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Europe in the World: From Soft Power to Rule-Maker

November 13, 2019
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Europe is becoming assertive as a global standard-setter. To a large extent it sets the global agenda on consumer protection, financial services, and data. The EU is successfully exporting regulation as a template to be copied by other jurisdictions. The fact that the standards are related to values shared by global constituencies across markets adds powerful leverage and makes Europe’s standards hard to ignore for multinationals keen to preserve their corporate image.

For the future, the European Union has a full agenda that gives priority to sustainability advancements, the spread of internal market standards, a digital industrial policy and post-Brexit negations with the UK.

Trade Power

Most European countries have historically been big trading nations. The massive scale of transatlantic trade that developed in the past century further reinforced its openness to the world. The federal power in trade, conferred to the European Commission in the EU’s founding treaties, has given it the power to negotiate on behalf of its member states. The Commission has always been anxious to exploit fully this prerogative.

Today, the void left by a weak World Trade Organization (WTO) is being filled by Europe. Where the WTO fails to deliver, the EU embarks on bilateral or plurilateral trade agreements. Over recent years, it has concluded agreements with Japan, Korea, Singapore, Vietnam, Canada, MERCOSUR (Brazil, Argentina, Paraguay and Uruguay) and is in the process of modernizing its agreements. Where the U.S. steps back from promoting free trade in relation to the North Atlantic Free Trade Agreement and the aborted plan for the Pacific Partnership Agreement, the EU steps in.

EU norms and standards are becoming trans-European, as they apply not only to EU’s member states, but also extend to Norway, Iceland, Lichtenstein and Switzerland. The same is the case for countries East of the EU’s border, where the internal market standards are gradually being introduced in the Ukraine,Moldova and Georgia through the ambitious Association Agreements. The Balkan countries are also included. This makes the European Internal Market by far the largest in the world – population wise twice as big as the U.S. ‘Third countries’ that want to export to this area have to conform to EU norms.

EU’s modern trade agreements with third countries are increasingly being used to promote European norms and standards, not just for exports to the EU, but also internally in the contracting countries, including in areas like environment and climate.

Global industry shows an interest in conforming to EU standards, even where they are not forced to do so by law, or international treaties. European standards tend to be higher than in most other countries. By conforming to the ambitious EU standards, producers around the world avoid double production lines. If they are EU-conformed they automatically fulfil the less demanding requirements of others. This is particularly the case for industries that are a smaller part of the wider global supply chains.

Moreover, the EU’s trade policy increasingly incorporates recognition of regulatory standards, which effectively exports these norms to the rest of the world. Successful examples of such exports include the General Data Protection Regulation (GDPR), the Markets in Financial Instruments Directive (MiFID) and the Regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH).

U.S. business has traditionally been in favor of single market rules on the basis that it replaces layers of national bureaucracy across the EU Member States, thus allowing multinational businesses to scale across the EU markets far more easily and infinitely cheaper than if they had to go market by market. However, in the early 00’s, U.S. business woke up to the fact that EU regulation could be potentially very costly, as the 2006 REACH regulation proved to be.

Consumer Impact

The EU’s growing focus on sustainability, consumer rights and public interest is aligned with global activists demands. Europe also has the clout to claim the position of a representative of the voice of global citizens. In decades past, when Europe claimed intellectual leadership in the world, citizens concerned about human rights, solidarity, or the environment turned to their own governments to put them under pressure to follow Europe’s lead.

In today’s world, where governments are elected to explicitly reject the notions Europe seeks to embody (sometimes even within Europe itself), citizens are increasingly turning to companies to claim the mantle that politicians have cast off. This encourages companies to play a greater political role, making value judgments in areas previously in the remit of government or regulatory agencies, such as environment and sustainability, labour standards, tax, and sustainable use of resources. This shift has made its way into boardrooms, with executives now accountable for their company’s track record in these areas as consumers are becoming increasingly driven in their choices by the positions taken by brands.

Another reason why international companies should pay attention to the EU’s regulatory drive and its enforcement in international trade, is the fact that Europe’s post-modern values are well-aligned with rising global movements, and are empowered by the world-wide reach of global news and social media. This means that EU regulation will likely be representative of the growing expectations of the consumer audience, which will help international corporates identify and fulfill this expanded set of expectations ahead of their competitors.

The Taxation Issue

There is rising popular pressure in Europe for tackling the problem of crossborder tax avoidance and punish what is considered as unfair tax practices by the giant IT companies. However, unlike internal market legislation, tax questions are ruled by unanimity decisions in the EU, and many issues fall under national competence.

In recent years, the Commission sought to achieve some degree of harmonization by attacking what were considered unfair and discriminatory tax practices by multinationals, using wide-ranging tools under EU competition law to attack illegal state aid and discrimination.

However, competition policy cannot replace EU tax legislation if a genuine and durable EU policy is to be established. The EU does not possess powers on taxation, which has so far made it impossible to adopt rules on a common corporate tax base, let alone common source of direct taxation or harmonisation of corporate tax rates. Member States show no sign of wanting to relinquish their veto power in this area.

These obstacles could be overcome if international standards could be established, in particular through OECD, where work is presently being intensified. Should these efforts fail, it is likely that the present trend will intensify, where individual countries adopt national legislation on taxing major tech companies. This could at a later stage lead to renewed efforts on EU harmonisation, if major problems of tax competition concurrently arise between Member States.

What Next?

Politically, one of the new Commission’s most important objectives is the European Green Deal, which aims to bring Europe’s ambitions on tackling climate change, energy policy and environmental protection to a new level. This includes enshrining the target for EU climate neutrality by 2050 into law and setting more ambitious goals on reducing emissions. The Commission wants to extend the emissions trading system to new sectors, including maritime, traffic and construction, and lower the exemptions for aviation. It is proposed to use EU funds to help less developed parts of the EU catch up on their environmental targets and in general to direct a major part of EU financing instruments towards green investments. Additional policy targets are envisaged on biodiversity, circular economy, single-use plastics and other aspects of environmental pollution.

The new Commission (supported by member states) is determined to ensure that the EU’s effort is not undermined by carbon leakage. In this respect, the new Commission envisages a Carbon Border Tax with import tariffs on products from countries that do not meet the required carbon emissions standards. The Commission is convinced that such a tax can be constructed without infringing WTO rules. However, international contestation can be expected.

For third-country businesses, this means an impact on market access, particularly procurement rules. Mergers and acquisitions may also be impacted. For those operating in the EU, strict regulation could stifle competition, so the Commission will likely be careful to ensure that third country companies also follow the path to higher standards.

Finally, for some, the new standards will mean nothing less than a complete overhaul of their business models.

The EU will also use its international leverage to push the global climate agenda, including through its trade policy. For the moment, several Member States are threatening not to ratify the MERCOSUR agreement, unless Brazil make serious efforts to combat forest fires in the Amazon. At present, the EU is handicapped by the fact that it has only the “nuclear option” available – to refuse or denounce a trade agreement. The new Commission will seek ways of applying more flexible responses in future trade deals. It is a moot point whether the EU would be prepared to walk away from a free trade deal with the U.S. – if ever such a possibility would arise – because of present U.S. refusal to join the Paris Agreement.

Another of the Commission’s priorities is the digital sector. The core tenet of the policy approach is not to try to replicate U.S. and Chinese success on ‘hyperscalers’ but to secure Europe’s sovereignty in the digital economy by strengthening its capacity in key technologies like blockchain, quantum computing and algorithms. In practice, this means a European regulatory framework for human and ethical implications of Artificial Intelligence, a Digital Services Act outlining the liability rules for digital actors, and a more collaborative cybersecurity policy for the EU.

Margrethe Vestager, Europe’s new ‘digital czar,’ is best known for her role as the former Competition Commissioner, thanks to her string of high-profile antitrust investigations into big tech. In her new role, she has highlighted the larger societal role that online platforms play today, and the special responsibility that comes with dominance. Under her influence, the Commission will likely be supportive of measures that force platforms to be neutral and interoperable, and allow users to more easily switch providers, for example by easily taking their data from one platform to another. Vestager will also likely champion public alternatives to private online platforms, such an official EU online identity system to allow people to prove who they are, instead of having to log in through private platforms.

The Commission will also likely put in place a long-term digital industrial policy, and an artificial intelligence plan that should focus on the use and sharing of data to enable new technologies and business models. She will also be responsible for an update of liability and safety rules for online platforms in the Digital Services Act, and work towards consensus on digital taxation globally.

In terms of broader implications, Vestager’s anti-trust action has already become a leverage to enforce structural reforms and changes, as she will likely continue to apply it to tech. She may use court challenges to bypass legislative process and obtain similar results, imposing new standards on digital services that would otherwise be difficult to achieve.

Money Laundering Plague

Finally, the EU may seek to assert itself in the financial markets. The areas to watch are currency and anti-money laundering regulation. Money laundering scandals plaguing European banks in recent years have raised this issue to one of the top priorities in the financial sector and the new Commission will likely seek to address the situation and prevent further instances by imposing new regulation, strengthening oversight and cross-boundary cooperation.

Meanwhile, currency sovereignty may be an equally pressing issue when it comes to business implications for the broader economy. European countries were shocked to see the U.S. administration negate the Iran nuclear deal and reimpose sanctions. The cost to French industry alone ran into billions. The U.S. power in this respect is based on the dominance of the dollar in international transactions and the lack of real alternatives. As a stopgap measure, the EU has initiated a system of barter trade with Iran, but only on a small scale, and avoiding its use for oil sales. If the EU wants to be serious in its endeavors, it would need to create a series of safe assets on a major scale denominated in euros. This links the issue to a reform of the EU’s Economic and Monetary Union, which presently is progressing at a snail’s pace, which is unlikely to speed up in 2020 without a major catalyst.

Europe: The Future

Europe is on a global path. A path of less resistance than agreeing to global standards through cumbersome and endless multilateral negotiations; and a path that will continue to drive disagreements with the United States. And one that will have implications for global business, whether directly exporting to the EU or not.

The EU’s strategic agenda aims at strengthening the internal single market, and at the same time, pursuing ambitious and robust trade policy ensuring reciprocity and mutual benefits. This may mean that while trade will become easier within the bloc and with its trade partners, barriers may be raised in relationship with other blocs or individual industries. Norms and standards may become a reason to suspend trade agreements alongside issues such as human rights.

The EU will likely promote multilateralism and rules-based international order, pursue an ambitious neighbourhood policy, and focus on strengthening its influence in Africa. While this may strengthen the EU’s voice in world trade, it also implies potential tensions with other powers – Russia on the neighbourhood policy, China on Africa, and possibly the U.S. on multilateralism.

What About Brexit?

The departure of the UK could present a rupture in the ever-increasing spread of EU norms and standards. For the present UK government, “taking back control” is a key motivation for Brexit. It rejects the EU demand that a future UK-EU long-term deal should maintain a level playing field in areas like consumer and environment protection, labour standards, taxation, climate etc. This will become a key issue in the negotiations that will follow the UK’s departure and will have a broader impact on the future EU-UK relationship. The EU fears the appearance of a “Singapore on the Thames” and will champion tough bargaining in this area.

It is yet to be seen if the UK breaks the trend, and pivots towards U.S. norms and standards. Despite possible cost savings, such a move will not be generally welcomed by UK industry, where the EU will remain the main market, and where there is little appetite for changing its production process towards double production lines and breaking existing production chains with European partners.

Negative consumer reactions can also be expected, perhaps most violently with regard to norms and standards for food. There is little appetite for taking over U.S. norms and standards involving greater acceptance of pesticides, chloride chicken or hormone beef.

Finally, while the U.S. has recently engaged in a roll-back of several measures introduced after the 2007-8 financial crisis, the EU is unlikely to follow suit. In this area, there will be a great temptation for the UK to follow the American lead after Brexit, but the implications of such a possible divergence in standards is difficult to estimate as of now.

The views and opinions in these articles are solely of the authors and do not necessarily reflect those of Teneo. They are offered to stimulate thought and discussion and not as legal, financial, accounting, tax or other professional advice or counsel.

This article appeared in Teneo's Vision 2020 Book.
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