Luis Alonso Cabezas Villagarcia – Junior Researcher G.E.O Economics
Abstract: Although considered by many to be doomed to global irrelevance due to its lack of military assertiveness and the rise of new international powers, the European Union still has the ability to unilaterally affect global markets. So is the opinion of scholar Anne Bradford, who, in her book The Brussels Effect, shows how the European Union imposes its rules and regulations worldwide through both theory and case studies. These will be briefly presented, as well as a critical assessment of the Brussels effect in the current geopolitical environment.
Introduction:
Numerous commentators believe that the European Union is going through a crisis of global irrelevance. Its incapacity to effectively respond to current geopolitical challenges, like the military aggression of Russia and the economic assertiveness of China, show the limits of European foreign policy. Moreover, internally the EU suffers from different issues mainly stemming from the 2008 global financial crisis: the increasing anti-globalization and anti-EU sentiments led to the rise of nationalistic and Eurosceptic parties that have limited the ability of Brussels to continue the political and economic integration of the continent. The apex of Euroscepticism came in 2016 with the Brexit vote, leaving the European project in an uncertain state.
In fact, despite the common currency and market, which allow for the free flow of goods, people, services and capital, and despite possessing all the three powers of a state, Europe is not fully politically united: it does not have a unified foreign policy (depending on the unanimity of the Council); it does not have a common tax system, and, more importantly, it does not have a common army, a palpable demonstration of strength through which to exert global influence.
The European Union, thus, might seem doomed to act only as a “normative power”, as stated in the Security Strategy of 2003, whose maximum influence in global affairs is the diffusion of European values and norms to the rest of the world. Against this view is the theory of the “Brussels effect”, a concept developed by the Finnish-American lawyer and scholar Anu Bradford. It is named after the phenomenon of the “California effect”, studied extensively by David Vogel, which consisted in a regulatory “race to the top” in the United States: the stringent environmental standards adopted by the state of California led to other states to adopt similar regulations as well. In the case of the Brussels effect, companies from all over the world have adapted their productive processes to comply with EU regulations (de facto Brussels effect), while foreign governments have imitated or even straight-out copied European legislation and court rulings in their own legal systems (de jure Brussels effect). In sum, the European Union is able to exert global influence merely by regulating its own internal market
How does the “Brussels Effect” work and why does it exist?
Although it is important to consider the political ideology behind these regulations, which denotes more trust for government than other contexts like that of the United States, as well as the general preference for consumer protection by European citizens, the most crucial factor in explaining Brussels’ preference for stringent regulation can be found in furthering the integration of its single market: given that the wealthiest countries, like France and Germany, already had stringent regulations, they could lobby the Commission to promote harmonization upwards, instead of downwards, in order to level the playing field and protect their national markets. Of course, these regulations would usually comprise sectors not too controversial for individual states. The surprising aspect of this, however, is that European regulations started being followed both by foreign firms and by foreign governments. Brussels did not seem to acknowledge these consequences until 2007, when the Commission explicitly expressed its willingness to export the European regulatory regime abroad.
For the Brussels effect to manifest, five requisites must be present: first, the big market size of the European Union means that foreign companies cannot simply withdraw their business from Europe, as they would incur in heavy losses; second, the presence of regulatory capacity refers to the bureaucracy and expertise needed to elaborate and implement regulations; third, standards must be stringent with respect to other regulatory regimes; fourth, the targets of regulation must be inelastic. The question of inelasticity implies that firms cannot circumvent regulations by modifying the location from which they operate. This is the case with consumer goods, which can only access the European market if they follow specific procedures regardless of where they are produced. On the contrary, an elastic regulatory target is, for example, the financial sector: banks and insurance companies operate in accordance with a country’s financial regulations, and can transfer their business abroad to enjoy less burdensome regimes if desired. Finally, there is the requisite of non-divisibility, i.e., the incapacity to differentiate production processes to adapt to different regulatory regimes. The example given by Bradford is that of a “dinner party”: if one were to organize a dinner party including non-meat eaters and omnivores, the easiest organizational solution would be to just serve, for example, fish. However, this effectively restricts the choice of red meat for the people that don’t mind eating it. Having one single standard tends to provide better economies of scale and, as we will see later, reputational benefits. However, sometimes divisibility costs are trivial, and firms are able to circumvent them.
The interesting aspects of this framework are twofold. First, it means that the Brussels effect manifests only if all these five requisites are present at the same time: if the European Union regulates a divisible sector, or if it were to lose any other requisite in the future, the Brussels effect will not manifest. Second, the framework can be abstracted to go beyond Europe, since it describes how any future regulatory hegemon would develop.
The first piece of evidence that Bradford provides to support her argument is that of EU regulation in competition policy. The most emblematic example is the merger case between General Electrics and Honeywell. This merger was authorized by the American Department of Justice, but it wasn’t by the European antitrust authorities. Given the non-divisibility of mergers (they cannot be implemented in only one location), this decision by Brussels unilaterally affected the outcome of a ruling by a foreign antitrust authority. Going to de jure examples, South Africa, India, Singapore, China and several Latin American countries have extensively relied on European Court of Justice (ECJ) rulings regarding competition policy. Curious is the case of Ecuador, which outright copied a part of Spanish law (which stemmed from European law) into its regime.
Another sector under heavy EU regulation is digital markets. The General Data Protection Regulation (GDPR), launched in 2016, is the most stringent data protection scheme in the world. The non divisibility of digital markets (as European consumers are located only in Europe) implies that digital companies, if they wish to keep doing business in Europe, must forcefully comply. This was the case of tech giants like Google, Apple, Airbnb and Facebook (now Meta), which last year was heavily fined by the Irish Data Protection Commission, showing the extent to which European authorities are willing to defend their regulatory regime.
A very controversial element of the GDPR was the so-called “right to be forgotten”, established by Article 17 of the regulation. It means that any personal information of any user existing on the internet must, if requested by the owner, be eliminated by the company that stores it. Since the publication of The Brussels Effect, subsequent rulings by the ECJ have confirmed a strict interpretation of Article 17.
The de jure side of data protection of the EU is particularly important, as almost every country in the world has adopted it. Some countries have their own data protection legislature which needs to be recognized as valid by the EU commission - a process called “adequacy decision”. One of the last countries with a pending decision was South Korea, gaining the adequacy label in 2021, while the controversy regarding the adequacy of the United States’ “Privacy Shield” led to a re-elaboration in 2023 of the American regulation. Some, however, believe that it is yet to comply with European standards.
The other critical aspect regarding digital markets is hate speech. Unlike the US, which has a pro free-speech political philosophy, the EU is more prone to condemn verbal acts that might be deemed harmful. Similarly to data protection, EU measures against online hate speech have already been adopted by big tech giants. The last European regulation in this regard is the Digital Service Act, adopted in 2022, which, among other things, gives users stronger instruments to flag illegal or harmful contents, which should be immediately removed by companies. The DSA has already led the Commission to take action against supposed infringements by X and TikTok. An interesting note is that the EU does not have the most stringent regulations available for digital markets, since that title belongs to China. However, Chinese standards might not have spread worldwide because of politics: EU standards, stemming from its norms and values, are more “acceptable” than the extreme censorship promoted by the Chinese government.
EU regulations are prevalent in consumer health and safety as well. High standards for food safety relate to European citizens’ cultural sensitivity to national cuisines. Moreover, European farmers tend to have big lobbying influence. The most prominent aspect of EU regulation in food products comprises GMOs, which cannot enter the country if not in minimal doses. This has led farmers in the US and elsewhere to severely reduce their GM crop production, since cross-contamination risks make it very difficult to grow differentiated strands for various markets. In this case, non-divisibility is strictly technical (difficulty in separating production in crops).
As previously mentioned, reputational motives can sometimes promote the Brussels effect. For example, certain US sweets companies had used artificial coloring for their candy. Following the strict EU regulations, they managed to develop two lines of production: one with artificial coloring and one with natural coloring, aimed at the US market and the EU market respectively. However, thanks to pressure by American consumers associations, some of these companies started withdrawing their products with artificial coloring from the American market, even though they were considered safe by the law.
Concerning de jure effects, Brazil, for example, drastically changed its national regulation of honey production to align its industry to European standards. Moreover, Brussels has a principle of equivalence for products to be sold as organic in the European market, which does not let in products just because they have been recognized as organic in their home markets. So far, countries like Argentina, Australia, Canada, Costa Rica, Switzerland, and even the United States have these agreements with the EU. In 2023, an equivalence agreement was reached with the UK as well. Likewise, the Global GAP (Good Agricultural Practices) certification, required from importers to the EU and that ensures that a given product has been produced in an environmentally sustainable, labor-friendly way, has been obtained by thousands of companies.
The second general sector in which Brussels exerts big regulatory power is that of chemical safety. In fact, the EU has the most stringent regulation in the world called REACH (Registration, Evaluation, Authorization and Restriction of Chemicals), preventing the entry of harmful chemicals into European territory, and comprising products as different as pharmaceuticals, cosmetics and textiles. REACH has been so influential as to force the United States to adopt heavier regulations for their own domestic products. Although with initial difficulties, the US adopted the Toxic Substances Control Act or TSCA in 2016. Another place where the EU was particularly influential was South Korea, whose chemical regulation is almost identical to REACH.
Finally, EU regulatory influence is prevalent on environmental regulation. Just like in the other domains, EU citizens tend to be more sensitive to environmental problems, with the memories of environmental incidents, like the spillage of nuclear waste in Chernobyl and the contamination of the Rhine River with heavy chemicals, still looming among the public. Besides the lobbying by environmental NGOs, many private companies see the benefits of having a leveled playing field thanks to stringent EU-wide regulation.
Three are the main domains inside environmental regulation in which Brussels intervenes with vehemence: the first is hazardous substances and electronic waste, in which the RoHS Directive (Restriction of Hazardous Substances) plays a main role. Among its compilers are TMSC, Apple, Dell and Samsung. Its worldwide presence includes countries like Argentina, Brazil, China, India, Japan, Malaysia, Singapore, South Korea, Switzerland, Taiwan, Turkey, and Vietnam. The second domain is animal welfare, in which the EU has emitted different directives banning animal testing, mandating stunning before slaughtering, and even particular standards for the storage of chickens and animal transport, which have had effect in places as far away as New Zealand and Kazakhstan. The third domain is climate change, with one particularly controversial regime being the ETS (Emissions Trading System), which sets a cap on the maximum amount of CO2 that companies can emit. This was very controversial for the aviation industry, since the EU wanted to force its system to all flights, even those coming and going outside European territory. This led to severe international pressure on the EU to back down on its regulatory ambition, even with the threat of economic sanctions by different parties.
Conclusion: The European tradeoff
The multiple examples cited by Bradford give substantive evidence to prove that Europe can be unilaterally influential. Not only that, but the sectors that the EU has regulated are strictly related to the evolving global economic sphere, such as environmental issues and the digital economy. This could lead some to think that the EU will forcefully shape future economic processes and technologies, disregarding any normative considerations about the Brussels effect that one could have. However, the latest geopolitical developments since the book was published, like the war in Ukraine and the industrial competition waged by China and the US, show how limited EU influence can be if it only relies on regulatory power. The whole framework of the Brussels effect can be re-interpreted considering the document published by ex-ECB president Mario Draghi - the so-called “Draghi Report”. In it, the Italian banker recommends that the EU economy, to recover its international competitiveness, should forgo regulations to allow for economies of scale to form, leading to the creation of European-wide companies, while at the same time engaging in heavy investments in innovation. In theory, this would allow the formation of firms that are able to compete with the “national champions” of China and the US, which are billions of dollars bigger than the largest European firms. Of course, a complete re-elaboration of competition policy and other domains would imply a reformulation of the entire European identity and political economy. In addition, what is at stake is not only the competitiveness and influence exerted by Brussels, but the survival of the Union itself, given that economic difficulties exacerbate the internal problems caused by a lack of political unity.
A great historical parallel can be drawn between Europe and the former British empire. In fact, Britain, like the European Union, used to influence the economic stake of the entire world, not only of its metropolitan territory and its colonies. However, this “comfortable” position in global economic matters did not give it enough incentives to innovate, and the British regulatory regime would be often burdensome. One iconic example regards the invention of the autobus, which had an important precedent in Britain, but its immediate overregulation discouraged further refinement. On this and other technological ventures the United States took the lead, establishing the path for it to become an innovative superpower. Moreover, the United Kingdom as a political entity is de facto a union of different nations, drawing a clear parallel with the European Union. Scottish and Northern Irish independentist movements and Euroscepticism respectively are the centrifugal threats that considerably restrict the capacity of both political entities to act unilaterally.
The European Union therefore has a choice. To stay a regulatory hegemon is to give up the potential to become a world superpower, even risking implosion. To become a world power, however, would require a complete re-elaboration of how Europe conceives its own identity and thus its place in the global scenario. Some measures in that direction could be further political centralization in Brussels and the promotion of innovation-oriented policies; these, however, have the potential to work against the interests of individual consumers through the loosening of pro-competitive regulations and other protective devices in favor of European citizens. For instance, in light of the Draghi Report the Commission has recently revised its Horizontal Block Exemption Regulation and Guidelines on the Applicability of Article 101 to horizontal co-operation agreements, potentially leading to a laxer interpretation of Article 101 TFEU that explicitly prohibits cartels and anti-competitive agreements. Moreover, the Report proposes a revision of the merger assessment process to make it less burdensome. According to the economics of competition theory, undertakings with big market power can potentially harm consumers through a loss in welfare (higher prices and lower production). The European Truck Cartel, for example, led to a welfare loss of up to 15.5 billion euro and an overcharge of up to 7.6%, according to the calculations made by economists of the OWL University in Germany. Brussels must carefully consider these and other scenarios that are likely to hurt individual consumers in its path towards strengthening European competitiveness and geopolitical weight.
Source Classification
Information Content | ||
1 | Confirmed | Confirmed by other independent sources; logical in itself; coherent with other information on the topic |
2 | Presumably true | Not confirmed; logical in itself; coherent with other information on the topic |
3 | Maybe true | Not confirmed; reasonably logical in itself; coherent with some other information on the topic |
4 | Uncertain | Not confirmed; possible but not logical in itself; no other information on the topic |
5 | Improbable | Not confirmed; not logical in itself; contradicts with other information on the topic |
6 | Not able to be evaluated | No basis to evaluate the validity of the information |
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