Proposed European Tech Regulations Will Backfire, Badly

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The European Union recently proposed two major tech regulation bills aimed at America’s tech industry, the Digital Markets Act (DMA) and the Digital Services Act (DSA). While American antitrust law is flawed, European competition policy is arguably more so. On purpose or not, DMA/DSA would add trade barriers in a world that already has too many. They are costly. And they won’t increase competition. In fact, they would help to lock in the big U.S. companies’ dominance.

How would they do this? They would block self-preferencing, such as Amazon promoting self-branded products in its search results, or Google and Apple giving their own apps special treatment in their app stores. Retailers and grocery stores already have been doing this for the last century or so, and those markets are highly competitive. It is no different when a company does the same thing online.

Companies would face stricter content moderation policies. If the EU says to take down certain content, companies would have a short time frame to either remove it or be fined. European companies would not face these same compliance costs, presumably giving them a leg up, though without improving their products.

Tech platforms would be liable for user-posted content, rather than the users themselves. This essentially copies President Trump’s position in the Section 230 controversy. Besides chilling speech, this would give popular services a reason to avoid the European market. It would also lock in dominant players. Facebook can afford to hire armies of content moderators, but startup competitors cannot. Repeat offenders risk fines of up to 10 percent of global revenue.

Breaking up companies is another option, though the practical politics of the EU breaking up a U.S.-based company likely make this unrealistic.

Unlike most legislation, DMA/DSA would not apply to everyone. They would only apply to “gatekeepers,” a new term defined in just such a way that it applies only to a handful of major U.S. tech companies. In practice, DMA/DSA is simple extraction from successful companies, without proof of consumer harm.

Swiss competition commissioner Henrique Schneider argues in a recent Competitive Enterprise Institute paper that, even if that EU officials understand basic economics—no sure thing—they “choose to disregard it in order to advance two political aims—protectionism and consumer welfare (as they conceive the latter).” And, as he predicted, things are getting worse.

Beyond Spotify, it is hard to even name a major European tech company. This is not for a lack of talent and good ideas in Europe. It is because of a broken regulatory culture that prefers tearing down over building up. Taking foreigners down a notch is very different from allowing homegrown entrepreneurs to build and innovate.

DMA/DSA is trade protectionism under another name. U.S.-EU trade relations are already strained because of President Trump’s misguided trade war, Europe’s equally misguided retaliation, and a long-running dispute over subsidies to Boeing and Airbus. President Biden is likely to further raise trade barriers, as my colleague Iain Murray points out. Some kind of major U.S.-EU trade agreement is likely necessary in the next few years as a diplomatic and economic counterweight against China. DMA/DSA would aggravate tensions between allies at precisely a point when they can be somewhat smoothed.

Finally, DSA/DMA wouldn’t actually take down the big American companies, but lock in their dominance. They can afford massive fines and compliance costs; smaller startups can’t. And if a smaller competitor nears the threshold of becoming a “gatekeeper,” it may decide to stay small on purpose, leaving most of the market to big incumbents. This would harm consumers, who would pay more to have fewer choices and lower-quality services.

If the DMA/DSA bills are enacted—no sure thing—it will be a long process. According to CNBC, Margrethe Vestager, the EU’s top competition policy official wants them enacted “as fast as possible,” meaning about two years. More realistically, the process will be delayed by tech company lobbying efforts and squabbles between Brussels and the EU’s 27 national governments. By then, the tech market will likely look very different.

If the Digital Markets Act and the Digital Services Act are accurate statements of where EU regulators stand on tech policy and innovation, then Europe’s tech sector will remain second-class. Along the way EU regulators would make global trade less free, help to lock in today’s big tech companies’ dominance, and harm consumers around the world.