Weaponizing Antitrust: The EU’s Protectionist Agenda

By Henrique Schneider

Wednesday, November 11, 2020

 

The European Commission wants Google to become less connected, the German government wants Facebook to use less data, and the French government wants to promote national champion industries. On a benign interpretation, these policies seem to be based on a basic misunderstanding of the business models underlying the modern tech industry. As I discuss below, there is room for a rather darker analysis of what is going on.

 

Google deals in connections. A search engine that does not allow its results to be ranked is useless. Facebook deals in data. Because of it, it connects people free of charge. If Facebook were to use less data, it would either be unable to allow its users to connect with one another, or it would have to charge them.

 

And yes; the last time a French tech company (Bull) competed globally was in the 1990s.

 

Even if the intentions of the European Union or many of its member state governments were not problematic — and they are — greater trouble comes from the way they are to be set in place: via antitrust. European antitrust, or competition, policy is especially salient now that the European Union is pursuing a “modernization” of its antitrust doctrine and enforcement apparatus.

 

In 2019, the European Commission, the EU’s executive body, published a report commissioned by its Directorate General for Competition on how to modernize antitrust. It suggests giving more leeway in doctrine, enforcement, and decision-making to EU competition authorities. Incidentally, the commission itself is such an authority — it is, at the same time, lawmaker, prosecutor, and judge (in the first instance).

 

The cornerstone of this “modernization” is inverting the burden of proof for tech, especially multi-sided business models (businesses in which customers can interact directly with each other). Thus digital platforms would need to prove that they are not dominant undertakings. If they fail to show that their business model is disciplined by the market, they must automatically comply with the special duties imposed on “dominant” players. These obligations include limits on price and product differentiation as well as norms on conduct.

 

There are two ways of interpreting this modernization, one benevolent and one rather less so.

 

Under a benevolent interpretation, the examples mentioned above show how little European institutions and governments understand economics. This lack of understanding applies both to multi-sided business models or traditional “linear” enterprises, which create value in the form of goods or services and then sell them to somebody downstream in their supply chain.

 

As suggested above, multi-sided businesses, or platforms, are focused on building and facilitating a network. So digital, or online, platforms usually do not own the means of production. Rather, they connect the owners or producers with those in need of a product or service. Connectivity, and with it, market coverage, is the core of their business model.

 

The less-benevolent interpretation is that EU institutions and member-state governments understand the economics of these businesses very well. They just choose to disregard it in order to advance a politico-economic aim — protectionism. The EU might be an advocate for free-market exchange among its member countries, but where “third countries” are concerned, it is an entirely different matter, other than to the extent provided for separate treaties.

 

While the EU tends to make relatively little use of tariffs to protect its markets, it has proved deft at using non-tariff barriers, notably regulation — such as labor or environmental law or licensing requirements — to ringfence its internal market. More recently, the EU Commission (its bureaucracy) has been trying to co-opt antitrust for the same purposes.

 

And when it comes to the latter, it comes as little surprise that the main targets of the European Commission’s weaponized antitrust are non-EU firms, such as Google and Facebook. To be fair, if unkind, it might be argued in Brussels’s defense that there are no EU-based big-tech corporations or platforms for the commission to go after.

 

That said, the conspicuous absence of digital innovators in the EU contains its own message, as it owes at least something to existing protectionism by the EU. By creating barriers against outside competitors to challenge European firms, EU regulation effectively curbs domestic innovation, too, and now it wants to raise those barriers still higher.

 

Antitrust is meant to stimulate competition. Weaponizing it to pursue mercantilist ends would appear to be the antithesis of that aim, and yet that appears to be the direction that the commission is taking. If the result it is to leave the EU to develop “champions” behind a protective wall — the result will be stagnation, not innovation.

 

However, not all is lost. As we saw recently in its ruling overturning Commissioner for Competition Margrethe Vestager’s attempt to deem the tax regime under which Apple operated in Ireland as a form of state aid, the European Court of Justice is quite willing to rein in the commission’s excesses, and not infrequently has. Contrary to the commission, the court’s attitude to antitrust appears to be business model–agnostic. The question is: How long is it going to remain that way? The rules can always be changed, and if both the commission and the member states want to move in the direction that is now being suggested, there is little reason to think that the law will not be changed.

 

For the moment, Google still ranks results, Facebook still connects people, and Bull isn’t a material competitor to anyone. And if technological innovation continues as fast-paced as it is, technology will outsmart European regulators. Which, in turn, is good news for European consumers.