Under the microscope: the digital markets law of the European Union

[This is the second article in a series on policy priorities for transatlantic relations. Read articles one, three, four, and five.]

As the US-EU Leaders’ Summit approaches on June 15, the digital economy is high on the agenda. The European Union has proposed the establishment of a forward-looking strategic dialogue around trade and technological policy. The Chamber strongly supports such a platform so that Washington and Brussels can maximize the opportunities for convergence and minimize the risks of divergence.

While such a strategic platform for dialogue holds great promise, the agenda will include some tough questions. One of the thorniest issues is Europe’s quest to dictate market outcomes with its Digital Markets Bill (DMA). The European Commission has expressed interest in essentially abandoning competition law as a tool to control anti-competitive behavior, preferring to assemble a regulatory straitjacket to be applied selectively to a handful of US companies. This is one of more than a dozen legislative efforts where the EU seeks to make its mark on digital economy policy, all under the banner of ‘technological sovereignty’.

Europe is turning away from competition law

The EU’s approach to competition enforcement for years has relied on the vast power of its underlying antitrust laws to combat the vastness. It imposed with little restraint huge fines on US tech giants, including Microsoft, Intel and Google, and forced them to change their business practices, allegedly to give competitors a “fair” chance in the Internet market. ‘EU.

While the limits of EU competition enforcement have yet to be discovered, Europe has decided that competition investigations are not worth the time it takes to gather and assess the evidence. Why bother to apply a rigorous economic analysis to examine the allegedly anti-competitive behavior or to propose a suitable solution so as not to go further than necessary to restore competition in the market? Instead, Brussels decided to prioritize tough new regulations over competition law. Unlike most regulations, which apply to everyone in the market, DMA is designed to capture only a few, mostly American companies, effectively treating them as utilities.

Europe is creating a regulatory straitjacket

Although common in any functional economy, regulation generally applies equally to all market participants. For example, the EU General Data Protection Regulation (GDPR) is designed to protect privacy. The importance given to privacy is universal and, therefore, the requirements of the law broadly apply to all commercial actors. Even economic regulations, such as VAT or labor laws, take over large swathes of the economy. Such regulations do not identify specific economic actors.

DMA is fundamentally different. The proposed legislation is not principle-based regulation and does not follow any of the standards of good regulatory practice.

Instead, it is guided by the underlying belief that only a few should be subject to in-depth regulatory controls, as applying those controls to a broader set of economic actors would be counterproductive to the Europe’s desire to increase competitiveness, innovation and economic growth. . It is a tacit admission that it is not necessary to expect European companies to compete on the merits.

The net effect is that a handful of businesses will be labeled as “gatekeepers”.

These companies will not be investigated to determine whether their conduct constitutes a violation of any law; one would rather assume that because of their size, their economic freedoms should be restricted. This goes against the principle of equality of justice before the law.

There are a limited number of things that companies likely to be captured within the scope of DMA have in common, other than having some sort of platform business and a large market cap. Most offer a diverse range of products and services, and in many cases specific offerings are not even necessarily dominant in the individual markets in which they compete. Instead of targeting specific business practices, or specific products or services, a gatekeeper would essentially be treated as if the entire business were a public service. But unlike utilities, few of these companies’ offerings are as essential to daily life as, say, water or electricity.

The range of devices that make up the “Internet of Things” and the explosion of the app economy have been nothing short of remarkable in terms of innovation and value creation. Some players have enjoyed immense success because they have been financially rewarded for making consumers’ lives more convenient.

These companies have also ushered in countless economic opportunities for small and medium-sized businesses. Thanks to these platforms, businesses of all sizes have seen their transaction and marketing costs drop dramatically, even as their ability to effortlessly woo consumers previously considered out of reach has increased.

There are some business practices associated with platform companies that may deserve close scrutiny, but artificially lumping them together under an excessive set of rules does not make sense. A case-by-case, evidence-based approach to investigating potential wrongdoing is far preferable to the EU’s attempt to craft a regulatory straitjacket.

Removing a page from China’s playbook?

To be clear, Europe is not China. Europe is not dominated by highly prized state-owned companies, nor the Chinese restrictions that prevent foreign investors from entering the market. But with the DMA, Brussels appears to be pulling several pages out of Beijing’s playbook by imposing greater government control over the market, bypassing due process, potentially burdensome technology transfer, and generally setting up an uneven regulatory ground in the country. profit of European companies at the expense of American competitors. Here are three examples:

  • Targeting: Europe maintains that it is not targeting American companies, but rather the large platforms which happen to be American, because it believes that these platforms should have a duty to help European competitors. However, the DMA will focus on the platforms that the Commission designates as “gatekeepers” and will not capture many of the important platforms operating in Europe. This echoes the unilateral digital services taxes imposed by several EU member states, which are cleverly designed to apply almost exclusively to US businesses in a way that clearly violates the EU’s WTO commitments. .
  • Regular procedure: Of particular concern is the potentially arbitrary mechanism by which a company could be designated as a “custodian”. Would these companies be so designated for life? How would other businesses be added? More importantly, could a company advocate for the removal of the designation? So far, the proposed DMA provides little clarity – and therefore little comfort – on these issues.
  • Technology transfer: The DMA appears to impose an obligation on “gatekeepers” to share proprietary information with competitors and to provide direct access to basic technical and operational infrastructure, including operating systems. As written, the DMA does not include any relevant protection for trade secrets or intellectual property rights. It is one thing to demand fair competition, but it is quite another to demand that a company hand over the keys to its plant to a competitor.

If adopted as is, the DMA would likely not meet Europe’s trade obligations, nor would it take a least trade restrictive regulatory approach. It would also take advantage of loopholes in commercial law, which only deal in a limited way with investment or competition obligations. As the Biden administration seeks to resolve long-standing disputes and take an allied approach to jointly address common challenges with China, Europe’s proposed DMA is inconsistent with the collaborative, non-discriminatory, and plurilateral approach that the EU expects from the United States.

Outlook

Europe has the right to regulate its market and improve its regulatory environment in accordance with the societal objectives of the EU. It is also bound to uphold its trade commitments and uphold the non-discriminatory, market-based, and least trade-restrictive principles that it has long maintained as its core philosophy. Internationally, the EU knows what it is like to be restricted in foreign markets when, in the name of security and sovereignty, regulatory frameworks are closely aligned with industrial policy and imposed unilaterally.

The DMA, as drafted, seeks to manage competition rather than promote it. This is not a foolproof way to boost European competitiveness, and it is not easy to see how DMA will boost innovation or investment in Europe. We hope that the proposed legislation will change, but in the meantime, US companies are closely monitoring DMA and the EU’s broader approach to “technological sovereignty”. A US-EU Trade and Technology Council would be a useful platform to address some of the very real questions about Europe’s intentions.

About the authors

Sean heather

Senior Vice President, International Regulatory Affairs & Antitrust

Sean Heather is Senior Vice President of International Regulatory Affairs and Antitrust Law.

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