, that activity is pushed outward to a web of digital routers throughout the network, thus denying the potential for chokepoint inspection and control.
  2. 5G further complicates its cyber vulnerability by virtualizing in software higher-level network functions formerly performed by physical appliances. These activities are based on the common language of Internet Protocol and well-known operating systems. Whether used by nation-states or criminal actors, these standardized building block protocols and systems have proven to be valuable tools for those seeking to do ill.
  3. Even if it were possible to lock down the software vulnerabilities within the network, the network is also being managed by software—often early generation artificial intelligence—that itself can be vulnerable. An attacker that gains control of the software managing the networks can also control the network.
  4. The dramatic expansion of bandwidth that makes 5G possible creates additional avenues of attack. Physically, low-cost, short range, small-cell antennas deployed throughout urban areas become new hard targets. Functionally, these cell sites will use 5G’s Dynamic Spectrum Sharing capability in which multiple streams of information share the bandwidth in so-called “slices”—each slice with its own varying degree of cyber risk. When software allows the functions of the network to shift dynamically, cyber protection must also be dynamic rather than relying on a uniform lowest common denominator solution.
  5. Finally, of course, is the vulnerability created by attaching tens of billions of hackable smart devices (actually, little computers) to the network colloquially referred to as IoT. Plans are underway for a diverse and seemingly inexhaustible list of IoT-enabled activities, ranging from public safety things, to battlefield things, to medical things, to transportation things—all of which are both wonderful and uniquely vulnerable. In July, for instance, Microsoft reported that Russian hackers had penetrated run-of-the-mill IoT devices to gain access to networks. From there, hackers discovered further insecure IoT devices into which they could plant exploitation software.

Fifth-generation networks thus create a greatly expanded, multidimensional cyberattack vulnerability. It is this redefined nature of networks—a new network “ecosystem of ecosystems”—that requires a similarly redefined cyber strategy. The network, device, and applications companies are aware of the vulnerabilities and many are making, no doubt, what they feel are good faith efforts to resolve the issues. The purpose of this paper is to propose a basic set of steps toward cyber sufficiency. It is our assertion that “what got us here won’t get us there.”

Employees can be seen in the Security Operation Centre for Telstra, Australia's biggest telecoms firm, which is used to monitor, detect and respond to security incidents, including cyber attacks, during a media event in central Sydney, Australia, August 24, 2017. REUTERS/Tom Westbrook - RTS1D3F6
Fifth-generation networks create a greatly expanded, multidimensional cyberattack vulnerability. Therefore, the redefined nature of these networks requires a similarly redefined cyber strategy. (Credit: Tom Westbrook/Reuters)

5G service providers are the first ones to tell us that 5G will underpin radical and beneficial transformation in what we can do and how we manage our affairs. At the same time, these companies have publicly worried about their ability to address the totality of the cyber threat and have described the future challenge in disturbingly blunt terms. The president’s National Security Telecommunications Advisory Committee (NSTAC)—composed of leaders in the telecommunications industry—told him in November, “The cybersecurity threat now poses an existential threat to the future of the [n]ation.”

The nature of 5G networks exacerbates the cybersecurity threat. Across the country, consumers, companies, and cities seeking to use 5G are ill-equipped to assess, let alone address, its threats. Placing the security burden on the user is an unrealistic expectation, yet it is a major tenet of present cybersecurity activities. Looking to the cybersecurity roles of the multitude of companies in the 5G “ecosystem of ecosystems” reveals an undefined mush. Our present trajectory will not close the cyber gap as 5G greatly expands both the number of connected devices and the categories of activities relying on 5G. This general dissonance is further exacerbated by positioning Chinese technological infection of U.S. critical infrastructure as the essential cyber challenge before us. The truth is that it’s just one of many.

WHAT HAVE WE LEARNED THUS FAR?

5G has challenged our traditional assumptions about network security and the security of the devices and applications that attach to that network. As officials of the Federal Communications Commission (FCC), the authors struggled to deal with these challenges only to be confronted by:

  • Industrial-era procedural laws that make rulemaking activity cumbersome and non-rulemaking activity less than optimal.
  • The incentive of bad actors to overcome any solution that is typically greater than the incentive to maintain the protection.
  • Industry stakeholder fear of exposing their internally identified risk factors at precisely the time when sharing information about attacks would be of greatest value for a collective defense.

At the same time, those who know the networks the best—the network operators—exist under business structures that are not optimal for effective risk reduction. As an FCC white paper concluded three years ago:

As private actors, ISPs (internet service providers, such as 5G networks) operate in economic environments that pressure against investments that do not contribute to profit. Protective action taken by one ISP can be undermined by the failure of other ISPs to take similar actions. This weakens the incentive of all ISPs to invest in such protections. Cyber accountability therefore requires a combination of market-based incentives and appropriate regulatory oversight where the market does not, or cannot, do the job efficiently.

The FCC report’s finding—that market forces alone would not address society’s cyber risk interests—highlighted the ISPs over which the agency had primary jurisdiction. The report additionally examined the larger ecosystem and concluded that the motivation to solve the problem generally gets worse when consumers do not link a purchasing decision with a cyber risk outcome. This, unfortunately, is all too often the case, as service providers as well as device and application vendors do not make meaningful security differentiators public and don’t compete on any verifiable security indicators.

“None of this suggests that we suspend the march to the benefits of 5G. It does, however, suggest that our status quo approach to 5G should be challenged.”

In 2016, for instance, hackers shut down major portions of the internet by taking control of millions of low-cost chips in the motherboards of video security cameras and digital video recorders. That the internet could be attacked this way reflected the reality of digital supply chains: Because consumers didn’t consider cybersecurity in their purchase decisions of low-cost connected devices (they were the means, not the target of the attack), retailers didn’t prioritize security in their decisions of what to stock. As a result, manufacturers didn’t emphasize cyber in the components they purchased and thus chip and motherboard manufacturers did not include cyber protections in their product. None of companies defined a role for themselves for sustaining post-purchase product cyber readiness and, by and large, that’s still the case.

New industry verticals are bringing 5G-enabled capabilities to a market where good faith efforts are insufficient. There is no evidence that the business priorities of the suppliers of devices and applications are any different than those attributed to network operators in the FCC report. A 2018 report by the Trump administration’s Council of Economic Advisers, for instance, warned of, “underinvestment in cybersecurity by the private sector relative to the socially optimal level of investment.”

None of this suggests that we suspend the march to the benefits of 5G. It does, however, suggest that our status quo approach to 5G should be challenged. Continuation of corporate and governmental policies that are not keeping up with today’s cyber risk do not bode well for a volumetric expansion of the attackable network and data surface of 5G networks. There is a crying need for coordinated efforts to achieve targeted expectations.

TWO KEYS TO WINNING THE REAL “5G RACE”

The real “5G race” is whether the most important network of the 21st century will be sufficiently secure to realize its technological promises. Yes, speedy implementation is important, but security is paramount. To answer that overriding question requires new efforts by both business and government and a new relationship between the two.

The recommendations that follow are both important and not without cost. In normal times, such suggestions might be judged too much of a departure from traditional practices. These are not normal times, however. The outlook for a future that relies on 5G and other new digital pathways is cyber-defined. Our nation has moved into a new era of non-kinetic warfare and criminal activity by nation-states and their surrogates. This new reality justifies the following corporate and governmental actions.

Key #1: Companies must recognize and be held responsible for a new cyber duty of care

The first of this two-part proposal is the establishment of a rewards-based (as opposed to penalty-driven) incentive for companies to adhere to a “cyber duty of care.” Traditionally, common law established that those who provide products and services have a duty of care to identify and mitigate potential harms that could result. There needs to be a new corporate culture in which cyber risk is treated as an essential corporate duty and rewarded with appropriate incentives, whether in monetary, regulatory, or other forms. Such incentives would require adherence to a standard of cyber hygiene which, if met, would entitle the company to be treated differently than other non-complying entities. Such a cyber duty of care includes the following:

  • Reversing chronic underinvestment in cyber risk reduction

Proactive cyber investment today is the exception rather than the rule. For public companies, the Securities and Exchange Commission (SEC) and others are driving change from the corporate board-level on down through management. A favorite entrance point for cyberattacks, however, remains the smaller companies, many of which are outside of the scope of these efforts. Unfortunately, the SEC’s efforts impact only the less than 10% of American companies that are publicly owned. At the very least, where companies have a role in critical infrastructure or provide a product or service that, if attacked, could imperil public safety, there must be the expectation that cybersecurity risks are being addressed proactively.[2]

  • Implementation of machine learning and artificial intelligence protection

Cyberattacks on 5G will be software attacks; they must be countered with software protections. During a Brookings-convened discussion on 5G cybersecurity, one participant observed, “We’re fighting a software fight with people” whereas the attackers are machines. Such an approach was like “looking through soda straws at separate, discrete portions of the environment” at a time when a holistic approach and consistent visibility across the entire environment is needed. The speed and breadth of computer-driven cyberattacks requires the speed and breadth of computer-driven protections at all levels of the supply chain.

  • Shifting from lag indicators of cyber-preparedness (post-attack) to leading indicators

2018 White House report found a “pervasive” underreporting of cyber events that “hampers the ability of all actors to respond effectively and immediately.” The 5G cyber realm needs to adopt leading indicator methodology to communicate cyber-preparedness between interdependent commercial companies and with government entities charged with oversight responsibilities. There are a number of good examples to pull from. Shared cyber risk assessments are increasingly a best practice for cyber-mature companies and their supply chain. Several accounting and insurance firms have developed lead metrics to inform cyber risk reduction investments and underwrite policies. The Department of Homeland Security has resiliency self-assessment standards to motivate long-term community disaster preparedness improvement.[3] Such a model should be extended to the 5G cyber realm in order to shift oversight from lag indicators to lead indicators.

A regular program of engagement with boards and regulators using cybersecurity lead indicators will build trust, accelerate closing the 5G readiness gap and lead towards more constructive outcomes when cyber attackers do succeed. Underreporting of lag indicators, as highlighted in the 2018 White House report should be addressed, but with the primary purpose of closing the feedback loop, improving the quality of lead measures and the investment decision process they inform.

  • Cybersecurity starts with the 5G networks themselves

While many of the large network providers building 5G are committing meaningful resources to cyber, small- and medium-sized wireless ISPs serving rural communities have been hard pressed to rationalize a robust cybersecurity program. Some of these companies have fewer than 10 employees and can’t afford a dedicated cyber security officer or a 24/7 cyber security operations center. Still, they will be offering 5G services and interconnecting with 5G networks. About one-third of these companies have ignored government warnings about the use of Huawei equipment and are now petitioning Congress to pay for their poor decisions and pay to replace the non-Chinese equipment. Any replacement must include the expectation that the companies will establish sufficient cybersecurity processes that sustain protections. All the networks that deliver 5G—whether big brand names, small local companies, wireless ISPs, or municipal broadband providers—must have proactive cyber protection programs.

  • Insert security into the development and operations cycle

For many application developers, a core agile development tenet has been sprinting to deploy a minimum viable product, accepting risk, and committing to later providing consumer-feedback-driven upgrades once the product gains a following. Software companies and those providing innovative, software-based products and services are beginning to insert cybersecurity in the process as a design, deployment, and sustainment consideration for every new project. Such security by design should be a minimum duty of care across the commercial space for innovations in the emerging 5G environment.

  • Best practices

The National Institute for Standards and Technology (NIST) Cybersecurity Framework has established five areas for best practice cybersecurity management that could become the basis of industry best practices: Identify, protect, detect, respond, and recover. For instance, NIST’s “identify” initiative focuses on determination of a company’s cyber universe, threats, and vulnerabilities in order to identify cyber risk reduction investments. While not limited only to the NIST framework, Congress should establish a cybersecurity standard of expected performance and accompanying incentives for its adoption by companies. While industry-developed best practices are a step in the right direction, they are only as strong as the weakest link in the industry and continue to place the burden on poorly informed consumers to know whether the best practices are being fulfilled. The Consumer Technology Association (CTA)—representing the $377 billion U.S. consumer technology industry—helped produce an anti-botnet guide that outlines best practices for device manufactures, but there is no way for a consumer to easily tell if it’s being followed.

“While industry-developed best practices are a step in the right direction, they are only as strong as the weakest link in the industry.”

Unfortunately, publication of optional cybersecurity best practices without full industry buy-in may be an attempt at responsible behavior and good public relations, but often do little to change the cyber risk landscape. While CTA has additionally published a useful buyer’s guide to explain cyber risk issues and improve household cyber hygiene, one wonders how many consumers of low-cost network connected technologies even know of its existence. Shifting cyber risk burdens to poorly informed consumers has limited utility. The 5G commercial sector needs to acknowledge the limits of consumer-based actions, own the residual risk, and work together with government oversight to assign cross-sector mitigation responsibilities.

Key #2: Government must establish a new cyber regulatory paradigm to reflect the new realities

Current procedural rules for government agencies were developed in an industrial environment in which innovation and change—let alone security threats—developed more slowly. The fast pace of digital innovation and threats requires a new approach to the business-government relationship.

  • More effective regulatory cyber relationships with those regulated

Cybersecurity is hard, and we should not pretend otherwise. As presently structured, government is not in a good position to get ahead of the threat and determine detailed standards or compliance measures where the technology and adversary’s activities change so rapidly. A new cybersecurity regulatory paradigm should be developed that seeks to de-escalate the adversarial relationship that can develop between regulators and the companies they oversee. This would replace detailed compliance instructions left over from the industrial era with regular and fulsome cybersecurity engagements between the regulators and the providers at greatest risk as determined by criticality, scale (impact), or demonstrated problems (vulnerabilities) built around the cyber duty of care. It would be designed to reward sectors where participants have organized and are clearly investing ahead of failure to address risk factors.

Conversely, where sectors are ignoring cyber risk factors, graduated regulatory incentives can change corporate risk calculus to address consumer and community concerns. These activities would be afforded confidentiality and not be used by themselves to discover enforcement violations, but instead to help both regulators and the regulated better spot trends, best practices, and collectively and systematically improve their sector’s approach to cyber risk. DHS can have a supporting role for this, but at the end of the day, the balance between security, innovation, corporate means, and market factors is inherently regulatory. Absent the ability to impose a decision, government involvement can only be hortatory.

  • Recognition of marketplace shortcomings

Economic forces drive corporate behavior. Of course, there are bottom-line-affecting costs associated with cybersecurity. Even when such costs are voluntarily incurred, however, their benefits can be undone by another company that doesn’t make the effort. The first of this paper’s two recommendations suggests what companies can do to exercise their cyber duty of care. History has shown, however, that the carrot accompanying such efforts often needs the persuasion of a standby stick. This is only fair to those companies that step up to their responsibility and should not be penalized in the marketplace by those that do not step up. A rewards-based policy would amplify the value of cyber duty of care participation, especially when others fall short. It would also provide forward-looking incentive for risk reduction and a more useful feedback loop when breaches invariably occur.

  • Consumer transparency

Consumers have little awareness and no insight with which to make an informed market decision. The situation is analogous to the forces that resulted in the establishment of nutritional labeling for foods. Consumers should be given the tools with which to make informed decisions. “Nutritional labeling” about cyber risks or a cyber version of Underwriters Laboratories’ self-certification will help focus the attention of all parties on its importance.

  • Inspection and certification of connected devices

For years, the FCC has overseen a program to certify that radio-signal-emitting devices do not interfere with authorized use of the nation’s airwaves. Whether cellphones, baby monitors, electronic power supplies, or Tickle Me Elmo, the FCC assures the design and assembly of transmitting devices are within standards. The industry then organizes underneath that construct to self-certify devices in a cost-effective means baked into their production and distribution processes. At the time of the 2016 DYN attack that took control of millions of video cameras, the authors proposed a similar regimen to review the cybersecurity of connected devices. If we protect our radio networks from harmful equipment, why do we not protect our 5G networks from cyber-vulnerable equipment?

  • Contracts aren’t enough

Both the executive and legislative branches have focused on using government acquisition standards and pathfinder contracts to impose cybersecurity requirements where government contracts can compel commercial actions. This is an important, proven practice, but it can only go so far. Federal acquisition policies do not reach non-government suppliers that in an interconnected network can wreak havoc by simply connecting to the network. The majority of small and medium 5G network providers are not bound by any of these government contracts.

  • Stimulate closure of 5G supply chain gaps

For years government review of mergers and acquisitions has typically failed to appreciate the potential negative impact on critical supply chains. Moving companies and processes offshore or to joint ventures with foreign ownership/control has created wholesale gaps in the supply of crucial 5G components and the absence of domestic procurement options. Country of origin/ownership concerns must become relevant to both the corporate calculus that led to offshoring purchase decisions as well as to the market conditions that led to the destruction of a national capability in the first place. 5G supply chain market analysis must be continuous with regular engagement between regulators, industry, and the executive and legislative branches to properly incentivize globally competitive domestic sourcing alternatives.

  • Re-engage with international bodies

At present, the standards setting process for 5G is governed by the 3rd Generation Partnership Project (3GPP), an industry group that makes decisions by consensus based on input from its members, including Chinese 5G equipment companies. (Huawei reportedly made the most contributions to the 5G standard). The Obama FCC engaged directly with 3GPP to identify public safety and cybersecurity risk considerations applicable to the U.S. market. It additionally opened a notice of inquiry to ask the nation’s best technology brains how to implement cybersecurity risk reduction as part of the development and deployment cycle. The move was opposed by some industry associations and the Republican commissioners. Shortly after the beginning of the Trump administration, the new FCC cancelled the Obama FCC’s cyber initiatives.

FCC headquarters
The FCC should re-engage with international bodies like the 3rd Generation Partnership Project to have more agency in the worldwide debate over 5G cybersecurity. (Credit: FCC/U.S. government work)

There needs to be informed third-party oversight early in the 5G industry’s design and deployment cycle in order to prioritize cyber security. The nation, our communities and our citizens should—through their government—have some degree of agency in the process. The FCC and Commerce Department should participate in 3GPP and the U.S. feeder group as observer stakeholders. This will allow for earlier issue identification and the opportunity to submit concerns, without changing the basic governance of standards setting. The representatives of American citizens should have the option to escalate engagement on matters of national security and public safety concern.

CONCLUSION

It is an amazing turn of events when the U.S. Senate, currently led by Republicans, feels it necessary to introduce legislation instructing the Trump administration “to develop a strategy to ensure the security of next generation mobile telecommunications systems and infrastructure.” The 5G cybersecurity threat is a whole-of-the-nation peril. We should not be lulled into complacency because the newness of the network has masked the threat. We must not confuse 5G cybersecurity with international trade policy. Congress should not have to pass legislation instructing the Trump administration to act on 5G cybersecurity. The whole-of-the-nation peril requires a whole-of-the-economy and whole-of-the-government response built around the realities of the information age, not formulaic laissez faire political philosophy or the structures of the industrial age.

“People are going to be put at risk and possibly die as we increasingly connect life sustaining devices to the internet,” was the stark warning from one of the experts participating in a Brookings roundtable on 5G cybersecurity. This cold reality is because the internet’s connection to people and the things on which they depend will increasingly be through vulnerable 5G networks. It is an exposure that is exacerbated by a cyber cold war simmering below the surface of consumer consciousness.

Early generation cyberattacks targeted intellectual property, extortion, and hacked databases. Today, the stakes are even higher as nation-state actors and their proxies gain footholds in our nation’s critical infrastructure to create attack platforms lying in wait. Any rational risk-based assessment reveals that the favored adversary target is our commercial sector. Companies that provide critical network infrastructure or provide products or services connected to it represent the likely and potentially most dangerous enemy course of action in the ongoing cyber cold war.

“If you’re asking me if I think we’re at war, I think I’d say yes,” the former commandant of the Marine Corps, Gen. Robert Neller, told an audience in February. “We’re at war right now in cyberspace. … They’re pouring over the castle walls every day.” While our adversaries, no doubt, see positive outcomes for high-profile direct attack, they also are perfecting less-risky positive outcomes in a steady pace of low-level attacks intended to erode U.S. public confidence in our cyber critical infrastructure and the digital economy it underpins. The low-intensity cyber war is already ongoing as our adversaries risk very little in these attacks and stand to gain much.

Into this attack environment has come a software-based network built on a distributed architecture. With its software operations per se vulnerable, and a distributed topology that precludes the kind of centralized chokepoint afforded by earlier networks, 5G networks will be an invitation to attacks. Given that the cyber threat to the nation comes through commercial networks, devices, and applications, our 5G cyber focus must begin with the responsibilities of those companies involved in the new network, its devices, and applications. The cyber duty of care for those involved in 5G services is the beginning of such proactive responsibility.

“Yes, the “race” to 5G is on—but it is a race to secure our nation, our economy, and our citizens.”

At the same time, the federal government has its own responsibility to create incentives for 5G companies to focus on the cyber vulnerabilities they create. This is especially the case when there may be a corporate or marketplace lack of motivation to prioritize a maximum cyber effort. As outlined in this paper, this will necessitate replacing the rigid industrial-era relationship between government and business with more innovative and agile means of dealing with the shared problem.

Yes, the “race” to 5G is on—but it is a race to secure our nation, our economy, and our citizens.

The moment is now for a bipartisan call to action to not just address the current 5G exposures, but also to address the structural shortfalls that have allowed the cyber readiness gap to continue to grow. What got us here won’t get us to a secure 5G-enabled future.

Tom Wheeler was the 31st chair of the FCC from 2013 to 2017. Currently, he is a visiting fellow at the Brookings Institution. Rear Admiral David Simpson, USN (Ret.), was chief of the FCC’s Public Safety and Homeland Security Bureau during the same period. Currently, he is a professor at Virginia Tech’s Pamplin College of Business.

 

To read original report, click here

FOOTNOTES

  1. 1Captain Wayne P. Hughes, Jr., USN (Ret.), Fleet Tactics and Coastal Combat, 2nd ed., U.S. Naval Institute Press, 2000, pp.40-44
  2. 2Gordon, L.A., Loeb, M.P., Lucyshyn, W. and Zhou, L. (2015). Externalities and the Magnitude of Cyber Security Underinvestment by Private Sec tor Firms: A Modification of the Gordon-Loeb Model. Journal of Information Security, 6, 24-30. http://dx.doi.org/10.4236/jis.2015.61003
  3. 3While the authors do not want to understate the shortfalls associated with the NIMS self-assessment model and lack of federal engagement at the regional level to assess actual NIMS implementation, we do want to note that a decade in, NIMS has succeeded in establishing a common language and investment framework for long-term steady improvements to resiliency in over 10,000 jurisdictions across the country.

 

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The Rise of Global Innovation by US Multinationals Poses Risks and Opportunities /nextgentrade/global-innovation-us-multinationals-risks-opportunities/ Tue, 25 Jun 2019 15:27:17 +0000 /?post_type=nextgentrade&p=16397 Excerpt: This Policy Brief presents a statistical portrait of US MNCs’ global innovation system and the technological, organizational, and labor market factors that have changed the system in the last...

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Excerpt:

This Policy Brief presents a statistical portrait of US MNCs’ global innovation system and the technological, organizational, and labor market factors that have changed the system in the last two decades, as discussed in our previous research. The evidence points to an international division of R&D labor akin to the well-documented global value chains in goods production, in which particular R&D activities are located in regions where innovation in those domains appears most efficient. As is usually the case when the benefits of specialization and gains from trade can be realized, this transformed system brings broad-based opportunities by increasing the innovative capacity of US companies. In the context of the productivity slowdown in the advanced industrial world, these benefits should be welcomed, as they appear to offer a plausible pathway to increase productivity growth.

Several challenges could limit these benefits from the globalization of R&D, however. The global rise of economic nationalism poses a potential risk to progress in this area, particularly if the United States retreats from international trade policy leadership, for example. The aggressive use of tariffs under the Trump administration is already signaling to companies that the US government no longer supports the internationalization of commercial activities. It may take years to measure the impact on global R&D activity with any precision, but it is not difficult to imagine current rhetoric resulting in a decrease in overseas R&D activity by US MNCs or, potentially worse, decreasing integration and collaboration between US MNCs’ domestic R&D labs and their foreign affiliates.

In addition, some important developing countries are resisting effective protection of intellectual property rights and openness to foreign direct investment (FDI), preventing MNCs from taking full advantage of these nations’ potential as R&D sites. As the locus of R&D effort shifts from manufacturing to services and digitally traded services become a greater component of global consumption, global trade in services must be liberalized to achieve progress in innovation. The global effort to restrict (or tax) international data flows is another potential impediment. Because movement of skilled workers is a vital element of this system, rising opposition to immigration is another risk. Finally, growing US-China tensions pose a special challenge because of the important role these two economies play in the system. Certain public policies are needed to strengthen intellectual property rights, encourage labor mobility, and liberalize trade in services so that innovation can flourish to improve living standards and fuel economic progress.

innovation multinationals

 

[To read the original brief, click here.]

Copyright © 2019 Peterson Institute for International Economics. All rights reserved.

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Next-Generation Technologies and the Future of Trade /nextgentrade/next-generation-technologies-and-the-future-of-trade/ Wed, 10 Apr 2019 14:28:19 +0000 /?post_type=nextgentrade&p=15299 The history of trade reflects the ongoing march of technological innovation. This column argues that despite today’s increased trade tensions, rising nationalism, and slowdown in global goods trade, globalization is not...

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The history of trade reflects the ongoing march of technological innovation. This column argues that despite today’s increased trade tensions, rising nationalism, and slowdown in global goods trade, globalization is not in retreat. Instead, it is entering a new chapter that is being driven by flows of information and data, as well as technological changes that are reshaping industry value chains.

Many forces shape trade flows, including trade policies, changes in the nature and location of consumer demand, and differentials in the costs of labor and other inputs across geographies. Another important, but underappreciated, driver of trade flows is technology. 

The history of trade reflects the ongoing march of new technological innovations. After the Second Industrial Revolution, for example, the introduction of steamships and railroads changed the economics of trading across national borders. Likewise, the digital revolution of the 1990s and early 2000s enabled companies to interact with far-flung suppliers and customers (Baldwin 2016). Global value chains existed before the internet, but the internet further enabled fragmentation and offshoring of production by vastly improving coordination and communication costs. As China and other developing countries began participating in these production networks of specialized suppliers and assembly plants, trade flows soared and stretched around the world.

Today the next generation of technologies will reshape trade flows and global value chains again. But unlike the previous ICT revolution, these innovations will have a more varied and complex effect on trade in the years ahead. Some advances, like digital platforms, blockchain, and the Internet of Things, will continue to reduce transaction and logistics costs, thereby fuelling trade (WTO 2018). But other technologies may reduce trade flows by changing the economics and location of production, and transforming the actual content of what is bought and sold across borders. 

The net impact of the entire wave of new technologies is unclear, but in plausible future scenarios they could dampen goods trade while further boosting flows of services and data. Evidence of technology increasing data and service trade has been found in previous research (e.g. Bughin and Lund 2017, Freund and Weinhold 2000), but the literature to date has not provided evidence at a detailed level of value chains. For companies and countries alike, these trends will benefit some companies, but will also create losers. A growing imperative for all is to focus on digital skills and infrastructure, service capabilities, and innovation. In this column we consider some of the possible effects and estimate the magnitude of potential change. 

SOME TECHNOLOGIES WILL IMPROVE TRADE LOGISTICS AND TRANSACTION COSTS, BOOSTING GOODS TRADE

Companies trading across borders often lose time and money to customs processing or delays in international shipments and payments. But a number of new technologies can ease these frictions. 

Digital platforms, for instance, connect buyers and sellers directly, lowering the costs of search and coordination (McAfee and Brynjolfsson 2017). They have created seamless global marketplaces in areas such as e-commerce, payments, travel, learning, and labour services – and there is room for much more growth. Alibaba’s AliResearch projects that cross-border B2C e-commerce sales alone will reach approximately $1 trillion by 2020. B2B e-commerce could be five or six times as that figure. While some of those transactions may substitute for traditional offline trade flows, e-commerce could still spur some $1.3 trillion to $2.1 trillion in incremental trade by 2030, boosting trade in manufactured goods by 6–10%. This will include many small businesses that can directly reach customers in other countries. EBay, Alibaba, Amazon, Jumia and other online marketplaces are enabling the rise of ‘micro-multinationals’ – today, startups tap global talent, finance, and consumers from day one (McKinsey Global Institute 2016).

Logistics technologies also continue to improve. The Internet of Things can track shipments in real time, while AI can route trucks based on current road conditions. Automated document processing can speed goods through customs. Some companies are developing fleets of self-driving trucks, and a number of ports worldwide have introduced automated cranes and guided vehicles that can unload, stack, and reload containers faster and with fewer errors. Blockchain has potential for tracking shipments and triggering faster automated payments, although it will be some time before its scalability and success in trade can be determined. 

We calculate that this group of technologies could reduce shipping and customs processing times by 16–28%. The academic literature finds that a 1% reduction in trade costs can result in a 0.4% increase in trade flows (Djankov et al. 2010, Hausman et al. 2013). Based on these figures, we estimate that these technologies together could potentially boost overall trade by 6–11% by 2030 compared to the baseline, worth some $4.7 trillion in annual trade. Looking at each country’s average processing times and bilateral flows, it appears that Bangladesh, India, and Indonesia are among the countries that could make the biggest gains.

Figure 1 The effect of technology on trade flows in value chains

Source: McKinsey Global Institute (2019)

AUTOMATION AND ADDITIVE MANUFACTURING CHANGE PRODUCTION PROCESSES AND THE RELATIVE IMPORTANCE OF INPUTS, AND MAY REDUCE GOODS TRADE

The diffusion of automation and artificial intelligence technologies suggests that multiple industries will experience a profound shift in the importance of capital versus labour (McKinsey Global Institute 2017). The growing adoption of automation and AI in manufacturing makes labour costs less important and other factors – such as proximity to consumer markets, access to resources, workforce skills, and infrastructure quality – more important.

As a result, we can already see a trend towards moving production closer to end consumer markets, such as the US and the EU. Today, only 18% of goods trade is from a low-wage to a high-wage country, and that share is shrinking in the most labour-intensive industries, such as textiles and apparel. Both Adidas and Nike, for instance, have designed new lines of athletic shoes that make them amenable to full automation of the production process – and they have opened those new factories in Germany and the US (Adidas) and Mexico (Nike). 

In addition to affecting the trade in manufactured goods, automation will influence trade in services. Many call centre and help desk services are already ‘staffed’ by virtual agents, which are adding natural language processing abilities and beginning to handle a wider range of tasks. This is leading some companies to automate customer support and back-office services rather than offshoring them. This trend could reduce the $160 billion global market for business process outsourcing, now one of the most heavily traded service sectors.

Additive manufacturing (3D printing) could also influence future trade flows. Most experts believe it will not replace mass production over the next decade; its cost, speed, and quality are still limitations. But it is gaining traction for prototypes, replacement parts, toys, shoes, and medical devices. Since 3D-printed goods can be produced near the point of use, they would eliminate the need for international shipping (although they may increase data flows as design files are transmitted). While this could reduce trade in some individual products substantially, the drop is unlikely to amount to more than a few percentage points across all manufactured goods by 2030. In some cases, additive manufacturing could even spur trade by enabling customisation.

Overall, we estimate that automation, AI, and additive manufacturing could collectively reduce global goods trade by up to 10% by 2030, as compared to the baseline, or $4 trillion in annual trade flows. However, this reflects only the direct impact of these technologies on enabling production closer to end consumers in advanced economies. It is also possible that these technologies could lead to nearshoring and regionalisation of trade instead of reshoring in advanced economies, impacting both modes of transportation (e.g. overland and air cargo replacing container shipping) and trade corridors. We already see that intra-regional trade has grown faster than inter-regional trade since 2013, a trend seen worldwide but particularly notable as regional value chains are developed in Asia and in the EU28 (McKinsey Global Institute 2019).

NEW TECHNOLOGIES MAY ALSO HAVE INDIRECT – AND UNEXPECTED – IMPACTS ON TRADE FLOWS 

As technology transforms some products and services, it will also alter the content and volume of trade flows. Some of these may have unexpected consequences for trade flows.

Renewable forms of energy, such as solar and wind, are less tradable than carbon-based fuels such as coal and LNG. The ongoing decarbonisation of economies and shift to renewable energy may therefore reduce trade in energy.

As another example of indirect impacts on trade, growing adoption of electric vehicles could reduce trade in auto parts. McKinsey estimates that electric vehicles will make up some 17% of total car sales globally by 2030 (up from 1% in 2017), but as their drivetrains have only about 15% as many moving parts as internal combustion engines, this trend could reduce the hundreds of billions of annual trade in vehicle parts by up to 10% while also dampening oil imports (over half of which are used in transportation). 

The shift from physical to digital flows that started years ago with individual movies, albums, and games is now evolving once again as companies such as Netflix, Tencent Video, and Spotify popularise streaming and subscription models. Streaming now accounts for nearly 40% of global recorded music revenues. Cloud computing uses a similar pay-as-you-go or subscription model for storage and software, freeing users from making heavy capital investments in their own IT infrastructure. The shift from physical goods to streaming, leasing, and pay-as-you go services is only in its infancy. This will affect not only the composition of trade – from physical goods to services – but likely also the relative value of services. 

THE RISING IMPORTANCE OF SERVICES 

The net impact of these countervailing forces on global trade flows is uncertain. But in plausible scenarios, it is quite possible that the next impact could be to further accelerate the shift in global trade flows from goods to services. This is consistent with other research on the causes of the slowdown in trade (Timmer et al. 2016).

Already today, services trade is growing 60% faster than goods trade overall. Some types of services, such as IT services, telecom, business services, and IP royalties, are growing 2-3 times as fast as goods trade. Moreover, 30% of the value of traded goods comes from the embedded services in their production, such as engineering and design, financial services, distribution, and marketing (Miroudot and Cadestin 2017). Counted in value-added terms, services already account for at least 45% of global trade flows.

5G wireless networks, virtual reality, and augmented reality may all give a boost to services in the future. The advent of ultra-fast 5G wireless networks opens new possibilities for delivering services globally. Remote surgery, for example, may become more viable as networks transmit sharp images without any delays and robots respond more precisely to remote manipulation. In industrial plants, 5G can support augmented and virtual reality-based maintenance from remote locations, creating new service and data flows. 

CONCLUDING REMARKS

Despite the increased trade tensions, rise of nationalism, and well-documented slowdown in global goods trade, globalization is not in retreat (Lund and Tyson 2018). Rather it is entering a new chapter that is being driven by the flows of information and data, as well as technological changes reshaping industry value chains. 

REFERENCES

Baldwin, R (2016), The Great Convergence: Information Technology and the New Globalization,Cambridge, MA: Harvard University Press.

Baldwin, R (2019), The Globotics Upheaval: Globalization, Robotics, and the Future of Work,Oxford University Press.

Bughin, J and S Lund (2017), “The ascendancy of international data flows,” VoxEU.org, 9 January.

Djankov, S, C Freund and C S Pham (2010), “Trading on time,” The Review of Economics and Statistics 92(1).

Freund, C and D Weinhold (2000), “On the effect of the internet on international trade,” Board of Governors of the Federal Reserve System International Finance Discussion Paper No. 693.

Hausman, W H, H L Lee and U Subramanian (2013), “The impact of logistics performance on trade,” Production and Operations Management 22(2).

Lund, S and L Tyson (2018), “Globalization is not in retreat,” Foreign Affairs, May/June.

McAfee, A and E Brynjolfsson (2017), Machine, Platform, Crowd: Harnessing Our Digital Future,New York, NY: W W Norton & Company.

McKinsey Global Institute (2019), Globalization in transition: The future of trade and value chains,January.

McKinsey Global Institute (2017), Jobs lost, jobs gained: Workforce transitions in a time of automation, December.

McKinsey Global Institute (2016), Digital globalization: The new era of global flows, March.

Miroudet, S and C Cadestin (2017), “Services in global value chains: From inputs to value-creating activities,” OECD Trade Policy Papers 197.

Timmer, Marcel et al. (2016), “An anatomy of the global trade slowdown based on the WIOD 2016 release,” University of Groningnen Growth and Development Center, Research Memorandum 162.

World Trade Organization (2018), World trade report 2018: The future of world trade: How digital technologies are transforming global commerce, October.

[To read the original paper, click here.]

Copyright © 2019 VoxEU. All rights reserved.

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