Over the past couple weeks, three different readers have asked me to talk about the European Union’s impact on technology. I know, I know, the request seems silly. Europeans don’t build anything. Why would we write about them? But the unfortunate fine print of globalism is this: a market is enough to matter.

I feel embarrassed to admit I wasn’t really keyed into the Brussels issue until this year, when the topic of AI finally roused my interest, and here it would certainly be a mistake to say the Europeans aren’t producing anything; they have produced regulation in quantities rivaled only by the authoritarian prison state of China, the costs of which Brian Chau recently detailed for Pirate Wires. Still, a Europe relegated to another Dark Age, while very sad for them, is not really our problem. Our problem is market pressures mean what’s regulated abroad impacts what we can all do here, at home, in the very country — a free country — where technology is actually built. Such limits, in the actual seat of global progress, threaten the concept of progress itself.

An important story this morning from the Foundation for American Innovation’s Luke Hogg.

-Solana

---

From the street, one could easily miss the nondescript building that houses the Irish Consulate just east of Union Square in San Francisco. People subjecting themselves to the massive European bureaucracy required to renew passports and visas are totally unaware that behind the main consular area sits a unique entity. A small sign is the only indication that the consulate also hosts the offices of Gerard de Graaf, the European Union’s “ambassador” to Silicon Valley.

A career bureaucrat, de Graaf has worked on information and communications tech policy for the European Commission since 1991. After focusing on standards regimes and cybersecurity for a while, de Graaf rose to prominence as the man behind the Digital Services Act and the Digital Markets Act. According to the EU, these two new laws are intended “to keep the Internet safe, protect fundamental rights and enhance competition in digital markets.” In reality, they’re protectionist regulations designed to punish American tech giants in an attempt to bring Europe’s tech industry back from the dead.

Ostensibly established to aid tech companies’ compliance with these new competition rules, de Graaf’s new outpost symbolizes an unsettling collaboration between two giants. In addition to taking part in pride parades and celebrating Europe Day at City Hall (who knew that was a thing?), de Graaf and his team facilitate transatlantic dialogue with tech CEOs, scholars, and, most importantly, state officials.

Thanks in no small part to inaction in Washington DC, policymakers in Europe and California have developed a chummy relationship to collectively impose onerous restrictions on the tech industry. From data privacy to market concentration and competition to protecting children online, the Brussels-Sacramento Axis holds an outsized sway over the trajectory of technological innovation. Their next target? AI.

Beneath the veneer of safeguarding user rights and taming the tech titans lies a record of stifled creativity and bureaucratic overreach. If we’re not careful, the future of tech will be governed by a transatlantic partnership of bureaucrats.

The Brussels Effect

Through the second half of the 20th century, globalization of markets drove a shift in the nature of power, and economics became a far more potent tool of geopolitics. In merging its disparate economies under the various treaties that led to the creation of the European Union, Europe quickly realized that, as the third largest economy in the world, it had significant leverage over the trajectory of global economic policy. Over the past 30 years, the EU has learned how to flex its economic muscles.

Through the Brussels Effect — a term coined by Columbia Law professor Anu Bradford — the EU exerts a form of regulatory power that stems from its ability to set and enforce rules that companies around the world are compelled to follow in exchange for access to the vast European consumer market. This phenomenon has led to the global adoption of EU regulations, as companies adjust their practices and products to meet these standards, regardless of where they operate. As Bradford put it, “the EU’s regulatory clout shows that the EU can be a superpower without being a super state.”

There are three basic factors behind the Brussels Effect. First, the EU represents one of the world's largest consumer markets, giving it substantial bargaining power to influence global business practices. Second, the EU's regulations often focus on issues such as privacy, consumer protection, and environmental standards, which resonate with international consumers and are therefore attractive for companies eager to win the hearts and minds of progressive, young consumers. Third, the EU's regulatory approach tends to be more stringent than its counterparts’, resulting in companies adjusting their practices to meet the high standards that, more often than not, mean compliance with more rational policies in other jurisdictions.

The most obvious example of the Brussels Effect in recent years has been the General Data Protection Regulation (GDPR). As of 2018, all tech companies that wish to operate in the EU must comply with the GDPR’s onerous rules and numerous restrictions on the collection and use of user data. The effect has been extraterritorial; the GDPR set a benchmark that transcends national borders. Practically all international tech companies have been compelled to align their products to comply with the GDPR.

While some companies have the resources to run parallel systems (GDPR compliant and noncompliant), most choose to simply apply the same rules globally just to be safe. If you’ve ever had to deal with annoying pop-ups when browsing in the European Union, you can thank the GDPR. If you’ve ever had to deal with annoying pop-ups when browsing in the United States, you can thank the Brussels Effect. But the EU isn’t the only political body that exerts extraterritorial regulatory power.

Californication

It should be no shock that California is often the vanguard for progressive policies. Less obvious is the impact California's laws and regulations have on the rest of the country. Similar to the Brussels Effect, this phenomenon is tritely named the California Effect. For many of the same reasons that regulations coming out of Brussels have an outsized impact on companies globally, regulations and laws passed in Sacramento have an outsized impact on companies nationally.

As the largest state in both population and Gross Domestic Product, California has significant leverage over the trajectory of domestic politics and it knows it. At the federal level, California’s representatives are often some of the most influential. Both Nancy Pelosi and Kevin McCarthy represent California; in spite of failing health, Dianne Feinstein refuses to retire because her departure will kick off a proxy war for control of her influential Senate seat. 

At the state level, California’s influence is murkier but just as potent. This influence comes in two forms. First, California’s “lead from the front” mentality means they’re the most powerful laboratory of democracy in America. While few states have followed Sacramento’s lead on decriminalizing theft, blue states are always looking to win over the progressive left by adopting California style regulations. For example, in spite of the fact that California has the unique luxury of being able to purchase extra clean energy when necessary from neighboring Nevada and Arizona, blue states have quickly followed California off the cliff of 100 percent renewable energy programs.

Second, as the largest consumer market in the United States, California is in the unique position to gatekeep with strong consumer-focused regulations. The classic example of this phenomenon is vehicle emissions. In order to gain access to California’s 31 million driving-age adults, automakers are forced to comply with onerous emissions standards. Because car manufacturing is far from a nimble process, most automakers end up selling the California-compliant vehicles nationwide rather than produce different models for different markets.

More recently, the California Effect has not been limited to environmental regulations. Just like Europe, California has taken serious interest in going after the tech industry. What happens when Brussels and Sacramento begin working together?

The Axis

Regulators from Europe and California were in cahoots well before de Graaf established his tech consulate in San Francisco. When it comes to tech, the most blatant evidence of collusion is found in the similarities between Europe and California’s data privacy laws. While there are some distinctions, the GDPR and the California Consumer Privacy Act (CCPA) are identical in spirit and about as close in effect as two laws can be when passed through separate judicial processes.

Both laws broadly define personal data or information as anything that could directly or indirectly identify a user. Both laws include a private right of action. Both laws mandate that companies must provide users the option to opt-out of certain practices such as the sale of personal information. Both laws have nearly indistinguishable transparency requirements. Both laws include data minimization and deletion requirements. In fact, it's hard to find an area where the two laws aren’t in agreement.

In passing effectively identical laws, Brussels and Sacramento figured out that they could force American companies, and global companies by extension, into their progressive vision of data privacy without having to get the federal government involved at all. It is only a matter of time before the American tech industry starts experiencing the dearth of innovation caused by GDPR-like regulations. Essentially, policymakers figured out a way to run around Washington DC and the annoyances of federated democracy. Once they figured this out, they began to run the playbook in other contexts.

Though proposals in California targeted at perceived anticompetitive practices and children’s safety online bear hallmarks of European collusion, the next major offensive from the Brussels-Sacramento Axis centers around artificial intelligence. This time, however, the Europeans aren’t being nearly as furtive. 

As the EU continues to develop its AI Act, calls from across the Atlantic for action are growing. “If you have a common approach in the US and EU [on AI], we have the capacity to put in place an international standard,” the European Commissioner for Justice told WIRED. Meanwhile, many in the EU are more than aware that Washington is unlikely to comprehensively regulate AI anytime soon. Any near term federal legislation on AI is likely to be targeted and light-touch.

California, on the other hand, is already starting to follow Europe’s lead and is discussing heavy-handed regulation of AI. In anticipation of this, de Graaf and his team are already meeting with California legislators about aligning state legislation with the EU’s AI Act. The most likely result is another unholy collaboration towards burdensome and counterproductive regulations.

Breaking the Axis

Amidst the growing rivalry between China and the United States for technological supremacy, the United States cannot afford to be boxed in by bureaucrats from Brussels and Sacramento. This Axis has already succeeded in promulgating a radical vision of data privacy across the western world and now stands to do the same with AI. If we are to compete globally at the cutting edge of technology, the US must preserve its sovereignty and push back against regulatory encroachments.

Gerard de Graaf and his tech consulate are merely the most recent symbol of the Brussels-Sacramento Axis’ collaboration. This long-standing alliance has been so effective precisely because Washington appears unwilling to act. If federal policymakers remain idle, America’s tech industry will be regulated by bureaucrats who have little interest in its success. Rather than passively accepting external regulatory frameworks, the United States should assertively legislate domestically and dictate internationally. While there is some room for dialogue and collaboration with the EU, the US should approach Europe from a position of strength not passivity.

-Luke Hogg