We hear Brexiteers constantly telling us the EU is a busted flush and will soon collapse. A lot of Daily Mail readers genuinely believe it but as we know, it simply isn't true. However, it is also easy for remainers to think the EU is weaker than it really is. Of course the EU can't be compared militarily with the USA or Russia or China but in terms of regulatory power it is way ahead of all three and in the modern world, it matters.
This is more or less the finding of an academic article written in 2012: The Brussels Effect by professor Anu Bradford of Columbia law school for the Northwestern University Law Review.
At 68 pages it's quite an article but well worth reading to understand the huge global power and reach of the EU. This opening piece on page 3 sets the scene:
"Few Americans are aware that EU regulations determine the makeup they apply in the morning, the cereal they eat for breakfast, the software they use on their computer, and the privacy settings they adjust on their Facebook page. And that’s just before 8:30 AM. The EU also sets the rules governing the interoffice phone directory they use to call a coworker. EU regulations dictate what kind of air conditioners Americans use to cool their homes and why their children no longer find soft plastic toys in their McDonald’s Happy Meals. This phenomenon— the “Brussels Effect”—is the focus of this Article."
I don't believe the EU ever started out with the goal of becoming the world's regulator but this is what has happened in practice. So how did it happen?
Firstly, the single market created a need for strict regulation. Brussels became extraordinarily good at writing these regulations, consulting widely and coming up with clear, concise rules for ensuring secure, high quality food and product standards. This was despite all the myth making articles from Brexit Johnson in The Telegraph.
While he was making a name for himself in the 1990s, misleading people about the EU, and even though he was at the centre of it all, he appears to have been blind to what was happening and he probably doesn't even see it now.
"In the global economy, power is correlated with the relative size of any given country’s internal market. To secure access to important markets, producers gravitate toward adopting the standards prevailing in those markets. The larger the market of the (strict) importing country relative to the (lenient) market of the exporter country, the more likely the Brussels Effect will occur. More accurately, the greater the ratio of exports to the (strict) jurisdiction relative to sales in the (lenient) home or third-country markets, the more likely the Brussels Effect will occur. The better the exporter’s ability to divert trade to third markets or increase demand on its home market, the less dependent it is on access to the market of the strict jurisdiction."
The sheer size of the EU and its position as the world's largest importer gives it massive power:
"The EU has a quarter of the countries’ combined Gross National Product (GNP) worldwide and is the largest importer of goods and services. The EU’s internal market is also constantly growing as new countries are joining"
The USA has wilfully ceded the role of global regulator to the EU probably because of a lot of right-wing dogma that the markets always know best and can be trusted. This at a time when life is more complex and greater regulation is essential. As Lord Heseltine said, civilisation is built on regulation:
"Until the 1980s, the United States set the global norms in consumer and environmental regulation, leading European firms to adjust to higher standards originating from the United States. Since then, the roles have been reversed as the EU has increasingly adopted tighter standards of consumer and environmental protection while the United States has failed to follow the EU’s lead. The only way for the USA to supersede the European standards today would be to adopt even higher standards itself—something that it does not consider to be welfare enhancing and thus in its interest."
Bradford says the EU's preference for stringent regulation reflects their aversion to risk and commitment to a social market economy and this is probably true.
If Brexit Johnson and his swivel-eyed acolytes in government and the ERG think Britain will be able to compete with the EU as a global standard setter or, more importantly, resist the EU's regulatory gravity they are in for a big shock. Listen to this:
"One of the most famous examples of the EU’s global regulatory clout was its decision to prohibit the $42 billion proposed acquisition of Honeywell International by General Electric. When the EU blocked this transaction involving two U.S. companies, it was irrelevant that the U.S. antitrust authorities had previously cleared the transaction: the acquisition was banned worldwide because it was legally impossible to let the merger proceed in one market and prohibit it in another. In this sense, merger decisions are legally nondivisible. The GE/Honeywell case is emblematic of a difference in the antitrust regulatory approaches of the EU and the United States. The U.S. authorities considered the merger to be efficient and hence welfare enhancing. In contrast, the EU was concerned that any efficiencies that resulted from the transaction, including a short-term decrease in price, would later drive out competitors and result in a long term increase in price."
Or this:
"The EU similarly threatened to block a merger between two U.S. companies, Boeing and McDonnell Douglas, even though the deal was already cleared by the U.S. authorities without conditions. In the end, the EU let the merger proceed subject to extensive commitments. These included abandoning Boeing’s exclusive dealing contracts with various U.S. carriers. Similarly, the EU often gets to dictate the code of conduct for dominant companies worldwide. For example, the EU has imposed record-high fines and behavioral remedies against dominant U.S. companies, including Microsoft and Intel."
The way EU regulations take hold in other countries is both obvious and logical, viz:
- A non-EU company needs to export to grow
- The EU is a large rich market with the largest imports of any bloc (2102)
- Exporters to EU must obey EU rules
- Exporters will need to minimise costs so produce just one standard - the highest
This is what Bradford calls the de facto adopting of EU rules but this frequently turns to de jure (legally enforced) adoption as follows:
- The company finds itself unable to compete at home because domestic makers produce to a lower standard.
- Options are just twofold: (a) persuade government to adopt the higher EU standard or (b) move to the EU
EU companies also export or acquire other companies in third countries and since they have incurred what the article calls the "adjustment costs of conforming to common European standards", they prefer that those standards are institutionalized globally and seek to export them to the third country, perhaps even making it a condition of investing.
So, I am afraid the notion that Britain alone can resist the colossal regulatory pull of the Brussels effect after Brexit is really quite laughable. We will still be a rule taker whatever Sajid Javid says.
And all the talk of being governed by unelected bureaucrats is answered by this:
"This Article has highlighted the unprecedented global power that the EU is exercising through its legal institutions and standards that it successfully exports to the rest of the world via the Brussels Effect.
"The Brussels Effect may also raise concerns of democratic accountability. The idea that unelected European civil servants have the ability to block global transactions by U.S. companies can be disconcerting to those involved. However, others might claim that the Brussels Effect does not undermine U.S. democracy. The EU’s regulatory reach may have the effect of balancing the overrepresentation of business interests in American public life by empowering consumers."
In other words, the choice is not between being 'ruled' by bureaucrats or elected politicians but between bureaucrats and big business.
The article concludes:
"Acknowledgment of the EU’s global regulatory power might give pause to both the EU’s relentless critics, who emphasize the EU’s weakness and irrelevance, as well as to its most ardent defenders, who call for increasing integration and a gradual move towards a federation that allows the EU to rise to global prominence. For the critics, the discussion has shown that to portray the EU as powerless focuses on a narrow and outdated vision of what power and influence mean.
"The EU is already a superpower and, importantly, a superpower of a meaningful kind."
