Europe’s High-Tech Protectionism

The trade war is on. When the European Union (EU) slapped Google with a €2.42 billion ($2.7 billion) fine, it signaled to the continent that it would not allow its competitive landscape to be dictated by the search engine that millions of Europeans use every day. The premise of the ruling was that Google was promoting its own businesses and allied partners in the search results while demoting those who are not part of the Google sphere. For instance, companies such as Kelkoo experienced catastrophic drops in web traffic once Google set its controversial search algorithm in place. Google’s competitors in the UK saw an 85% drop in web traffic, while those in Germany saw a 92% drop. As such, the EU mandated that Google provide a plan to change the algorithm to allow its businesses to appear in searches, or else face a daily fine of 5% of its operating income in Europe.

Image courtesy of Sébastien Bertrand, © 2010

This whopper of an antitrust ruling is just one of a series of recent shots taken at American tech firms doing business on the continent. The EU has targeted the titans of Silicon Valley in a series of investigations or regulations related to taxes, competition, privacy, and online content. Last August, the EU forced Apple to pay Ireland €13 billion in allegedly unpaid taxes. In May, it fined Facebook €110 million over misleading authorities over its acquisition of WhatsApp and also decided that Uber is a taxi company, exposing it to further regulation. Official statements by Facebook and Apple in their respective investigations describe a biased process whereby the companies acted in good faith but were unjustly punished. In addition, the EU is considering policies that will restrict web platforms, such as TripAdvisor, from dictating contract terms to small businesses that use their platform to sell products or provide services. The EU’s competition chief has also signaled that it is looking into voice recognition technologies, such as Amazon’s Alexa platform, for further antitrust investigation. Taken together, this trend of actions by the EU point to a targeted campaign to limit the competitiveness of American tech firms on the continent.

This implicit protectionist war that the EU has waged against American tech firms should come as no surprise. While Europe was a leader in the mobile revolution, it has since taken a back seat to Silicon Valley in terms of innovation and revenue. Instead of setting policies to stimulate its own innovation and provide competition for Google and Amazon, it seeks to level the playing field in the tech universe by increasing regulation, taxes, and fines. This anti-free market campaign will in the end be counter-productive for the European economy by limiting the choices for consumers and stifling innovation and foreign direct investment from reaching its shores.

Google’s actions are within the boundaries of sound business practices. As the world’s leading search engine, its business model consists of selling ad space and selling the opportunity for companies to be bumped up in a consumer’s search results. Companies who do not do business with Google are intuitively demoted in the search results. Consumers are provided fine print in the margin of the search results that these are sponsored ads. It appears that Google’s only misdeed here is owning a 73% global market share in the search business, which could be seen as a threat by Europeans as American dominance of their eCommerce industry. If Google were a German, French, or Polish company, it is unlikely that it would face such intense scrutiny. The same is true for the other Silicon Valley firms that do business in Europe.

The EU, instead of implicit protectionism, should look at establishing policies geared toward spurring startups and entrepreneurship. This may mean dismantling the cumbersome labor and tax regimes that compose the economic environment of the continent. Supporting fledgling tech hubs in Berlin, Dublin, Amsterdam, Krakow, and Zagreb could potentially produce European alternatives to the ideas and products from Silicon Valley. Promoting more competition, not less, is the right course for Europe and should be considered by policy makers in Brussels in place of a trade war with American tech.

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