Raise the Bar by Leveraging the EU’s Regulatory Power

A decade of crises has generated plenty of pessimism about the European Union. It is certainly true that the EU faces structural challenges and political divisions over reforming the euro and migration policy, as well as disputes over the rule of law in some member states. But these problems should not obscure the union’s strengths.

The EU is a trade, regulation and standard-setting superpower, and even while international cooperation stalls in some areas, it can help to lead the world in regulating markets on crucial questions of privacy, competition, technology and the environment.

In 2012 Anu Bradford, a professor at Columbia Law School, christened the EU’s ability to export its regulations around the world as the ‘Brussels effect’, borrowing from a term used to describe the phenomenon in the US in which Californian regulations – often more stringent than in the rest of the country – are adopted in other US states due to California’s relative economic heft.

The EU’s size means it can replicate this in some policy domains at a global level: in effect, achieving a form of ‘unilateral regulatory globalization’ through market mechanisms, and ideally leading to raised and harmonized global standards.

In a number of areas, the EU has shown its international regulatory clout. EU competition policy has constrained the behaviour of multinationals or blocked corporate mergers, sometimes even when the companies involved are not headquartered in Europe. The EU’s chemical regulation, REACH,[1] vies with its US equivalent to set the terms of global chemical use. Through its General Data Protection Regulation (GDPR), the EU has taken the lead in trying to protect personal privacy amid the rise of the data-driven economy.

The EU can do this largely because of its size and competence. Non-compliance means losing out on access to Europe’s $20 trillion market. In many cases, it does not make sense for companies to make products to varying standards, rather than ensure all adhere to the highest one. So where EU standards are more stringent than – and not incompatible with – those in other key markets, particularly the US, they can become the de facto rule.

Brexit has been a powerful demonstration of the EU’s trade and regulatory power. In many areas, from electrical products to pharmaceuticals, it will make little sense for the UK to try to diverge from rules made in Brussels. Even though it is a major economy, the UK is the considerably smaller side in the negotiations, and the EU is the destination for more than 40 per cent of its exports.

The ‘common rulebook’ that formed part of the UK government’s proposed future relationship was an admission of this: rather than being ‘common’ rules, the commitment was a euphemistic expression of the need for the UK to follow rules set by the EU to ease trade, while losing the ability to directly shape them.

The Brexit process has highlighted the EU’s position as Europe’s regulatory hegemon: the mass of laws, rules and standards around which the rest of non-EU Europe, and much of the world, orbits. Britain has burned a lot of political fuel seeking escape velocity, with little economic opportunity in sight.

The process has also shown the lengths to which the EU will go to defend the integrity of the market it has built. That integrity brings power. The relative importance of this power is increased in an era when multilateralism is under strain. The EU’s regulatory power is not dependent upon international consensus-building or functioning multilateral institutions.

It is not the result of an international negotiation dependent on reasonable or compliant partners who share a broadly similar world view. It is a unilateral power of the EU, rooted in market size and regulatory competence, and so is less affected by, say, a rogue American president.

As Bradford originally observed, the ‘Brussels effect’ has not always been an intentional phenomenon. The EU’s approach to regulation is largely driven by its own politics and policy preferences, filtered through the complex process of law-making at the European level, rather than generally being a conscious effort to regulate the world. However, in some instances there has been a greater awareness of the EU’s capacity to set global standards in areas of emerging law.

The EU’s data privacy law, GDPR, is a good example. The regulation governs how the personal data of Europeans are collected, used, moved and stored, but its broad scope gives it extraterritorial effect.[2] It puts citizens’ privacy at the heart of data use, placing much clearer restrictions on the collection, storage and use of personal data.

While GDPR initially attracted criticism for compliance costs and ambiguity in implementation, various revelations about the behaviour of big technology companies[3] have served to validate the intention and spirit of the regulation.

The EU could be more active in seeking to export regulation internationally, designing standards with the intention of promoting global goods and using its trading power to supplement such efforts. In this, the EU is likely to have a greater impact through its regulatory power than through its generally weak foreign and defence policy, which is hampered by substantial differences of attitude, capability and will across the continent, and by the fact that decisions are largely intergovernmental and based on unanimity.

For example, the EU could do more to look at supply chain ethics and transparency. Building on member states’ efforts, such as the UK’s Modern Slavery Act, which obliges larger companies to publish annual statements explaining the efforts they have taken to address risks of slavery and trafficking, the EU could work with the private sector to raise standards of transparency, labour rights and corporate responsibility in global supply chains, as the European Parliament has called for.[4]

It could take a stronger approach to tax avoidance, adding robustness to the tax haven blacklisting initiative that began in December 2017. On the environment, the EU has already been a leader, for example by pioneering emissions standards and trading, but the scale of the task to combat climate change and biodiversity loss remains vast.

The EU could push further on electrical standards, plastics use and trying to curb the effects of European consumption on the developing world. It could more aggressively use trade policy, and even sanctions, to try to raise climate ambition on the part of major emitter countries.

It could also build on efforts to place ethical and legal constraints on the use of data by focusing on the regulation of emerging technologies. The EU has already convened a High-Level Expert Group to establish ethical guidelines on artificial intelligence. The European Commission’s focus on ensuring competitive markets while robustly protecting citizens’ privacy makes it well placed to lead this agenda. And it should always be willing to challenge domestic attitudes and interest groups within Europe when their positions are not rooted in science or evidence.

There are risks of overreach: stifling nascent industries, overburdening companies, or giving competitive advantages to other states or territories. But overall, the EU has a good record of pioneering pro-consumer regulation and challenging corporate power unilaterally, with knock-on effects globally. That agenda will be all the more important if international cooperation and multilateralism become ever more difficult.

Notes

[1] REACH refers to ‘Registration, Evaluation, Authorisation and Restriction of Chemicals’. See ECHA (undated), ‘Understanding REACH’, https://echa.europa.eu/regulations/reach/understanding-reach.

[2] Freshfields Bruckhaus Deringer (undated), ‘The extra-territorial scope of the EU’s GDPR’, https://www.freshfields.com/en-gb/our-thinking/campaigns/digital/data/g….

[3] Kleinman, Z. (2018), ‘Cambridge Analytica: The story so far’, BBC News, 21 March 2018, https://www.bbc.co.uk/news/technology-43465968.

[4] European Parliament (2017), ‘Motion for a European Parliament resolution on the impact of international trade and the EU’s trade policies on global value chains’, 20 July 2017, http://www.europarl.europa.eu/doceo/document/A-8-2017-0269_EN.html.

This essay was produced for the 2019 edition of Chatham House Expert Perspectives – our annual survey of risks and opportunities in global affairs – in which our researchers identify areas where the current sets of rules, institutions and mechanisms for peaceful international cooperation are falling short, and present ideas for reform and modernization.