EU Regulation Of US Technology Giants: A Forecast

The European Union’s new Digital Markets Act could be the most restrictive series of regulations against United States tech giants ever created. Under the “Act”, US tech companies potentially face fines of up to 10% of their annual revenue for anti-competitive policies, such as favoring their own services over those of other tech companies. 

In a year that promises much change, the Digital Markets Act is only one of the factors that could impact US tech companies’ ability to operate in the EU. First, it is helpful to explain the recent history of EU’s regulation of US technology giants. 

Populism

The global political cycles of 2015 shifted in the direction of right-wing populism. In 2016, the United Kingdom electorate voted through referendum to withdraw from the European Union. Several months later, in the fall of 2016, Donald Trump was elected president on an isolationist, nationalist platform. These are just two examples from a much longer list of political developments that cemented a global push toward populist politics. 

As part of its own nationalist agenda, the European Union levied significant fines against US technology giants for alleged violations of regional antitrust, taxation, and industry specific laws. 

In one instance, Ireland cut a deal with Apple
AAPL
limiting the company’s tax liability for European operations in exchange for providing jobs and technology. The EU claimed its member states did not have the authority to make such a deal and slapped Apple with a $14 billion fine for back taxes.

Examples of Fines by the EU against US tech companies proliferated in 2016-2018

1. Apple was fined $14.5 billion in 2016 for not paying sufficient taxes
2. Microsoft was fined $2 billion for antitrust violations in 2016
3. Google
   GOOG
   was fined $2billion and $5billion for antitrust violations in 2017 and 2018
4. Qualcomm
   QCOM
   was fined $1.2 billion for antitrust violations in 2018

As the political landscape changes in 2021 and beyond, a few key factors will likely affect how these US companies operate in the EU.

Factor # 1: The Ebb of European Populism

A review of approval ratings for European leaders suggests that the populist wave is ebbing. Domestic disagreements over policy and a disorganized response to COVID replaced the media’s focus on migration, and as a result, far-right leaders saw their approval ratings plummet:

• Poland’s Prime Minister Mateusz Morawiecki saw a 34 percent decrease in popular support.
• Italian Senator Matteo Salvini’s support has nosedived to 24 percent (down 8 points from a year earlier in 2020). 
• Hungarian Prime Minister Viktor Orbán Fidesz’s polling numbers have been falling, reaching levels below 50 percent in recent months. 
• The anti-immigrant Alternative for Germany party has fallen to 9 percent in recent months. 

This cyclical movement away from right-wing populism will certainly influence the political economy of the European Union and affect its regulation of US technology giants. The question is: In what way?

Factor # 2: The Biden Presidency

President Joe Biden and Vice President Kamala Harris are considered to be “moderate Democrats,” making them more likely than other democratic politicians to be sympathetic to Silicon Valley. A review of their campaign promises during the Democratic presidential primary reveals they were not as aggressive as their more liberal colleagues, Senators Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.), in calling to break up specific tech giants.

Although most donations came from company employees, the companies themselves also contributed to Democrats in a big way:

• Alphabet: $21 million 
• Amazon
  AMZN
  : $9.4 million
• Facebook, Microsoft and Apple: $25 million each

If the rational actor model—the theory that people will always act in their self-interests—and finance contributions tells us anything, Biden will fight hard against the EU’s attempt to manage the proliferation of US tech giants in Europe. 

Factor # 3 Host government discrimination

While host government discrimination against foreign investors is more likely under populist administrations, it is always a viable threat. After an initial period of success, Airbnb’s ventures in Western Europe ran into significant roadblocks. Complaints from hotel owners whose margins were falling and others who were upset about surging rental prices compelled government officials to take action. In Reykjavik, Dublin, Barcelona, Berlin, Hamburg and Munich, politicians passed laws and regulators enforced regulations that actively discourage homeowners from opening their homes to visitors. Even if host governments do not pass regulations that drive foreign investors out of Europe, they will still be motivated to make it difficult for multinational companies to succeed. The political gains of catering to the interests of local, domestic competitors are likely to carry the day. 

What’s next? 

While all of these factors are likely to affect the dynamic between US Big Tech companies and EU legislators, factors #2 and factors #3 will have the most significant impact. The political interests of politicians at the national and regional levels of government in the US and the EU will drive regulatory outcomes. While political shifts away from populism will impact the EU’s decision making, the interests of Big Tech will trump those whose ideology is more tolerant of foreign investment. More specifically, the decision of government officials are likely to weigh the self-benefits of satisfying companies and local Europeans who are losing business to Big Tech against the costs of disappointing the Biden Administration. Factor #3 will have the most profound effect.