Europe takes a front seat in Net rulemaking

The EU generally lagged the United States in e-commerce initiatives and Internet use in the late 1990s, but it's quickly catching up.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
7 min read
Salesforce.com Chief Financial Officer Andrew Hyde never considered himself an international trade policy guru, so participating in a conference call with U.S. trade officials last month was a bit awkward.

The San Francisco-based database marketing company wants to increase revenue from European customers, but Hyde worries that discrepancies between U.S. and European privacy laws could tangle Salesforce.com in an ugly regulatory fight. The European Union bans the sale of customer information to marketers unless the company qualifies for a "safe harbor" exception--a rule that could have major ripple effects for Salesforce.com and other U.S. businesses.

"It's a very practical thing," Hyde said. "We don't use our customers' information for any marketing purposes. (But) we thought in order to do business in Europe at all, with any kind of success, we had to have the safe harbor."

Hyde isn't the only American executive trying to come up to speed on trade regulations between the United States and the EU. The Internet has dramatically boosted the number of potential buyers for American goods and services, but increasingly U.S. companies must design products and make business decisions based on strict regulatory hurdles in Europe.

In fact, European regulations governing hot-button technology issues such as privacy, antitrust and taxation are beginning to play as much of a role as American regulations for businesses on both sides of the Atlantic.

For instance, the EU won a major victory over the United States on Monday, when the World Trade Organization ruled that multibillion-dollar tax breaks for businesses--including General Electric, Boeing and Microsoft--constitute illegal export subsidies. The WTO appeals panel ruling means the EU could impose $4 billion in punitive tariffs each year on American imports.

Last month, the EU's Council of Economic and Finance Ministers agreed to require companies outside the EU to collect taxes on the goods and services they deliver digitally to European consumers, such as music, videos and e-books. The agreement, expected to be approved in February and take effect in 2003, could end the Internet's status as a largely duty-free zone. It also complicates the already controversial debate in the laissez-faire United States about whether to tax the Internet.

While U.S. businesses ranging from Microsoft to Silicon Valley tech start-ups bristle at the WTO ruling, new taxes and the increasing dominance of EU trade regulations, Europeans say their influence is overdue.

"The European Commission is very concerned to make the best use of technology and the Internet, in ways that can boost our economy," said Maeve O'Beirne, a spokeswoman for the European Commission. "But (commissioners) are also aware of the downsides. While we want to maximize the positive effects, we want to ensure the negative ones are minimized."

Growing dominance of the EU
There may be little that the United States can do about Europe's growing regulatory influence and market heft. The EU generally lagged the United States in e-commerce initiatives and Internet use in the late 1990s, but it's quickly catching up.

Forrester Research predicts that online sales in Western Europe, including business-to-business transactions, will reach $2.5 trillion by 2006. In 2001, software sales in Western Europe totaled $52 billion, or more than 28 percent of the world market, according to research firm IDC.

EU's position on tech issues

Antitrust: The EU favors the protection of small businesses, not just consumers as in the United States. It's still investigating whether Microsoft stifled competition.

Privacy: The EU advocates the privacy of consumer data more than the United States. It bans the sale of information to marketers and distribution of medical data.

Taxation: The EU will collect sales tax for European customers beginning in 2003. The "value-added tax" could force price increases among American-based companies selling to Europeans.

Lawsuits: The EU traditionally allows consumers to sue foreign businesses in their home territory, even if the business has no presence there. This may become rule for the Internet, but the U.S., Japan and others object.

The potential influence of the EU's unified currency could give Europe even more influence in the New Economy. On Jan. 1, the 12 nations that adopted the euro began retiring their francs, lira, marks, drachmas and other national currencies and started circulating euros as cash--a symbolic but important move for European economic might.

It's difficult to gauge the consequences for American businesses from a strictly financial perspective. U.S. companies typically hire consultants and lawyers versed in European business practices, and they tailor merger agreements to European requirements. Costs for compliance with international trade rules often runs into the millions of dollars annually for large companies.

The intangible effects on the Internet may be as great. Even if national boundaries matter less online than in the physical world, national rules still hold sway. EU regulations that are stricter than relatively hands-off American policy could have more influence in shaping global e-commerce law.

European antitrust regulators have hogged the regulatory spotlight in recent months. After blocking several huge mergers, including WorldCom and Sprint, General Electric and Honeywell, and Time Warner and EMI, they're now scrutinizing Microsoft's business practices.

They've indicated they may go well beyond the company's settlement with the United States Department of Justice (DOJ), potentially forcing the software giant to license parts of its tightly protected operating-system code to rivals.

Many American executives say EU regulators are merely trying to protect homegrown businesses through broad antitrust rulings never intended for such purposes. U.S. criticism of EU regulations reached a fevered pitch last summer, after the denial of the merger of GE and Honeywell, which U.S. regulators approved quickly on grounds that they didn't directly compete.

At the heart of the debate are different standards to evaluate mergers and antitrust issues. U.S. trustbusters are primarily concerned with consumers' welfare: If a deal threatens to raise prices, or otherwise gives a company a stranglehold on a given market, it's likely to be blocked.

In the EU, regulators consider the effects on consumers and competing businesses. If a company establishes a "dominant" market position through a merger, regulators will block it. Under the directions of European Commissioner for Competition Mario Monti, the EU is examining its merger review process, but it's unlikely to radically change its standards.

The series of high-profile merger rejections is pushing American businesses to pay more attention to European rules.

"Large companies making large merger proposals do take European regulatory scenarios into account more than they did eight years ago, for sure," said O'Beirne, the European Commission spokeswoman.

American companies are also struggling to comply with the European Data Privacy Directive, originally passed in 1995. One of the most sweeping digital-privacy laws in the world, it bans the sale of information to marketers, or the distribution of medical data. It certifies countries as "privacy friendly" and forbids companies based in "privacy unfriendly" countries from sending European members' data overseas.

The EU says the United States is privacy unfriendly, but the EU also created a "safe harbor" exception a year ago for U.S. businesses that agree to follow certain privacy rules. Salesforce.com, Microsoft, Compaq Computer and Hewlett-Packard are among the 137 companies that belong to the safe harbor.

"We had to get this, or we won't make sales there," Hyde said.

A Department of Commerce staffer, who asked not to be named, said fewer large companies than initially expected had signed up for the program. Some may be cutting their own separate deals with European authorities, while others are waiting to see how the market shakes out, he said.

Taxes, courts and more
Further complicating regulatory discrepancies, American companies will have to start collecting a "value-added tax" (VAT), Europe's version of sales tax, beginning in 2003.

American businesses have avoided this tax so far and have priced products lower than European rivals as a result, so they're angry about the prospect of boosting prices.

"We have had grave concerns about that," said Mark Bohannon, general counsel of the Software and Information Industry Association (SIIA), a Washington-based trade association. "But we stand willing to work with (European regulators)...to reduce the risks it presents."

Still under negotiation by many nations is the Hague Convention on Jurisdiction and Enforcement of Judgments. The treaty would allow consumers to sue in their home country, even if companies have no buildings or employees there. European traditions allowing consumers to sue foreign businesses in their own home territory seemed to influence an early draft of the treaty.

American and Japanese negotiators have objected to the treaty, arguing that any business with a Web site could be sued anywhere in the world. The treaty comes after a French court ruled that Yahoo must block sales of Nazi memorabilia in France; a U.S. court later said that Yahoo did not have to comply with the French court's ruling, but that decision is being appealed.

Thousands of nuances and discrepancies between the EU and U.S. regulations are likely to make Hyde and other American executives international trade-policy experts--regardless of whether they want to be.

"We're talking about a multidimensional chess board that businesses now confront when they participate in the global market," Bohannon, the SIIA attorney, said.