Industry 4.0: Trade rules for the internet of things

“The Industrial Internet”

On factory floors and from computers in Silicon Valley, General Electric (GE) is building what it calls the “Industrial Internet”—global networks that employ sensors, cloud computing, and advanced analytics to help people better design and more efficiently operate millions of connected industrial machines around the world.

The Industrial Internet, for example, could enable a connected locomotive in South Africa to anticipate when it needs a repair; allow technicians in Saudi Arabia to troubleshoot a gas turbine with real-time help from U.S. experts; or enable a manufacturing plant in India to employ global cloud computing to help it use water and energy resources more sustainably.

Achieving the great promise of the Industrial Internet – part of the so-called “Internet of Things” – requires breaking down many technical and practical barriers. Billions of diverse things must get connected to the Internet (including manufacturing equipment, medical devices, cars, cities, cars and even cows). Different devices and siloed systems must be enabled to communicate securely, and mountains of data must be transformed into actionable advice.

Adding Tremendous Value to the Global Economy

Marrying the physical and digital worlds will create tremendous economic opportunity. McKinsey forecasts that the Internet of Things will add between $2.7 trillion and $6.2 trillion in economic value annually through 2025 and improve manufacturing productivity by up to five percent. Cisco estimates that the Internet of Things will have a global economic impact of $14.4 trillion between 2013 and 2022 and that 32 percent of these gains will flow to the United States.

GE thinks the Industrial Internet will boost U.S. productivity to levels not seen since the Internet revolution of the late 1990s­—increasing incomes, improving living standards, and supporting good jobs, including new manufacturing jobs.

What Could Possibly Go Wrong?

In today’s economy, products are sold and systems operate globally. Indeed, modern trade and commerce would be impossible without cross-border data flows—from Internet ordering and electronic payment to global networks for supply chain management. At the same time, however, countries are increasingly erecting barriers to digital trade, including restrictions that could significantly limit the global operation of the Internet of Things.

Many countries, including Brazil, China, and the European Union, have or are considering rules requiring that data be stored locally. Many of these rules seek to serve legitimate goals, like protecting privacy. But they often indiscriminately restrict all information—including impersonal technical data that is the lifeblood of the Industrial Internet—and can make cloud computing virtually impossible.

Countries also use trade restrictions to rig the game for their local digital sectors. Many countries require that foreign firms use locally based servers or other IT infrastructure as a condition for providing digital services. And IT industry participants are concerned that China will extend its desire for China-specific technical standards to sectors like cloud computing.

The Wild West of Trade Rules

For networks of things, “localization” requirements erect barriers to global connectivity by raising costs and seriously limiting innovation, especially for smaller firms. Localization requirements can effectively prevent countries from participating in some networks altogether. The power of globally accessible cloud computing, for example, is often essential for industrial data networks that store massive amounts of data. One cross-country flight of a single networked aircraft engine, for example, can generate as much data as 1,000 copies of the Encyclopedia Britannica.

National data laws can also act as a significant trade barrier. Over 100 countries have separate, different, and often nontransparent rules on cross-border data flows. The United States, European Union, and many other countries, for example, have substantially different approaches to Internet privacy and data protection. For companies that sell networked products globally—like the connected trucks that Sweden’s Scania sells worldwide—this patchwork of national rules can substantially increase compliance costs and risks, and even preclude sales to certain countries.

At the same time, international rules governing cross-border data flows and related goods, services, and infrastructure are incomplete and outdated. The World Trade Organization’s General Agreement on Trade in Services (GATS), for example, dates from 1995—the year that both Amazon and eBay were start-ups. As a result, GATS contains limited rules against digital trade barriers and did not anticipate complex networks like the Industrial Internet.

A Pragmatic Approach

Business, government, and academic experts—through groups like the Industrial Internet Consortium—are making significant progress in addressing the practical barriers to networks of intelligent things, and in developing the common technical standards. For policymakers, it will be equally important to make similar progress on eliminating trade barriers that could limit the global reach of the Internet of Things.

U.S. policymakers are seeking to spur this process by pursuing binding obligations in new U.S. trade deals—on services and technology goods. These agreements are intended to assure cross-border data flows, prohibit localization trade barriers, prevent discrimination against digital products and services, and eliminate tariffs on modern digital goods (including new Internet-connected products). Embedding them in bilateral and regional trade deals would lessen differences on digital trade with key U.S. trading partners while setting solid templates for broader regional and global trade rules.

At the same time, the United States is using international forums like APEC and the OECD to develop flexible international approaches—such as mutual recognition agreements and common principles—that facilitate global information flows and digital trade, while respecting national differences on issues like privacy. These arrangements could promote the global reach of the Internet of Things through common understandings on issues like transparency and interoperability, while assuring that restrictions in areas like privacy are targeted and proportional.

Trade’s Leading Edge

The Internet of Things is in its infancy but growing rapidly and will encompass some 50 billion things by 2020. As technical experts rapidly construct global networks of connected things, policymakers are working to keep pace by eliminating digital trade barriers and building a strong global network of supportive rules and policies. If they can manage to get unnecessary government requirements out of the way, networks of things can achieve great things for people around the globe—driving innovation and economic growth, improving living standards, and supporting good jobs.

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