Ignore the nay-sayers: Brussels will continue to rule the tech world

Opinion piece (Encompass)
13 December 2023

Europe is caught between a rock and a hard place. On the one hand, it is determined to lead the world in setting high standards – in areas like the environment and trustworthy technology. On the other hand, Europeans are increasingly concerned at threats to the continent’s competitiveness. They fear its industries will be undercut by foreign competitors with lower standards, and that Europe will be less worse off if companies pass through the costs of complying with expensive regulations solely to European customers.

The EU thinks it has the answer: the ‘Brussels effect’, a term famously coined by Columbia University academic Anu Bradford. The Brussels effect conveys how the EU’s market standards tend to be adopted across the globe, because firms find it easier to adopt the same practices wherever they do business. Examples are everywhere. In the digital sector, many of the world’s tech firms comply with parts of the EU’s data protection law, the General Data Protection Regulation (GDPR), everywhere . But can newer EU digital rules, such as the EU’s laws on digital competitionplatform accountability and the imminent law on artificial intelligence (AI), achieve the same result? Or will the US and UK obtain advantages from taking different regulatory approaches in these areas?

Many economists think the Brussels effect is already fading. They argue the EU’s digital laws are too onerous; its approach is too protectionist; that Europe’s lack of tech giants means its power is waning; or that companies will shun a region with a shrinking share of the world economy. But none of these are not good measures of the Brussels effect. In cross-border trade, regulations are set by the most important importers. Here, the EU is an undisputed champion thanks to its open market.

Europe is the world’s largest services importer, attracting about 30 per cent of global service imports. Its lead could be even stronger in digital services. Looking at the targets of EU regulation – like US tech firms – paints a similar picture. Big tech firms obtain about a quarter of their global revenue from Europe – second only to their home market of the US.

To avoid complying with EU laws, avoiding the EU market might be one option. But this is highly unattractive – which is why most tech firms that threaten to leave, or to not rollout new services in Europe, backtrack fairly quickly. Many digital services operate globally, so they do not ‘pick’ which countries to compete in, and cannot divert their services from one market to another. Abandoning the EU market therefore represents a huge loss of revenue which cannot be mitigated.

Firms’ other option to defy the Brussels effect is to limit their compliance with European standards to Europe. This may superficially seem easy: software can easily be tweaked for European customers. But it is often much tricker. For example, social networks work by combining different individuals’ personal data – when one person comments on another’s post, both of their data must be linked together. This makes it technically complex to isolate Europeans’ data and treat it differently.

There are, of course, cases where tech firms adopt EU-only approaches. But in many cases, this was a deliberate policy decision by the EU to limit access to its market. A good example is the increasingly strict approach that data protection authorities in Europe are taking to the transfer of Europeans’ data offshore (often necessary for firms to provide ICT services to Europeans). This hard-line approach increasingly requires firms to treat European personal data differently. The EU can – and should – avoid walling off its market in future to preserve the Brussels effect.

Digital firms may also limit their compliance to Europe when regulation makes services worse rather than better, or active hinders innovation. European users still cannot access Threads, Meta’s competitor to X/Twitter. And although Microsoft and Google have made changes to their services after EU antitrust action, these changes were never rolled out globally. In these cases, EU requirements were poorly conceived: they neither enhanced competition nor gave consumers choices they wanted. This poses a warning that the EU needs to be pragmatic when it decides how to implement upcoming digital competition rules and the Artificial Intelligence Act.

The EU therefore need not fear that strict (but sensible) regulations will undermine its competitiveness. The EU’s regulatory influence in the tech sector should be relatively immune to Europe’s broader economic challenges, so long as EU regulations focus on benefiting consumers and keeping Europe’s markets open. Conversely, it means that the US and UK’s attempts to regulate technologies like artificial intelligence in a ‘light touch’ way might fail to deliver much benefit. Rather than finding ways to undercut the EU, the US and UK would be better off engaging with Brussels and persuading it to moderate its regulatory excesses.

Zach Meyers is assistant director of the CER.