Why is the US following the EU’s lead on artificial intelligence regulation?

In the intensifying race for global competitiveness in artificial intelligence (AI), the United States, China and the European Union are vying to be the home of what could be the most important technological revolution of our lifetimes. AI governance proposals are also developing rapidly, with the EU proposing an aggressive regulatory approach to add to its already-onerous regulatory regime.

It would be imprudent for the U.S. to adopt Europe’s more top-down regulatory model, however, which already decimated digital technology innovation in the past and now will do the same for AI. The key to competitive advantage in AI will be openness to entrepreneurialism, investment and talent, plus a flexible governance framework to address risks.

The International Economyjournal recently asked 11 experts from Europe and the U.S. where the EU currently stood in global tech competition. Responses were nearly unanimous and bluntly summarized by the symposium’s title: “The Biggest Loser.” Respondents said Europe is “lagging behind in the global tech race,” and “unlikely to become a global hub of innovation.” “The future will not be invented in Europe,” another analyst concluded.

This bleak assessment is due to the EU’s risk-averse culture and preference for paperwork compliance over entrepreneurial freedom. After the continent piled on layers of data restrictions beginning in the mid-1990s, innovation and investment suffered. Regulation grew more complex with the 2018 General Data Protection Regulation (GDPR), which further limits data collection and use.

As a result of all the red tape, the EU came away from the digital revolution with “the complete absence of superstar companies.” There are no serious European versions of Microsoft, Google, Facebook, Apple or Amazon. Europe’s leading providers of digital technology services today are American-based companies.

Europe’s regulatory burdens hit small and mid-sized firms hardest. Two recent studies have documented how GDPR has “come at substantial costs in foregone innovation” and resulted in “more concentrated market structures and entrenching the market power of those who are already strong.”

The same situation is already unfolding in AI markets. Center for Data Innovation analyst Benjamin Mueller notes that just five of the 100 most promising AI startups are based in Europe, while private funding of AI startups in Europe for 2020 ($4 billion) was dwarfed by U.S. ($36 billion) and China ($25 billion).

Yet, European officials are doubling-down on their onerous data control regime with a variety of new laws, including the Digital Markets Act and the Digital Services Act, which are mostly meant to hobble large U.S. tech companies.

Next up is a new Artificial Intelligence Act, which proposes banning some AI technologies while classifying many others under a heavily controlled “high-risk” category. A new European Artificial Intelligence Board will enforce a bureaucratic system of “conformity assessments” and impose steep fines for violations. An appendix to the AI Act contains a lengthy list of covered sectors and technologies, which the law envisions expanding in coming years. Analysts have labelled the measure “the mother of all AI laws” and noted how compliance with the law will impose formidable barriers to AI innovation in many sectors, scaring away investors and talent in the process.

The EU’s approach will make it particularly difficult for startups to develop groundbreaking AI services. The largest network of small and medium sized enterprises (SMEs) in the European information sector, the European DIGITAL SME Alliance, says the AI Act’s mandates will “put a burden on AI innovation” and “will likely push SMEs out of the market.”

The EU itself says that just the requirement to set up the quality management systems mandated by the law will cost roughly $193,000-$330,000 upfront plus $71,400 in yearly maintenance costs. Smaller operators will struggle to absorb these burdens and other compliance requirements. “This is exactly the opposite of the intention to support a thriving and innovative AI ecosystem in Europe,” concludes the European Digital SME Alliance.

While it is true that the EU “has emerged as the world’s most powerful, and most aggressive, tech regulator,” and now seeks to become, in the words of a headline in The Economist, “the world’s super-regulator in AI,” it’s the same strategy they’ve promoted for two decades without much to show for it. If the EU succeeds in its quest to eliminate all theoretical AI risks, it will only be because they will have eliminated most of its AI innovators through complex and costly compliance mandates. And if Europe’s leading export is regulation instead of useful AI products, it is hard to see how that benefits the continent’s citizens in the long run.

Regardless, it shouldn’t be the model the U.S. follows if it hopes to maintain its early lead in AI and robotics. America should instead welcome European companies, workers and investors looking for a more hospitable place to launch bold new AI innovations.

Adam Thierer is a senior research fellow at the Mercatus Center at George Mason University.