The European Union is making life a lot more challenging for businesses across the globe.
The 27-nation bloc has aggressively adopted new laws meant to police personal data, social media content, and the dominance of Big Tech. It has sued to block mergers. And it has readied the world’s first comprehensive legislation to police artificial intelligence.
The actions are raising the stakes for how companies operate both inside and outside the EU. Just last month, EU opposition to a union of two American tech companies — Amazon (AMZN) and robot vacuum maker iRobot (IRBT) — was enough for the firms to call off their $1.4 billion merger.
Resistance from the EU was also enough to persuade Silicon Valley-based Photoshop maker Adobe (ADBE) to give up on plans to acquire San Francisco-based web-based design platform Figma and motivate US biotech giant Illumina to sell off a cancer-screening company called Grail.
Big companies in the US and across the globe now face a critical decision: Do they adjust the way they make products and provide services to the EU’s more aggressive laws or bet that more lenient regulations will take hold in other countries where they operate?
'The Brussels effect'
Some giant companies that operate globally aren’t willing to take the chance of tiptoeing around the EU, which remains the world’s third-largest economy and is home to roughly 450 million people.
"We've seen businesses say, ‘I'm going to build my products, my widgets, my service, to align with the most restrictive guidelines and not have different jurisdictional approaches,'" said Jordan Fischer, a lecturer on cross-border information governance at the University of California Berkeley and partner at Constangy.
This pressure to adopt the EU’s version of business compliance even outside its jurisdiction is growing, though isn't new. It's known as "the Brussels effect," a term coined in 2012 by Columbia Law School professor Anu Bradford to describe how the EU's aggressive legislation exerts “unprecedented and deeply underestimated global power."
Brussels, in Belgium, is considered the unofficial capital of the EU.
"Companies with customers, or hopes of future business, in the EU decide to comply with the regulations in order to be able to continue selling into the EU, and interacting with potential EU consumers," said Meredith Kolsky Lewis, director of cross-border legal studies at University at Buffalo School of Law.
The EU, which was created in 1993, has a long history of moving more aggressively in its regulation of businesses than the US.
It even chalked up some early victories. In 2001, its antitrust stance doomed a $42 billion proposed merger between GE and Honeywell, even though that industrial union had received approval in the US. In 2007, it adopted broad environmental legislation that pushed chemical companies around the globe to adhere to new restrictions.
'It's not a big problem for the Googles of the world'
In more recent years, the EU’s attempt to rein in tech giants has become a core focus. The EU's first major tech legislation, the General Data Protection Regulation (GDPR), went into effect in 2018.
It is designed to protect consumer privacy and security and imposes obligations on companies anywhere in the world as long as they "target or collect data related to people in the EU."
The EU then added two more laws in subsequent years — the Digital Markets Act and Digital Services Act— that attempt to curb the dominance of Big Tech companies like Apple (AAPL), Amazon (AMZN), Meta (META), and Microsoft (MSFT), and the content of major online social media and e-commerce sites.
"Where regulation like the GDPR has the biggest effect — it's actually outside of Europe, in countries in the developing world," said Charles Kenny, an economist and senior fellow at the Washington think tank Center for Global Development.
"And I think that's sad. I think it's something that European rule makers and regulators tend not to take into account."
In response to tech regulations that include GDPR, which Kenny said made no exceptions for startups, a group of African Union nations formed an alliance to advocate for rules more friendly to entrepreneurs in poor nations like Sierra Leone and Ghana.
"It's not a big problem for the Googles of the world or the Facebooks of the world to comply. It is a big problem for small tech startups," Kenny said, adding that he agrees that certain levels of regulation are needed.
"I worry the same might happen with these AI regulations."
The EU does intend to apply new legal restraints around artificial intelligence this year after EU members last week signaled their agreement on the world’s first comprehensive legislation to regulate AI.
The new rules will focus on the uses of AI technology and classify how heavily they are regulated depending on how risky the application is, with facial recognition and certain medical innovations requiring approval before being made available to customers.
Federal laws specific to AI don’t exist yet in the US, and it’s unknown whether that will happen.
The combination of the added tech regulations from the EU and confusion within the US as to its own intentions means more uncertainty and further complexity for global businesses, Lewis said.
Despite the hard line that the EU has taken with its tech laws, Fischer said there is reason for companies to hope that the EU and the US will come into greater alignment. She pointed to a framework concluded with the US this year known as the Trade and Technology Council.
"I think that makes a lot of companies breathe a little bit easier. Not easy. But easier," Fischer said.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
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