How the ‘Brussels Effect’ Helps the EU Rule the World

(Bloomberg) -- Where Europe leads, others follow -- at least when it comes to the rules of commerce. Why? Because the alternative could be too costly. Companies selling into multiple markets want a one-size-fits-all approach to regulation and products, perhaps even more so in a world grappling with the Coronavirus, and that is effectively giving the European Union an edge in setting standards far beyond its borders. Even Brexit-bound Britain and trailblazing California are feeling the Brussels Effect.

1. What is the Brussels Effect?

It’s a term for the influence the EU exerts by shaping rules and technical standards adopted by companies and countries around the world. When YouTube pulls a video rant off its website, it’s using the EU’s definition of hate speech. Timber chopped down in Indonesia, honey harvested in Brazil and the amount of chemicals in Japanese toys all abide by rules set by Brussels. EU antitrust probes into Google’s business are mimicked by India, South Korea and even the U.S. The list goes on.

2. Why does the EU have so much influence?

Global companies can’t afford to ignore the terms set by one of their most important markets, says Columbia Law School Professor Anu Bradford who coined the term “Brussels Effect” in an article and a book. If businesses want to avoid producing different versions of the same product for different markets, many will take the EU line for a number of reasons. Legislation from the bloc of 27 nations can prove more flexible than that from other regions as the EU picks up what’s been trialed in its member states, such as privacy tested out in Germany or emissions trading programs in the U.K. European rules also need to be agreed by consensus, allowing a say for companies and consumer or environmental activists. What comes out sets a high standard that firms with global supply chains tend to accept.

3. What areas of business does it affect?

Pretty much everything. Companies wanting to prove their products use safe chemicals will follow the EU’s REACH rules. African farmers growing food that might be sold to Europe will shun genetically modified crops to comply with EU standards. Trees felled illegally can’t be made into products destined for Europe. Any business that collects and uses data (that’s most of them) knows of the EU’s General Data Protection Regulation, or GDPR, rules that limit what personal information can be gathered and stored. Looking ahead, energy efficiency and environmental rules to meet EU climate goals may also be adopted by companies and copied by countries across the globe.

4. What about its influence beyond business rules?

That’s another matter. Its support of human rights is often ignored and few countries seek to emulate its expensive and generous social security and health systems or high-wage labor market. The euro, overseen by the European Central Bank in Frankfurt, has never seriously challenged the dollar as the world’s benchmark currency and the EU’s struggle to contain its own financial and debt crises have eroded its role as a global economic power. Former Bank of England Governor Mervyn King argued in a Bloomberg Opinion column that for U.K. banks the partnership with the U.S. may offer a better hope for regulation than tying London to an EU model.

5. Is anyone driving the Brussels Effect?

The Brussels Effect, a variation of the ‘California Effect’ phenomenon also described in academic research, didn’t come about by design but the EU’s executive, the European Commission, is happy to show it off. It invites overseas officials to see how it works and explain its policies, for example telling China how Europe tries to keep state subsidies in check. Lobbyists from companies and governments around the world maintain offices in the Belgian capital.

6. What does Brexit mean for the Brussels Effect?

The U.K.’s move to quit the EU was partly predicated on the desire to make its own rules. Yet, according to Bradford, the country is likely to remain hooked into EU regulations as its businesses push for alignment to allow them to sell into the European market of 450 million people. When it comes to internal EU debate, Britain’s disappearance will eliminate a pro-market voice that often countered French and German pushes for greater regulation and intervention.

7. Is Europe going to stay influential?

The EU isn’t leading the rule-making in every area, particularly emerging technologies such as artificial intelligence that are dominated by Chinese and American companies. Weary about the excesses such industries may bring, EU tech czar Margrethe Vestager aims to ensure technology deployed in Europe is transparent and has human oversight, likely meaning more stringent guidelines than in many other regions.

The Reference Shelf

• Anu Bradford’s “The Brussels Effect: How the European Union Rules the World.”
• A QuickTake on Europe’s ‘Green Deal’ and another on regulating Big Tech.
• A QuickTake on how GDPR made privacy stronger in the EU than the U.S.
• Mervyn King’s column: London’s Bankers Need Equivalence — With New York.

©2020 Bloomberg L.P.