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Wine, Cheese, Digital Services, and Unicorns

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On the same day French digital policy officials were visiting Washington, spreading the message that the U.S. should work with its European allies to regulate the internet and its dominant giants, the USTR released its finding that France’s tax on digital services discriminates against U.S. digital companies, such as Google, Apple, Facebook, and Amazon. Compounding the damage, the U.S. is threatening to retaliate by imposing tariffs on French wine, cheese, hand bags and other products. This dispute threatens to harm consumers on both sides of the Atlantic. Personally, I don’t care that much about handbags, but wine and cheese are another matter.

Although not stated explicitly, the digital services tax is part of the French effort to stimulate its tech sector. President Macron has a goal of creating 25 French tech unicorns (companies valued at a billion dollars or more) by 2025, up from the current 4. To that end, Mr. Macron announced in September that French insurers and asset managers had committed 5 billion euros in investment for French tech startups. In addition, according to the Wall Street Journal, “France has given billions in tax breaks and subsidies to domestic startups. But many have struggled to grow because they lack the financing Silicon Valley firms receive from venture-capital funds and other investors, which often push them to scale up before going public. Successful French startups typically find a foreign buyer or relocate to the U.S. to list on Nasdaq.”

By contrast, the U.S. has a vibrant venture capital sector which will invest 100 billion in startups in 2019, and has over 200 unicorns.

In light of all of this, why would either country want to go down the route of more internet regulation, particularly if the goal is more entrepreneurship? Arguably France could benefit if the U.S. adopted a more European approach that would reduce some of the advantage the U.S. now has. But France could also reduce the U.S. advantage, and benefit in other ways, if it adopted a more American approach.

The notion that we should follow the Europeans with more internet regulation resonates with many in the U.S. But the benefits of additional regulation have not been demonstrated. Moreover, we have experience with regulation of other network industries, such as transportation and communications. Those regulatory systems were largely abandoned (with considerable difficulty) when the evidence showed they were costly to consumers.

Developing regulations for the internet would be a more complicated task. Advocates talk about “smart” regulation, without providing much if any detail. We should ask ourselves if there is any reason to believe we can do a better job regulating the internet than we have done previously.

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