On June 19, Hogan Lovells Washington D.C. hosted a panel to discuss Europe’s Digital Single Market (DSM) initiative and how the European Union’s strategic plans might affect trade and business relations between the United States and Europe.

Hogan Lovells partners  (Brussels) were joined by Andrea Glorioso, Counselor for the Digital Economy at the Delegation of the European Union to the United States; Kelsey Guyselman, Counsel at the U.S. House of Representatives; and Adam Sedgewick, Technology Advisor at the National Institute of Standards and Technology. The panel discussed a range of political and economic implications of the Digital Single Market and how U.S. companies might anticipate and respond to any coming changes.

Political Considerations in the Single Market

The panelists discussed the realities of the DSM as a political—as well as an economic—project. For the panel, these realities were most recently exemplified by the new ban on mobile roaming charges in the European Union.  The process took over a decade to fully realize, according to Mr. Glorioso, and balanced political, business, and consumer needs on the one side with the economic realities identified by the Commission.

The United States leads the world in innovative digital products. This innovation is often attributed in large part to the “light-touch” regulatory framework in the United States.  However, the panel discussed the reality of often overlapping or contradictory state and federal laws in the United States.  These laws make interstate compliance burdensome and costly for companies operating nationwide, even as harmonized regulations allow that same national access.

The jostling between U.S. states and the federal government will seem familiar to anyone following the developments in Europe. As the European Commission follows its political goals of a single market, individual member states may be reticent to cede power upwards.  Their reluctance, and the limitations of the Commission’s political will, has the potential to create a fragmented regulatory market, even as the Commission implements policies encouraging cross-border trade in goods and services.

The challenges created by a fragmented market are far from theoretical—both for providers and consumers. For instance, while the United States has varied state laws, a unified federal system allows telecommunications companies to provide enterprise service to companies operating across the country.  The company’s single plan lowers business costs, which can be passed along to consumers.  Europe does not have the same unification, and so providers and enterprise consumers do not benefit from the same economies of scale possible in the United States. A multi-national company may need to retain internet services from a different company in Spain than in Germany, for instance.

Developing a similarly transcontinental service in Europe will pose significant challenges for the Commission. For instance, removing roaming charges is good for consumers, but may not provide significant incentive or opportunity for large national telecommunications companies to expand or provide the type of pan-continental service that has allowed flexibility in the U.S. market. Indeed, banning roaming charges may make expanding more difficult, since termination rates (the fees carriers charge to one another to use services) are assessed differently across national borders.

Past experiences with the pharmaceuticals may be instructive here, and might provide interested businesses a framework for engagement.  Pharmaceuticals were originally regulated at a national level, which created significant consumer cost and market uncertainty.  As the Commission moved towards a unified drug clearance system, it dabbled with mutual national recognition, and finally a cooperative process by which all national regulators work together.  The Commission may find fruitful lessons from its previous work.

As the European Union expands its digital initiatives, U.S. companies and government agencies should watch closely to see how the legal structures implemented affect micro- and macro-economic incentives and change relationships between companies and their competitors, consumers, and regulators.

Creating Physical Infrastructure to Support Digital Infrastructure

The panel also discussed the often-overlooked physical needs of implementing the DSM. The Digital Single Market is not just trade in digital goods and services, but also the physical background systems enabling those services. The DSM’s value is largely created by its pervasiveness: more connectivity in Europe means better access to goods and services—whether digital or physical—at reduced costs.  The DSM cannot be achieved by simply harmonizing laws on digital products and services.  Implementing the DSM also requires significant investment in physical infrastructure.

As the Commission takes steps to lower barriers to cross-border business-to-consumer transactions, such as restricting unnecessary geo-blocking and increasing the portability of digital services, the physical infrastructure surrounding e-commerce will need to develop correspondingly.  Shipping costs, for instance, remain an important physical barrier for many small- and medium-sized businesses in the European Union, and free trade of electricity in the common market is limited by the amount of physical interconnections between EU member states.  Removing or reducing these physical impediments will be critical to the DSM.

As the European Union continues to solidify the Digital Single Market, American companies can learn from the measures put in place to harmonize national and local laws with EU measures and should be open-minded about opportunities arising from increased physical development in support of the DSM. While the timeline for much of the EU’s action remains uncertain, increased interconnection in Europe seems likely, and one that can provide much for U.S. companies.