Brussels Effect or Brussels Defect: Digital Regulation in Emerging Markets

Geoffrey Manne & Dirk Auer —  20 December 2022

The blistering pace at which the European Union put forward and adopted the Digital Markets Act (DMA) has attracted the attention of legislators across the globe. In its wake, countries such as South Africa, India, Brazil, and Turkey have all contemplated digital-market regulations inspired by the DMA (and other models of regulation, such as the United Kingdom’s Digital Markets Unit and Australia’s sectoral codes of conduct).

Racing to be among the first jurisdictions to regulate might intuitively seem like a good idea. By emulating the EU, countries could hope to be perceived as on the cutting edge of competition policy, and hopefully earn a seat at the table when the future direction of such regulations is discussed.

There are, however, tradeoffs involved in regulating digital markets, which are arguably even more salient in the case of emerging markets. Indeed, as we will explain here, these jurisdictions often face challenges that significantly alter the ratio of costs and benefits when it comes to enacting regulation.

Drawing from a paper we wrote with Sam Bowman about competition policy in the Association of Southeast Asian Nations (ASEAN) zone, we highlight below three of the biggest issues these initiatives face.

To Regulate Competition, You First Need to Attract Competition

Perhaps the biggest factor cautioning emerging markets against adoption of DMA-inspired regulations is that such rules would impose heavy compliance costs to doing business in markets that are often anything but mature. It is probably fair to say that, in many (maybe most) emerging markets, the most pressing challenge is to attract investment from international tech firms in the first place, not how to regulate their conduct.

The most salient example comes from South Africa, which has sketched out plans to regulate digital markets. The Competition Commission has announced that Amazon, which is not yet available in the country, would fall under these new rules should it decide to enter—essentially on the presumption that Amazon would overthrow South Africa’s incumbent firms.

It goes without saying that, at the margin, such plans reduce either the likelihood that Amazon will enter the South African market at all, or the extent of its entry should it choose to do so. South African consumers thus risk losing the vast benefits such entry would bring—benefits that dwarf those from whatever marginal increase in competition might be gained from subjecting Amazon to onerous digital-market regulations.

While other tech firms—such as Alphabet, Meta, and Apple—are already active in most emerging jurisdictions, regulation might still have a similar deterrent effect to their further investment. Indeed, the infrastructure deployed by big tech firms in these jurisdictions is nowhere near as extensive as in Western countries. To put it mildly, emerging-market consumers typically only have access to slower versions of these firms’ services. A quick glimpse at Google Cloud’s global content-delivery network illustrates this point well (i.e., that there is far less infrastructure in developing markets):

Ultimately, emerging markets remain relatively underserved compared to those in the West. In such markets, the priority should be to attract tech investment, not to impose regulations that may further slow the deployment of critical internet infrastructure.

Growth Is Key

The potential to boost growth is the most persuasive argument for emerging markets to favor a more restrained approach to competition law and regulation, such as that currently employed in the United States.

Emerging nations may not have the means (or the inclination) to equip digital-market enforcers with resources similar to those of the European Commission. Given these resource constraints, it is essential that such jurisdictions focus their enforcement efforts on those areas that provide the highest return on investment, notably in terms of increased innovation.

This raises an important point. A recent empirical study by Ross Levine, Chen Lin, Lai Wei, and Wensi Xie finds that competition enforcement does, indeed, promote innovation. But among the study’s more surprising findings is that, unlike other areas of competition enforcement, the strength of a jurisdiction’s enforcement of “abuse of dominance” rules does not correlate with increased innovation. Furthermore, jurisdictions that allow for so-called “efficiency defenses” in unilateral-conduct cases also tend to produce more innovation. The authors thus conclude that:

From the perspective of maximizing patent-based innovation, therefore, a legal system that allows firms to exploit their dominant positions based on efficiency considerations could boost innovation.

These findings should give pause to policymakers who seek to emulate the European Union’s DMA—which, among other things, does not allow gatekeepers to put forward so-called “efficiency defenses” that would allow them to demonstrate that their behavior benefits consumers. If growth and innovation are harmed by overinclusive abuse-of-dominance regimes and rules that preclude firms from offering efficiency-based defenses, then this is probably even more true of digital-market regulations that replace case-by-case competition enforcement with per se prohibitions.

In short, the available evidence suggests that, faced with limited enforcement resources, emerging-market jurisdictions should prioritize other areas of competition policy, such as breaking up or mitigating the harmful effects of cartels and exercising appropriate merger controls.

These findings also cut in favor of emphasizing the traditional antitrust goal of maximizing consumer welfare—or, at least, protecting the competitive process. Many of the more recent digital-market regulations—such as the DMA, the UK DMU, and the ACCC sectoral codes of conduct—are instead focused on distributional issues. They seek to ensure that platform users earn a “fair share” of the benefits generated on a platform. In light of Levine et al.’s findings, this approach could be undesirable, as using competition policy to reduce monopoly rents may lead to less innovation.

In short, traditional antitrust law’s focus on consumer welfare and relatively limited enforcement in the area of unilateral conduct may be a good match for emerging nations that want competition regimes that maximize innovation under important resource constraints.

Consider Local Economic and Political Conditions

Emerging jurisdictions have diverse economic and political profiles. These features, in turn, affect the respective costs and benefits of digital-market regulations.

For example, digital-market regulations generally offer very broad discretion to competition enforcers. The DMA details dozens of open-ended prohibitions upon which enforcers can base infringement proceedings. Furthermore, because they are designed to make enforcers’ task easier, these regulations often remove protections traditionally afforded to defendants, such as appeals to the consumer welfare standard or efficiency defenses. The UK’s DMU initiative, for example, would lower the standard of proof that enforcers must meet.

Giving authorities broad powers with limited judicial oversight might be less problematic in jurisdictions where the state has a track record of self-restraint. The consequences of regulatory discretion might, however, be far more problematic in jurisdictions where authorities routinely overstep the mark and where the threat of corruption is very real.

To name but two, countries like South Africa and India rank relatively low in the World Bank’s “ease of doing business index” (84th and 62nd, respectively). They also rank relatively low on the Cato Institute’s “human freedom index” (77th and 119th, respectively—and both score particularly badly in terms of economic freedom). This suggests strongly that authorities in those jurisdictions are prone to misapply powers derived from digital-market regulations in ways that hurt growth and consumers.

To make matters worse, outright corruption is also a real problem in several emerging nations. Returning to South Africa and India, both jurisdictions face significant corruption issues (they rank 70th and 85th, respectively, on Transparency International’s “Corruption Perception Index”).

At a more granular level, an inquiry in South Africa revealed rampant corruption under former President Jacob Zuma, while current President Cyril Ramaphosa also faces significant corruption allegations. Writing in the Financial Times in 2018, Gaurav Dalmia—chair of Delhi-based Dalmia Group Holdings—opined that “India’s anti-corruption battle will take decades to win.”

This specter of corruption thus counsels in favor of establishing competition regimes with sufficient checks and balances, so as to prevent competition authorities from being captured by industry or political forces. But most digital-market regulations are designed precisely to remove those protections in order to streamline enforcement. The risk that they could be mobilized toward nefarious ends are thus anything but trivial. This is of particular concern, given that such regulations are typically mobilized against global firms in order to shield inefficient local firms—raising serious risks of protectionist enforcement that would harm local consumers.

Conclusion

The bottom line is that emerging markets would do well to reconsider the value of regulating digital markets that have yet to reach full maturity. Recent proposals threaten to deter tech investments in these jurisdictions, while raising significant risks of reduced growth, corruption, and consumer-harming protectionism.