Wednesday, February 26, 2020

Business must brace for the new national security economy

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Relations between the United States and China will continue to deteriorate despite the phase one trade deal signed in January 2020. The mood, at least among US elites, has shifted. A former White House official recently identified two schools of China policy: hardline and ultra-hardline. Significantly, the dividing lines are not between political parties but within them.

Businesses must rethink standard operating procedures and policies in the wake of intensifying competition between the world’s two leading economies. Executives must prepare for the new national security economy. Regulatory reforms have already begun and managers and decision-makers must be sensitive to this new reality.

The US National Security Strategy published December 2017 identifies a world marked by great power competition. While there will be a military dimension, it will be seen primarily in the economic arena and develop most fiercely in the arena of emerging technologies as the United States competes with China to create the world’s largest innovative economy. During the Cold War, attention was paid to technology leakage with military applications. That concern persists but today governments recognise that the country which dominates the frontiers of new technologies will prevail in the race for global leadership.

Since the United States and China are both deeply embedded in global supply chains, their policies have a profound impact on the behaviour of businesses worldwide. US Vice President Mike Pence’s remarks in October 2018 at the Hudson Institute make it clear that Washington is looking hard at private sector behaviour as it engages China. While US action gets most of the attention, China is also implementing measures to promote indigenous development and insulate its supply chains from political disruption.

The 2019 US National Defense Authorization Act (NDAA) calls for the identification and control of ‘emerging and foundational technologies’ that are considered vital to national security. While publication of a final list has been delayed as national security and business interests strive to find the right balance, representative technologies include biotechnology, nanotechnology, artificial intelligence (AI), quantum computing, sensing technology and robotics.

Any company that hopes to work with US partners in these areas must be prepared for stringent regulations and a restructuring of internal processes and procedures to meet US security concerns. Protocols and regulatory frameworks that were once limited to companies working on defence will be applied more broadly. Autonomous vehicles require AI, logistics technologies and sensors, for instance. Companies wishing to engage in cutting-edge research will have to implement a higher level of security than in the past.

Companies will have to develop new processes to ensure that research is secure and intellectual property protected. This requires that individuals and entities involved are not security risks. Management will have to be more transparent regarding investors, partners and controlling interests.

Governments are already demanding greater attention to these concerns. The United States has reformed criteria used by the Committee for Foreign Investment in the United States (CFIUS), which evaluates foreign investment in critical US industries. Australia also modified criteria used by its Foreign Investment Review Board to examine such transactions. Japan too has passed legislation imposing new restrictions on foreign investment.

Management will also have to create new mechanisms to ensure that internal communications are protected. Networks must be segregated to prevent leakage of information within a company. Vendors and suppliers will also be subject to review. Supply chains will have to be scrubbed to prevent tampering and protect intellectual property.

The new national security economy will also force change on companies that aren’t engaged in frontier research. In a deeply connected world, cybersecurity is critical. If there is no guarantee that transmissions are secure and data is protected, such ubiquitous links can become vectors of attack and sources of instability. This has powerful implications for business.

As Japan’s federation of business associations Keidanren has noted, top management must recognise that cybersecurity is ‘the most important management issue’. That demands a new mindset that is less concerned with reputational damage and more intent on sharing cyber incident information. In…

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