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One Import Nations Do Not Need: The EU’s Digital Markets Act

One Import Nations Do Not Need: The EU’s Digital Markets Act

As the digital age accelerates, the world’s tech industry faces an unprecedented wave of regulation, with the European Union’s (EU) Digital Markets Act (DMA) leading the charge. This unprecedented legislation aims to tame the purported power of the digital economy’s “gatekeepers.” As appetite for tech regulation continues to gain momentum, with more and more countries on the trail to adopt DMA-like rules, open questions abound about its potential impact on competition, innovation, and national technology competitiveness. As such, countries should carefully consider the full implications before copying the EU’s digital regulatory system.

The DMA is aimed at constraining the digital economy’s so-called “gatekeepers” (targeted at non-EU firms) which the EU justifies as part of its broader Digital Single Market (DSM) strategy. Specifically, making “Europe fit for the digital age” is one of the 2019–2024 European Commission’s (led by President Ursula von der Leyen) top policy priorities. At a high level, the DSM is built on three pillars: improving access to digital goods and services, creating a level playing field for digital networks and services, and maximizing the growth of Europe’s digital economy. The DSM also aims to strengthen the competitiveness of EU firms by adopting harmonized and uniform rules for certain sectors. The DMA has been justified within this framework but only because it seeks to harmonize digital competition rules across the EU.

The DMA is a unique attempt at regulating large online platforms, known as “gatekeepers,” as defined by three criteria: a strong economic position and significant impact on the internal market across multiple EU countries, a strong intermediation position linking a large user base to numerous businesses, and an entrenched and durable market position that has been stable over the past three financial years. Although the DMA’s effects are not yet known even in the European market given that it just recently became applicable by spring and summer of 2023, an increasing number of jurisdictions (Turkey, Australia, Brazil, India, the United Kingdom, etc.) have decided to take the leap of faith and embrace the DMA as a model to address alleged competition concerns in digital markets. The Brussels effect—the EU’s unilateral regulatory globalization—is alive and well. While concerns about concentrated digital power and its impacts on society and the individual are held by many, the potential harm and the unintended consequences of a bad regulatory scheme on competition and innovation are usually overlooked. On top of that, the global DMA-export trend raises red flags and calls for a more nuanced and cautious approach.

First, it is crucial to avoid viewing regulation as the only viable solution. As the saying goes, “If your only tool is a hammer, every problem becomes a nail.” An overly ambitious, extensive, and experimental regulatory approach risks stifling the dynamic competition andinnovation that have driven the digital age—and which may best able to solve the complex societal concerns increasingly associated with “Big Tech.” Specifically, a regulatory need should be evidenced by market failure. And, although it is common sense that a comprehensive and evidence-based approach should be prioritized when it comes to law-making, the global trend for the adoption of DMA-like rules does not appear to be tailored to intractable market failure or evidence-based economic analysis—around the world digital markets are mostly nascent. When regulation is untethered to concrete concerns about market failure there is a risk that there may be unintended consequences and harmful effects that undercut the regulation’s intended purpose.

Secondly, the DMA was designed to address the European situation, and its universal applicability in other jurisdictions remains untested. The digital landscape varies globally, and not only are digital markets generally nascent but often face particularized challenges that vary by country. Indeed, as noted above, the DMA’s effects are not yet known even in the European market given that it just recently became applicable by May 2023. Therefore, before it comes the global model, decision-makers should carefully evaluate the suitability of the DMA-regime in their national environment and prioritize alternative solutions, like increased antitrust enforcement where appropriate, that are better aligned with and country’s individual circumstances and promote healthy competition.

Indeed, it seems that DMA has already failed at one of its core objectives: preventing regulatory fragmentation within the EU’s Digital Single Market by providing an EU-level solution precluding national regulators initiatives. When the EU started the DMA legislation, some Member States (Belgium, Bulgaria, France, Germany, Hungary, Italy) already had laws for digital competition. As such, the only clear effect of the DMA so far is that it resulted in extra compliance and deregulatory tasks for these Member States. The implementation of the DMA has thus already created problems, including by requiring Internet gatekeepers to comply with a web of regulations.

Third, the DMA’s imposition of ex-ante rules of per se antitrust prohibitions disregard the need to treat competition-promoting conduct differently from inherently suspect behavior. For example, the DMA aims to prohibit the “egregious nature of unfair practices.” In reality, the DMA ends up banning and deterring pro-competitive and pro-innovative practices such as self-preferencing and leveraging capabilities that often benefit consumer welfare and innovation. Specifically, prohibiting companies from favoring their own products ignores the way self-preferencing can benefits consumers by more seamlessly integrating complementary products. Without question, the DMA will thus chill economic efficiency and digital innovation and may even violate the EU’s principle of proportionality.

To sum up, rather than rushing to impose sweeping tech competition regulations, nations need to take a deep breath and consider a more thoughtful approach. Assessing market conditions, innovation ecosystems, and existing regulatory and legal frameworks should be the starting point. Respecting market dynamics and soundly enforcing the antitrust laws is the foundation for ensuring healthy markets, including in the digital space. Blindly importing the DMA, the effects of which remain uncertain, would risk stifling innovation, which is essential to facilitate the growth of the digital market.

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