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America’s Tech Regulators Should Not Follow Europe's Lead

This week The Economist endorsed European “tech doctrine”—a combination of antitrust, tax, privacy, and regulatory policies that is rapidly being imposed on a mostly American tech sector seemingly powerless to resist it. The magazine said, “If the doctrine works, it could benefit millions of users, boost the economy, and constrain tech giants that have gathered immense power without a commensurate sense of responsibility.” That’s a big “if.” American regulators should avoid this doctrine like the plague.

Take antitrust first: The Economist celebrates European freedom to act in this area. In a long article, it notes that Europe is leaving America “in the shade” because, “The European Union can decide and impose fines by itself,” rather than having to bring a case before a judge. Yes, the power to impose fines on your own recommendation is attractive to regulators, but it is one that runs afoul of the American constitutional system of checks and balances. As it is, the Federal Trade Commission has some powers similar to those of the European Commission, but the last time it used them aggressively Congress reined in “the national nanny’s” power.

Moreover, the EU’s antitrust system relies on the idea that big companies are bad for competition—at least when they are American. In fact many observers regard the selective application of the EU’s antitrust policies as a disguised form of protectionism. The United States, by contrast, uses a “consumer welfare” standard whereby growing big as a result of adding value to consumers and outcompeting the rest of the industry is not a crime.

Many often point out—as The Economist acknowledges—that the EU has no big tech companies other than SAP, a business software company. This appears to be the result of the EU’s regulatory approach. In particular, the big tech companies have had a major disruptive effect on companies that the EU member states regard as “national champions.” This means that EU politicians and bureaucrats are likely to hear complaints about the effects of competition from people close to them while the benefits of tech are dispersed among the people at large. Concentrated costs and dispersed benefits make for fertile ground for regulatory rent-seeking, and so it has proved in the EU. This is not something to celebrate.

Then there is tax. The EU has contemplated a “digital services tax”—a tax on worldwide revenue imposed on digital businesses that operate in the EU. While the project is currently shelved, France is going ahead with a similar proposal. Given the size of the companies targeted and the fact that the tax will be deductible from France’s territorial corporate taxes, this is largely a tax on global—that is, mostly American—tech companies.

The Tax Foundation has a detailed analysis here. At 3 percent of global revenue, it would take just over 30 countries to enact a similar tax to wipe out the entire revenues—never mind profits—of the world’s biggest tech companies. It is concerning, to say the least, that Treasury Secretary Mnuchin appears to have endorsed the idea. U.S. regulators should push back against this idea forcibly.

Privacy is another area of law that appears to be being used in conjunction with antitrust law by the EU to target American tech companies. The EU General Data Protection Regulation (EU GDPR) has already had significant effects, as CEI analysts Ryan Radia and Ryan Khurana predicted. European consumers no longer have access to certain websites and the effects go some way beyond the obvious. In fact, the GDPR’s requirements are so stringent that only the biggest data-reliant companies can comply with them, effectively locking in their market dominance. This clearly conflicts with the idea of using antitrust law to promote competition.

As for regulatory policies, the EU Parliament today voted to approve a copyright directive that significantly limits what tech companies can do with content. Two provisions in particular will have a devastating effect on the development of the Internet in Europe.

Article 11 introduces the “link tax,” which stops aggregators like search engines from providing a snippet of content from the site linked to. Google has helpfully provided an example of what Google News will now have to look like in EU countries.

Article 13 makes platforms like YouTube responsible for copyright breaches by their users, which will lead to platforms taking down any potentially doubtful material automatically and may even make memes and GIFs illegal. Moreover, it will make distributing new content with rights attached more difficult, cutting off content creators. Matthew Lesh explains more in his discussion of the successful music video Despacito here.

Notably EU regulators are not talking about breaking up big tech companies. They recognize the difficulties inherent in that (see Will Rinehart here). Instead, they would prefer them to remain as cash cows for taxation and fines. That requires keeping them in place rather than seeing them get outcompeted.

If America values innovation the way it always has, the last thing it should do is follow Europe’s lead on tech.