How Europe’s decisions are shaping the tech world

When you think of Big Tech, five companies immediately come to mind: Alphabet (more commonly known as Google), Amazon, Apple, Meta (Facebook in the pre-virtual era), and Microsoft.

Investors sometimes refer to FAANG, an ugly acronym almost identical to this group but which replaces Netflix with Microsoft. (The rebranding of some of these companies prompted Jim Cramer, the person who invented FAANG, to start talking about MAMAA.) Alibaba, Baidu, Samsung, and Tencent are also making the cut.

One feature of this list quickly emerges: none of them are European. However, Europe is playing an increasingly important, if not decisive, role in the future of big technologies. Credit the “Brussels Effect” – the process by which the European Union sets global standards. Recent European legislation to regulate Big Tech will have profound implications for the future of technology, but it’s also a lesson in how power can be wielded in an interconnected world.

Anu Bradford, a professor at Columbia University, first identified the Brussels effect in 2012, saying that the EU has an outsized influence on trade because companies adopt European standards for their activities even if they do not operate in this market. She said it made more sense to internalize these rules for global operations than to differentiate between regulatory jurisdictions, even if EU standards were stricter. In a world where compliance has an effect on reputation, this logic makes sense: the scalability of solutions and the maintenance of higher standards are a clear plus for a company.

We had a taste of the power of the EU in 2016, after the adoption of the General Data Protection Regulation (GDPR), which conditions the use of personal data of European origin on the maintenance of protections of the which are essentially equivalent to those of the GDPR. That’s why every website you visit now has a warning about cookie settings.

This year, the EU has again taken the lead in the digital realm, passing the Digital Markets Act (DMA) a few weeks ago and the Digital Services Act (DSA) last week. This regulatory one-two punch is heralded as transforming the digital economy by limiting the power of Big Tech, ending its anti-competitive behavior and forcing it to pay greater attention to online content and practices.

The DMA applies to so-called gatekeepers: companies with a market capitalization of at least €75 billion or an annual turnover of €7.5 billion that provide such as browsers, messaging or social media, with at least 45 million monthly revenue users in the EU and 10,000 annual business users. This list includes the companies already mentioned and others, such as Oracle, AirBnB, Salesforce, PayPal and Zoom, to name a few.

It prohibits companies from combining personal data from different sources – Google cannot merge (without permission) data from, for example, a Google search and Youtube, which it owns – as well as the bundling of services . It also promotes interoperability and increased access to third-party platforms. Apple cannot restrict purchases to its App Store and messaging services must be interoperable. In short, it prohibits many of the anti-competitive practices that Big Tech uses to stifle smaller rivals.

The DSA is cracking down on online content, forcing big tech companies to be more aggressive in protecting their users. It prohibits targeted advertising aimed at children or based on sensitive personal data such as religion, gender, race and political opinion. It prohibits the use of manipulation techniques to trick users into clicking on content. Companies will be required to have policies and procedures in place to remove flagged hate speech, terrorist propaganda and other material defined as illegal by EU governments.

Significantly, they will be compelled to show their work. Platform providers will need to be transparent in how they recommend content and will need to disclose strategies and efforts to deal with misinformation and propaganda to regulators. Margrethe Vestager, EU Executive Vice-President for Digital Policy, summed up the new obligations: “Platforms must be transparent about their content moderation decisions, prevent dangerous misinformation from going viral and avoid that dangerous products are offered on the market places”.

Violators could face heavy penalties. Violators of the DMA face fines of up to 10% of total worldwide revenue for the previous fiscal year, 20% for repeated violations – and consistent violations may result in the banning of future acquisitions . Penalties under the DSA can be up to 6% of global turnover or a ban on EU operations for repeated serious breaches.

This assumes that execution is possible. The results are not encouraging. The main criticism of the GDPR is that companies just put up those irritating consent windows instead of actually protecting privacy. The DSA imposes an annual fee of up to 0.1% of the annual net income of major online platforms to cover the costs of monitoring compliance. This should provide for far more than the estimated 230 people – a figure everyone says is insufficient – ​​who will be hired to enforce the new law.

European governments have concluded that Big Tech is either unable or unwilling to curb their abusive behavior and are intervening to stop it. This activism contrasts sharply with the American model, which takes a laissez-faire approach and relies on self-policing. Whether this is a real mindset or a default position due to political paralysis and vigorous lobbying is hard to say.

According to European lawmakers, their Japanese counterparts have shown interest in the DSA. For now, Japan has the Law on Improving Transparency and Fairness in Digital Platforms, which came into force on February 1, 2021. The name clearly indicates its purpose. It is a hybrid approach that creates a regulatory framework and leaves the details to the voluntary efforts of companies; this relaxation aligns with Japanese tradition and practice, giving the bureaucracy substantial discretion.

The law empowers the Minister of METI to review the current status of the operation of the platform and to convene discussions among the various stakeholders. If there is suspicion of violation of the Antimonopoly Law, the Minister may request the Japan Fair Trade Commission to take appropriate action.

Tech companies continue to hope to shape the final details of EU legislation. They insist the rules target corporate America — the nationalist map is still a way to mobilize US lawmakers to fight on their behalf — and will stifle innovation. By their logic, forced system integration and interoperability requirements discourage research and development. A Google-sponsored economic analysis concluded that “basic economics” suggests that the DMA “will encourage free riding on the investments of others, and it will discourage parties from making those investments.”

The first argument could gain traction in Washington, although many observers believe the US and EU share the basic vision and skepticism towards Big Tech. The second assertion did not convince the European legislators. European officials and politicians counter that they are ensuring that the rules of the game are level playing field and that consumer rights are protected.

If DMA and DSA succeed in defining the rules of the digital space, they will once again confirm the influence of Europe and the need to think more broadly about power. Bradford argues that the EU “has the unique ability” to set standards that shape the business environment and lead “to a noticeable Europeanization of many important aspects of global trade”.

Europe has its challenges, but “market forces alone are often enough to convert the European standard into a global standard. In this way, the EU has a significant, unique and highly penetrating power to unilaterally transform global markets…”.

It is a timely reminder amid the horrors unfolding in Ukraine that resorting to naked coercion is a sign of failure. We must do all we can to ensure that our countries retain additional means to shape the world and that we do not create an order that relies on or rewards naked and dangerous exercises of power.

Brad Glosserman is Associate Director and Visiting Professor at Tama University’s Center for Rule-Making Strategies and Senior Advisor (non-resident) at Pacific Forum. He is the author of “Peak Japan: The End of Great Ambitions” (Georgetown University Press, 2019).