uch of the global economy is concentrated within two tightly integrated behemoths. Together, China and the U.S. generate 42% of world GDP with just 33% of the world’s population and claim 68% of the world’s business activity. As these rival states dominate international commerce, their own markets are becoming more concentrated and increasingly dominated by tech companies. Politicians in both countries plan to shrink Big Tech and promote domestic competition, but will the drive to compete globally and challenge ascending states lead to flawed antitrust policy?
The COVID-19 pandemic disrupted a global order built on free and open trade and movement of people. Shaken by fragile supply chains, economies in recovery are reasserting their sovereignty and idealizing autarky—and not just within the Sino-American duopoly. Europe, for example, is incubating firms that represent “European values” and regulating the rest, while India nurtures home-grown alternatives to Chinese social media and U.S. e-commerce.
Throughout the pandemic, tech companies have swelled in size. Although important drivers of economic growth, governments feel threatened by their size, their autonomy, and the power they wield. More and more, tech companies are outpacing governments in their ability to shape individual behavior and public opinion. They influence and operate in a digital space of their own design. Data, their lifeblood, binds consumers to incumbent firms.
Although a consensus is emerging that tech companies threaten states and endanger consumer welfare, there is little agreement within or between nations about how to respond. Will governments promote domestic competition to spur growth and innovation at home, or will global competition drive policymakers to protect their “national champions” and conscript tech firms to execute their policy agendas?
Their choice will shape the next decade of geoeconomic competition. On the one hand, punitive capital taxes, clampdowns on tech firms, and heavy state influence may make a country less competitive internationally and scare off foreign investment. On the other hand, coddling national champions leads to concentration in the tech sector, less domestic competition, and less innovation, leaving each country in a worse position to compete with foreign rivals.
In the U.S., the small number of firms generating “super-normal” returns has led many to believe they grow at the expense of a recovering economy. Politicians are pinning the blame for decades of weak wage growth, low entrepreneurship, economic inequality, and even inflation on companies deemed “too big to prevail.”
This reverses a half-century, free-market zeitgeist that spawned a number of theories playing up the consequences of cracking down and diminished the influence of antitrust law. Historically, the Federal Trade Commission and the Department of Justice sought to maximize consumer welfare by focusing on prices. So long as they kept prices low, firms were able to self-regulate and dominate their markets. Invoking the populist-progressive mentality of the Gilded Age, the U.S. now sees Big Tech as a threat to democracy.
Beijing also regards the ability of private firms to shape public opinion as a threat to the stability of the Communist Party. In 2018, Chinese antitrust enforcement was transferred from an industrial planner focused on cutting prices to the State Administration for Market Regulation (SAMR), a relatively new market regulator. Handed broad oversight of consumer protection, e-commerce, anti-monopoly, advertising, and pricing, Beijing recently expanded the agency's scope to sanction violators of antitrust and control mergers.
But antitrust decisions carry little weight, and firms are all-too-ready to pay meager fines. Extra-legal bargaining, such as divesting of assets that displease the CCP, happens behind closed doors. Unlike the U.S. or EU, where judgments include judicial review, Chinese regulators take a shortcut by shaming companies into obeisance. Companies complain of due process violations, and although they can appeal decisions, they typically do not. While Google spent five years appealing its European Commission decision, Alibaba thanked regulators for its $2.8 billion fine.
By threatening reputational damage, China encourages firms to proactively cooperate with antitrust authorities, and in this way shapes its own self-regulation regime. As other nations balk at doing business in China and resist its “corrosive capital” flows, the state will contrive a way to maintain its economy’s momentum. Most likely, antitrust will be used to achieve broad policy objectives, such as unified messaging and prioritized manufacturing, while extraterritorial jurisdiction will be weaponized against rivals.
Europe hopes to break the Sino-American duopoly, but it was late to embrace the digital economy. Preoccupied with inter-union politics and a lingering debt crisis, the world’s largest trading bloc has few domestic tech firms to rival foreign ones, which it’s eager to regulate. The European Commission and national regulators impose scattershot regulation plagued by delays, hoping this protectionism will jumpstart European innovation. But if Europe fails to replace the foreign firms pushed out, consumers will be worse off—a betrayal of its competition policy.
The U.S. has historically led the world in innovation, and its startups aspire to monopolization. Fledgling companies seek patents, create sprawling networks, and erect moats. “Competition is for losers,” they sneer. U.S. regulation, rule of law, and intellectual protections encourage firms to grow large, fast. This distinct advantage is one of the reasons the U.S., which accounts for 24% of GDP, is home to 38% of the world’s capital markets. More than 200 Chinese companies worth $2 trillion float shares on U.S. markets—until China saw national security threats and the U.S. saw noncompliance. Beijing’s regulatory shortcut may inspire envy in beleaguered U.S. trustbusters, but Western rule of law, due process, and free markets will continue to be the envy of China’s tech firms.
Tension between innovation and regulation is experienced globally, but the U.S. has been especially stunted by regulatory dissonance, tasking agencies to both protect consumers and encourage business. These are not mutually exclusive objectives. The competitive advantage of the U.S. should be its judicial review, but regulators are slow, resistant to economic analysis, and reluctant to intervene. While the world builds walled cities, the U.S. should consider how its regulators could be made as efficient and effective as the tech firms they seek to regulate. By sustaining innovation, regulating effectively, and remaining open to foreign investment, the U.S. can set a global example at a critical moment.
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Regulating the Disruptors
Image via Pixabay.
January 25, 2022
Regulating disruptive digital tech companies is a challenge for governments globally. China threatens reputational harm to companies that don't self-regulate while the EU risks over-regulating. US regulators need to be more efficient and embrace economic analysis to thrive, writes YPFP's Carey Mott.
M
uch of the global economy is concentrated within two tightly integrated behemoths. Together, China and the U.S. generate 42% of world GDP with just 33% of the world’s population and claim 68% of the world’s business activity. As these rival states dominate international commerce, their own markets are becoming more concentrated and increasingly dominated by tech companies. Politicians in both countries plan to shrink Big Tech and promote domestic competition, but will the drive to compete globally and challenge ascending states lead to flawed antitrust policy?
The COVID-19 pandemic disrupted a global order built on free and open trade and movement of people. Shaken by fragile supply chains, economies in recovery are reasserting their sovereignty and idealizing autarky—and not just within the Sino-American duopoly. Europe, for example, is incubating firms that represent “European values” and regulating the rest, while India nurtures home-grown alternatives to Chinese social media and U.S. e-commerce.
Throughout the pandemic, tech companies have swelled in size. Although important drivers of economic growth, governments feel threatened by their size, their autonomy, and the power they wield. More and more, tech companies are outpacing governments in their ability to shape individual behavior and public opinion. They influence and operate in a digital space of their own design. Data, their lifeblood, binds consumers to incumbent firms.
Although a consensus is emerging that tech companies threaten states and endanger consumer welfare, there is little agreement within or between nations about how to respond. Will governments promote domestic competition to spur growth and innovation at home, or will global competition drive policymakers to protect their “national champions” and conscript tech firms to execute their policy agendas?
Their choice will shape the next decade of geoeconomic competition. On the one hand, punitive capital taxes, clampdowns on tech firms, and heavy state influence may make a country less competitive internationally and scare off foreign investment. On the other hand, coddling national champions leads to concentration in the tech sector, less domestic competition, and less innovation, leaving each country in a worse position to compete with foreign rivals.
In the U.S., the small number of firms generating “super-normal” returns has led many to believe they grow at the expense of a recovering economy. Politicians are pinning the blame for decades of weak wage growth, low entrepreneurship, economic inequality, and even inflation on companies deemed “too big to prevail.”
This reverses a half-century, free-market zeitgeist that spawned a number of theories playing up the consequences of cracking down and diminished the influence of antitrust law. Historically, the Federal Trade Commission and the Department of Justice sought to maximize consumer welfare by focusing on prices. So long as they kept prices low, firms were able to self-regulate and dominate their markets. Invoking the populist-progressive mentality of the Gilded Age, the U.S. now sees Big Tech as a threat to democracy.
Beijing also regards the ability of private firms to shape public opinion as a threat to the stability of the Communist Party. In 2018, Chinese antitrust enforcement was transferred from an industrial planner focused on cutting prices to the State Administration for Market Regulation (SAMR), a relatively new market regulator. Handed broad oversight of consumer protection, e-commerce, anti-monopoly, advertising, and pricing, Beijing recently expanded the agency's scope to sanction violators of antitrust and control mergers.
But antitrust decisions carry little weight, and firms are all-too-ready to pay meager fines. Extra-legal bargaining, such as divesting of assets that displease the CCP, happens behind closed doors. Unlike the U.S. or EU, where judgments include judicial review, Chinese regulators take a shortcut by shaming companies into obeisance. Companies complain of due process violations, and although they can appeal decisions, they typically do not. While Google spent five years appealing its European Commission decision, Alibaba thanked regulators for its $2.8 billion fine.
By threatening reputational damage, China encourages firms to proactively cooperate with antitrust authorities, and in this way shapes its own self-regulation regime. As other nations balk at doing business in China and resist its “corrosive capital” flows, the state will contrive a way to maintain its economy’s momentum. Most likely, antitrust will be used to achieve broad policy objectives, such as unified messaging and prioritized manufacturing, while extraterritorial jurisdiction will be weaponized against rivals.
Europe hopes to break the Sino-American duopoly, but it was late to embrace the digital economy. Preoccupied with inter-union politics and a lingering debt crisis, the world’s largest trading bloc has few domestic tech firms to rival foreign ones, which it’s eager to regulate. The European Commission and national regulators impose scattershot regulation plagued by delays, hoping this protectionism will jumpstart European innovation. But if Europe fails to replace the foreign firms pushed out, consumers will be worse off—a betrayal of its competition policy.
The U.S. has historically led the world in innovation, and its startups aspire to monopolization. Fledgling companies seek patents, create sprawling networks, and erect moats. “Competition is for losers,” they sneer. U.S. regulation, rule of law, and intellectual protections encourage firms to grow large, fast. This distinct advantage is one of the reasons the U.S., which accounts for 24% of GDP, is home to 38% of the world’s capital markets. More than 200 Chinese companies worth $2 trillion float shares on U.S. markets—until China saw national security threats and the U.S. saw noncompliance. Beijing’s regulatory shortcut may inspire envy in beleaguered U.S. trustbusters, but Western rule of law, due process, and free markets will continue to be the envy of China’s tech firms.
Tension between innovation and regulation is experienced globally, but the U.S. has been especially stunted by regulatory dissonance, tasking agencies to both protect consumers and encourage business. These are not mutually exclusive objectives. The competitive advantage of the U.S. should be its judicial review, but regulators are slow, resistant to economic analysis, and reluctant to intervene. While the world builds walled cities, the U.S. should consider how its regulators could be made as efficient and effective as the tech firms they seek to regulate. By sustaining innovation, regulating effectively, and remaining open to foreign investment, the U.S. can set a global example at a critical moment.
