Under the Microscope: The European Union’s Digital Markets Act

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

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

While such a strategic platform for dialogue holds tremendous promise, the agenda will include some difficult issues. One of the thornier issues is Europe’s quest to dictate market outcomes with its proposed Digital Markets Act (DMA). The European Commission has signaled its interest to essentially abandon competition law as a tool to reign in anticompetitive behavior, opting instead to stitch together a regulatory straitjacket to be selectively applied to a handful of American companies. This is one of more than a dozen legislative efforts where the EU is looking to make its mark on digital economy policy, all under the banner of “technological sovereignty.”

Europe Turns Away from Competition Law

The EU’s approach to competition enforcement for years has embraced the vast power of its underlying antitrust statutes to go after largeness. It has with little restraint imposed huge fines on American tech giants including Microsoft, Intel, and Google and required them to change business practices, ostensibly to give competitors a “fair” chance in the EU market.

While the limitations of EU competition enforcement have yet to been found, Europe has decided that competition investigations aren’t worth the time needed to gather and evaluate evidence. Why bother with applying rigorous economic analysis to scrutinize allegedly anticompetitive conduct or to offer a remedy that is tailored so it goes no further than is necessary to restore competition in the market? Instead, Brussels has decided to prioritize stringent new regulations over competition law. Unlike most regulations, which apply to all market actors, the DMA is designed to a capture only a few companies, mostly American, effectively treating them as public utilities.

Europe Is Piecing Together A Regulatory Straitjacket

While commonplace in any functioning economy, regulation generally applies equally to all market actors. For example, the EU’s General Data Protection Regulation (GDPR) is designed to protect privacy. The importance placed on privacy is universal, and therefore requirements in the law apply broadly to all commercial actors. Even economic regulations, like VAT or labor laws, capture broad swaths of the economy. Such regulations do not signal out particular economic actors.

The DMA is fundamentally different. The proposed legislation is not principle-based regulation and follows none of the norms of good regulatory practice.

Instead, it is guided by an underlying belief that only a few should be subject to extensive regulatory controls, because application of these controls to a larger set of economic actors would be counter-productive to Europe’s drive towards increased competitiveness, innovation, and economic growth. It is a tacit admission that Europe’s companies need not be expected to compete on the merits.

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

These firms will not be subject to any investigation to determine if their conduct is a violation of any law; instead it would be assumed that because of their size, their economic freedoms should be restricted. This flies in the face of the principle of equal justice under law.

Companies likely to be captured within the scope of the DMA have a limited number of things in common, apart from having some sort of platform business and a large market capitalization. Most offer a diverse range of products and services and in many cases, the specific offerings aren’t necessarily even dominant in the individual markets in which they compete. Instead, of targeting business practices, or specific products or services, a gatekeeper would be essentially treated as if the entire company were a public utility. But unlike public utilities, few offerings from these companies are as essential to everyday 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. There are some players that have become immensely successful as they have been financially rewarded for making consumers’ lives more convenient.

These companies have also ushered in innumerable economic opportunities for small and medium-sized businesses. As a result of these platforms, businesses of all sizes have seen transaction and marketing costs drop dramatically—even as their ability to effortlessly court consumers previously considered out of reach has expanded.

Certain business practices associated with platform companies may deserve scrutiny, but artificially lumping them together under a set of overreaching rules makes little sense. A case-by-case, evidence-based approach to investigating potential wrong-doing is far preferable to the EU’s attempt to design a regulatory straitjacket.

Taking A Page Out of China’s Playbook?

To be clear, Europe is not China. Europe isn’t dominated by highly prized state-owned enterprises, nor does it have China’s restrictions that bar foreign investors from entering the market. But with the DMA, Brussels appears to be taking several pages out of Beijing’s playbook by imposing greater government control over the market, side-stepping due process, potentially compelling technology transfer, and generally setting up an unlevel regulatory pitch to benefit European companies at the expense of U.S. competitors. Here are three examples:

• Targeting: Europe argues that it is not targeting American firms, but, rather, large platforms that happen to be American, because it believes such platforms should have a duty to aid European competitors. Yet the DMA will focus on platforms the Commission designates as “gatekeepers” and will not capture many sizeable platforms operating in Europe. This echoes the unilateral digital services taxes imposed by several EU member states, which are cleverly crafted to apply almost exclusively to American companies in a manner that clearly violates the EU’s WTO commitments.
• Due Process: Of particular concern is the potentially arbitrary mechanism by which a company could be designated a “gatekeeper.” Would these companies be so designated for life? How would other companies be added? Most importantly, would a company be able to argue for removal of the designation? So far, the proposed DMA provides little clarity—and hence little comfort—on these questions.
• Tech Transfer: The DMA appears to impose an obligation for “gatekeepers” to share proprietary information with competitors and provide direct access to core technical and operational infrastructure, including operating systems. As drafted, the DMA does not include any relevant protections for trade secrets or intellectual property rights. It’s one thing to demand fair competition, but it is entirely another to insist that a company turn the keys to its factory over to a competitor.

If adopted as is, the DMA would likely not meet Europe’s trade obligations, nor would it adopt a least trade restrictive approach to regulation. It would also take advantage of loopholes in trade law, which speak only in limited terms to investment or competition obligations. As the Biden Administration seeks to resolve long-standing disputes and adopt an allied approach to jointly tackle shared challenges with China, Europe’s proposed DMA is inconsistent with the collaborative, non-discriminatory, and plurilateral approach the EU seeks from the United States.

Outlook

Europe has the right to regulate its marketplace and enhance its regulatory environment in accordance with EU societal objectives. It also has a requirement to abide by its trade commitments and to champion the non-discriminatory, market-based, least-trade restrictive principles it has long maintained as its essential philosophy. Internationally, the EU knows what it is like to be restrained in foreign markets when, in the name of security and sovereignty, regulatory frameworks are closely aligned with industrial policy and unilaterally imposed.

The DMA, as drafted, seeks to manage competition versus promoting it. It is hardly a sure-fire path for boosting European competitiveness, nor is it easy to see how the DMA will spur innovation or investment in Europe. We hope the proposed legislation will change, but in the meantime, American business is closely watching the DMA and the EU’s broader approach to “tech sovereignty.” A U.S.-EU Trade & Technology Council would be a helpful platform to address some of the very real questions about Europe’s intentions.

About the authors

Sean Heather

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

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