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Special Edition Magazine, Spring 2020: Beyond the Techlash

How Europe Rules the Digital Economy

Europe is not home to any of the major tech firms, but it shapes digital governance worldwide, owing to the size and attractiveness of its market. Whereas American-style techno-libertarianism and Chinese digital authoritarianism have both come up short, the European Union's regulatory approach has emerged as a global gold standard.

NEW YORK – Today’s “tech war” is often portrayed as a contest for digital dominance between just two powers: China and the United States. The US is home to the world’s most powerful and profitable tech companies – including Apple, Amazon, Google, Facebook, and Microsoft, whose combined market value exceeds $5 trillion. China has the telecommunications titan Huawei, the Internet and gaming giant Tencent, and the world’s largest e-commerce retailer, Alibaba. Without its own search engine rivaling Google or a social-media platform comparable to Facebook, Europe might look like it is sitting on the sidelines of the digital economy.

But quite the opposite is true. More often than not, it is the European Union that sets the rules by which multinational tech companies operate. As the world’s antitrust chief, the EU keeps global tech companies’ market behavior in check, even when their home regulators let them operate free of regulatory constraints. Between 2017 and 2019, the EU imposed almost $10 billion in fines on Google for its anticompetitive practices.

In addition, EU regulations often determine how big tech companies gather, process, store, and monetize personal data. For example, Facebook, Google, and Microsoft have all adopted one global privacy policy – and it is one that mirrors the EU’s General Data Protection Regulation (GDPR). Similarly, EU rules influence the types of speech that Internet companies will allow on their platforms. Instead of being guided by America’s First Amendment free-speech protections, Facebook, Twitter, and YouTube follow the EU’s definition of hate speech worldwide when deciding which content to remove from their platforms.

Why would these powerful companies surrender to the will of European regulators and design their products and services accordingly? The answer lies in what I have termed the “Brussels effect.” Because the EU is one of the world’s largest, most affluent consumer markets, multinational corporations accept compliance with EU rules as the price for doing business in Europe. And to avoid the costs of complying with multiple regulatory regimes, they often extend these rules to their operations globally. This dynamic allows the EU to exert passive but deep influence on corporate behavior, transforming global markets in the process.

While the Brussels effect is not limited to the digital domain – the EU wields similar power across many other domains, from environmental protection to consumer health and safety – the EU’s regulatory heft is particularly pertinent in the data economy. Tech companies simply cannot escape the Brussels effect, given the importance of the EU market for data-driven businesses. Facebook’s nearly 300 million users in Europe account for 25% of its global revenue; and Google commands over 90% of the search market in most EU member states, which is greater than its market share in the US. Abandoning the EU market or maintaining different data practices across global markets is often not commercially viable for these companies, leading them to follow EU standards globally.

Global companies are not the only ones to feel the Brussels effect. Governments, too, are increasingly looking to the EU when drafting their own rules for the digital economy. To date, nearly 120 countries have adopted privacy laws, and most of these resemble the EU’s data-protection regime. These countries range from large economies and regional leaders such as Brazil, Japan, South Africa, and South Korea to midsize economies like Colombia and Thailand. For its part, the US has thus far been reluctant to emulate the EU, but even the US-based tech giants concede that the global momentum has shifted in Europe’s favor.

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Indeed, Facebook’s founder and chief executive, Mark Zuckerberg, has urged the US government to adopt a comprehensive, federal EU-style privacy law. “New privacy regulation in the United States and around the world,” he argues, “should build on the protections GDPR provides.” Such industry buy-in suggests that US policymakers may not be able to hold out forever as the lone voice defending American data privacy exceptionalism, especially as its own companies follow the rules adopted in Europe.

Moreover, politics are also moving in favor of the EU’s regulatory approach, which will make resistance more difficult, even for companies and governments harboring reservations about the EU’s digital paternalism. Recent data breaches – such as the Cambridge Analytica scandal in the United Kingdom, where Facebook users’ data were misappropriated to influence elections – have further enhanced the EU’s standing in the regulatory debate.

Besides, just as the limits of American-style techno-libertarianism have been laid bare, so have those associated with Chinese digital authoritarianism. Neither model is likely to prevail in the battle of ideas over digital global governance. In fact, China’s reliance on data as a tool for state surveillance and social control has further contributed to the recognition that the EU’s regulatory model best protects the public interest, checks corporate power, and preserves democratic structures and institutions.

The EU is growing increasingly conscious of its ability to shape the global regulatory environment, bolstering its lawmaking ambitions. Existing laws like the GDPR are unlikely to be the last regulatory innovation coming from Europe. The uncontrolled pursuit of artificial-intelligence technologies, including facial recognition, is unsettling many Europeans, as are fake news and the use of digital technologies to interfere in democratic elections.

By the end of this year, the EU is expected to unveil its new Digital Services Act,which will include more aggressive rules governing the operation of Internet platforms. As such, the Brussels effect will likely continue to be felt worldwide, extending the EU’s influence – in the digital arena and beyond – long into the future.

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