The week of February 10, 2025: AI & the fight with the EU, tariffs, vaping, and much, much more.
The week of February 10, 2025: AI & the fight with the EU, tariffs, vaping, and much, much more.
Before Munich, there was Paris. The first stage of JD Vance’s European tour was an Artificial Intelligence (AI) summit in the French capital. The vice president’s speech was not well received. He disagreed with the EU’s approach to regulating AI and he had a few things to say too about the EU’s lawfare against the U.S. companies. To understand what has been going on involves looking more closely at the EU’s past, its attitudes to regulation, and to the U.S., so here goes . . .
EU rulemaking is the assertion of Brussels’s control over territory once reserved for the bloc’s national legislatures. The crucial role it plays in advancing “ever closer union” operates as a powerful incentive for legal and regulatory activism, not that it needs it. Dirigisme has, with occasional exceptions, been the default mode of what has become the EU since the time of its Christian or Social Democratic founders.
Some of those founding fathers envisaged the future EU as a device to win back the place at the global top table from which Europe’s great powers had been ejected by 1945. This would have bothered the U.S. more had western Europe’s rapprochement not played such a vital part in Washington’s Cold War strategy. For its part, the nascent bloc was rarely straightforwardly anti-American. Rather, it saw itself as evolving into an alternative power center within a West in which the U.S. had too much say. This was the spirit in which France became, for a while, semi-detached from NATO, and it was the spirit in which a common EU currency was first envisaged — as a way of challenging what a French finance minister (and future president) described as the “exorbitant privilege” enjoyed by the U.S. as a result of the dollar’s reserve status. And this was the spirit that in about 2017 led France’s President Macron to adopt the idea — it had been floating around for a while — of developing the EU’s “strategic autonomy.” Macron being Macron, by 2023, he was musing about the EU becoming a “third superpower,” alongside the U.S. and China.
Its chances of doing so will improve if it responds to recent U.S. prodding with a massive rearmaments program. Soft power counts, but, for all the chatter about a rules-based international order, hard power counts for more. Economic strength helps too, but, to quote the Economist:
In 1990 America accounted for about two-fifths of the overall GDP of the G7 group of advanced countries; today it is up to about half…. On a per-person basis, American economic output is now about 40% higher than in western Europe.
The EU’s economy has been held back by the same over-regulation that, paradoxically, is the basis of its one claim to global preeminence. The EU is a valuable market. International corporations must comply with its regulations to do business there. Making separate arrangements for the EU is expensive, so plenty of companies align substantial portions of their business with EU standards. This has allowed Brussels to boast that (in certain respects anyway) it is a “regulatory superpower,” a dubious distinction, but something.
If you can’t innovate, regulate. Brussels has used its laws as an obstacle to hinder and to loot American high-tech companies. Thus, in 2016, the Commission found that Ireland’s tax arrangements with Apple constituted an illegal state subsidy (a finding confirmed after a battle through the courts). Apple was told to pay €13 billion (roughly $14.5 billion) in “unpaid” taxes to Ireland, despite Dublin saying that it was not owed anything.
Writing about the original finding in 2016, I noted that the EU’s digital commissioner (then busy attacking Google) [had] publicly complained that the EU’s “online businesses are today dependent on a few non-EU players,” warning that “this must not be the case again…”
How’s that gone?
I also quoted the Daily Telegraph’s Ambrose Evans Pritchard:
[There] is a strong suspicion that powerful forces in the EU are trying to use state aid probes to break the global dominance of America’s technology giants, vainly hoping to nurture its own ‘Silicon Valley’ behind a digital wall. Amazon, Facebook, Google, as well as Apple, are all under fire, and Microsoft has fought an epic battle.
The view in [Obama’s] Washington is that Mrs Vestager’s [Vestager was the EU Competition Commissioner] probe of the Russian gas giant Gazprom is being conducted with kid gloves, and that she is strangely accommodating over the Nord Stream pipeline so favoured by Germany. It is almost as if some in Brussels view America as the real enemy.
That, I argued, went too far:
The EU sees both Russia and the US as, well, rivals. But, of the two, it only envies the US.
Evans Pritchard:
The US has in the past played down the episodic outbursts of anti-Americanism, but patience is wearing thin and the strategic calculus is shifting. [Candidate] Donald Trump has already warned that he is willing to “walk away” from NATO altogether.
Others question ever more loudly exactly why the US should continue to guarantee the EU’s eastern border against Vladimir Putin’s Russia if Brussels is behaving in such an unfriendly fashion – and without the American security blanket a disarmed Europe is almost completely defenceless…
In the absence of retaliation from either the Biden or (first) Trump administration, both of which were suspicious of the tech sector, the EU carried on looting. In August 2024, Sean Heather of the U.S. Chamber of Commerce, hardly a nest of bomb throwers, wrote an angry article triggered by fines of over $300 million imposed by the Dutch on Uber and another of $1.3 billion levied by the EU on Meta. The fines were (essentially) retroactive and either unmerited or wildly disproportionate.
But the actual or threatened imposition of disproportionate fines is how the EU operates, in terrorem, as lawyers say.
Heather:
Europe routinely grants its enforcers the ability to levy massive extraterritorial fines based on a percentage of global revenues. Among the laws that feature these fines and their thresholds for first-time offenses: Digital Markets Act (up to 10% of global revenues); Competition Law Violations (10%); EU AI Act (7%); Digital Services Act (6%); Corporate Sustainability Due Diligence Directive (5%); and GDPR (4%).
This is just a sampling of European laws that use this approach. Even minor violations will likely result in fines of 1 to 2% of global turnover, and repeat violations allow for even larger amounts. The fining authority has no guardrails to ensure that penalties track the actual harm caused. In fact, European regulators have no obligation to quantify the harm caused, leading to hefty fines in a seemingly arbitrary fashion.
American companies are squarely in the sights of European regulators. Over the years, the EU and its member states have levied billions of dollars in fines and penalties against U.S. firms. Apple, Amazon, Google, Illumina, Mastercard, Meta, Microsoft, and Qualcomm, to name a few, have been slapped with competition fines ranging from hundreds of millions to billions of dollars. Again, none of these fine amounts is correlated to actual harm suffered by consumers.
Heather mentions a fine of around $2 billion (€1.8 billion) imposed on Apple earlier this year. In fact, the base fine was €40 million, but the huge supplement was justified by the Commission as the need for “deterrence,” a subjective calculation, which the Commission has pushed beyond any reasonable point. In terrorem is what it is. Such fines, explained the Commission, are paid into the general EU budget. They help “finance the EU and reduce the burden for taxpayers.”
So that’s all right then.
Among the EU laws listed by Heather is an AI act. This was passed in 2023 and came into force last year.
In December 2023, Elon Musk antagonist and would-be censor Thierry Breton (then an EU Commissioner) posted a tweet celebrating the EU’s unique contribution to AI:
The EU becomes the very first continent to set clear rules for the use of AI. The #AIAct is much more than a rulebook — it’s a launchpad for EU startups and researchers to lead the global AI race. The best is yet to come!
Regulation as the pathway to innovation, a “launchpad” no less. Interesting.
Political scientist Yascha Mounk:
The idea that Europe could remain relevant by becoming the world’s leader in AI regulation…is sad, reminiscent of a schoolchild’s dreams of growing up to be a hall monitor.
Brussels-based think tank Bruegel:
In the first half of 2024 alone, more than $35 billion was invested globally into artificial intelligence startups. The European Union attracted only 6 percent of that. The EU is doing better in AI patents and in training AI researchers, but the outputs from this tend not to stay in the EU, but rather to flow to the United States…
In his Paris speech, Vance stressed the benefits of a lighter regulatory touch:
[T]he development of cutting-edge AI in the US is no accident. By preserving an open regulatory environment, we’ve encouraged American innovators to experiment and to make unparalleled R&D investments. Of the $700 billion give or take that’s estimated to be spent on AI in 2028, over half of it will likely be invested in the United States of America.
Vance also took a shot at the EU’s climatism:
[W[e stand now at the frontier of an AI industry that is hungry for reliable power and high-quality semiconductors. Yet too many of our friends are deindustrialising on the one hand and chasing reliable power out of their nations and off their grids with the other.
The Jevons paradox (if resources are used more efficiently demand for them will increase) is likely to mean that AI will still add strongly to the need for power even if China’s DeepSeek has shown that developing an AI model can be done with less energy and fewer chips than previously expected.
That DeepSeek is open source is another reminder that regulation will either stifle innovation or be left in the dust by it. To economist John Cochrane, DeepSeek had overturned the “old” AI equation: “The winners will not be the producers of AI, which looks to become a marginal cost commodity with remarkable speed, but the users of AI.” That offers the EU a second chance, but will it regulate it away? After all, DeepSeek’s model is reportedly easier to trick into giving harmful information — instructions for a bioweapon attack, say — and the same (or more) may apply to its derivatives, if, that is, they have even require trickery to turn to the dark side.
Another piece of legislation referred to by the Chamber of Commerce’s Heather is the Digital Services Act (DSA). This imposes obligations on online-service providers offering their services in the EU. These increase substantially for companies with a large number of users in the bloc such as X. The DSA was the legal basis of various threatening tweets sent by (then) EU Commissioner Thierry Breton to Musk last year. Its many, many provisions include a number designed to force social media providers into a made-in-EU censorship framework.
Vance:
Many of our most productive tech companies are forced to deal with the EU’s Digital Services Act and the massive regulations it created about taking down content and policing so-called misinformation. And, of course, we want to ensure the Internet is a safe place, but it is one thing to prevent a predator from preying on a child on the Internet, and it is something quite different to prevent a grown man or woman from accessing an opinion that the government thinks is misinformation…
The Commission has made a preliminary finding that X’s handling of its blue checkmark system was in breach of the DSA, but a broader investigation of whether X is doing enough to police content has recently been stepped up. The dislike felt for Musk by much of the EU’s ruling class has been turned into loathing by his support of Germany’s populist-right AfD, a party, it must be said, with a significant element that deserves the much-abused label “far right.” If there was any room (some, perhaps, but not much) for any kind of settlement between X and the Commission it has almost certainly evaporated, raising the prospect of a massive confrontation between Brussels and Musk at a, uh, delicate time.
Vance:
The Trump administration is troubled by reports that some foreign governments are considering tightening the screws on US tech companies with international footprints. Now America cannot and will not accept that…
The spread of the internet across international boundaries has led to a clash between American notions of free speech (thank you, First Amendment!) and the much narrower interpretation that prevails in the EU and U.K.
Even without the turn of EU’s ruling class to a form of soft authoritarianism, the way that social media and, a little more indirectly, AI, permit the gatekeeper-free dissemination of information and opinion to and between the public would never have been welcomed in Brussels. To Jean Monnet, the most important of the founding fathers of what became the EU, two world wars had proved that Europe’s nation-states could not be trusted to run their own affairs. They were thus to be gradually superseded by a supranational European institution growing up in their midst. Given that voters remained attached to their nation-states, key transfers of national powers to Brussels have typically occurred during moments of crisis, or stealthily, “by zig and by zag,” just as Monnet anticipated, or through the actions of a creative — and unaccountable — EU judiciary, a process divorced from conventional ideas of how democracies should function.
The Trump administration has reversed a major Biden-era executive order regulating AI, while leaving intact (for now?) two last-minute Biden EO’s including the much-criticized framework for AI diffusion. This may suggest a less radical change of direction than some expect, but the administration’s aversion to, in Vance’s words, an “overly precautionary regulatory regime” seems set.
Vance:
“[E]xcessive regulation of the AI sector could kill a transformative industry just as it’s taking off, and we’ll make every effort to encourage pro-growth AI policies…
[W]e need international regulatory regimes that foster the creation of AI technology rather than strangle it. And we need our European friends in particular to look to this new frontier with optimism rather than trepidation.
Well said. But Vance, sadly, is no convert to classical liberalism. He opposes allowing “AI to become dominated by massive players looking to use the tech to censor or control users’ thoughts,” apple pie enough language, but not from someone who admired Lina Khan’s neo-Brandeisian approach to antitrust and who has also argued for the repeal of Section 230 of the Communications Decency Act, the invaluable wording of which allowed social media companies to offer, should they choose to, free speech platforms. “Amending” Section 230 would be to concede that the government should have a role in policing content (beyond enforcement of criminal law) put up on a privately-owned platform. That’s not a door that should be opened. As the Biden administration’s pandemic-era meddling with social media proves, any legislation in this area should be crafted to keep the state away from social media content.
Vance, like many, had been angered by the left’s hijacking the “moderation” of social media sites and frets about what this might imply for AI:
Now over the last few years, we’ve watched as governments, businesses, and nonprofit organisations have advanced unpopular and, I believe, downright ahistorical social agendas through AI. In the US, we had AI image generators trying to tell us that George Washington was black or that America’s doughboys in world war one were in fact women.
Now we laugh at this now, and, of course, it was ridiculous, but we have to remember the lessons from that ridiculous moment. And what we take from it is that the Trump administration will ensure that AI systems developed in America are free from ideological bias and never restrict our citizens’ right to free speech. We can trust our people to think, to consume information, to develop their own ideas, and to debate with one another in the open marketplace of ideas.
Fears that AI models could become agents of mass deception, either accidentally — through scrapingdodgy information from, say, Wikipedia — or on purpose are reasonable. But there is not much that the government can do about it unless they can be relied upon to determine what is or is not true. The “misinformation” panic, the use of “fact-checking” as propaganda, and elementary logic, all, in their different ways, suggest that no administration can safely “ensure” that American AI systems will be free of bias. Even if, magically, it could, the search for where within a model the bias is located would often be extremely difficult and, frequently, continuous: models “learn” their biases. The best, however imperfect, method to manage AI bias is to let people decide for themselves which models to use.
The administration understands that an AI race with, above all, China is underway. It will work to find ways to block hostile powers’ access to AI technology and their attempts to use it against the U.S. It won’t win this race by passing self-crippling heavy regulation, or submitting to the “global governance” being mooted by some of the usual suspects. The U.S. (and U.K.) were right to sign an international agreement pledging an “open,” “inclusive,” and “ethical” approach to AI. That one of the signatories was China makes such agreements dangerous as well as absurd.
Vance is an optimist about AI (“transformative,” a “new industrial revolution,” and so on). He believes it will be an engine of job creation, which will involve supplementing, not replacing the job that Americans do. That means there is no contradiction between the administration’s support for this technology and Vance’s pledge “to always center American workers in our AI policy.” The unanswered question is what happens if AI eliminates more jobs than it creates, or if the new jobs take a very long time to arrive.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which is hosted by financier David L. Bahnsen makes use of another medium to deliver Capital Matters’ defense of free markets. Sometimes David will respond to the day-to-day in the economy
In the 212th episode, David talks about the Consumer Financial Protection Bureau. It is being taken apart by Trump 2.0 and DOGE, but is it needed to protect consumers from big, bad financial companies? Or rather, is it a mirage of a protection that seeks to protect its own power, and maybe, if they’re lucky, capture some extra video-game tokens for some gamers. Sometimes, you can’t make this stuff up.
LFG (Looking for gamers): CFPB wants to hear about your video game loot…
The Capital Matters week that was . . .
AI
For years, Khan and her allies argued that only they could take down Big Tech and create competition in digital markets. They believe that Alphabet, Amazon, Apple, and Meta maintain dominance in the marketplace because new entrants cannot possibly replicate the vast resources — data, algorithms, and computing power — needed.
DeepSeek’s achievement reveals the folly of these regulators’ beliefs…
Every professional blackjack player knows that the key to winning isn’t just in the hand you’re playing — it’s in the cards you’ve already seen. If a dealer shows a ten — and you know there’s a disproportionate number of high cards left in the deck, because you’ve been counting — you will quickly realize that your chances of losing just went up. And when it comes to artificial intelligence, the Chinese Communist Party just showed us a ten…
Fiscal
Recently on this website, Vance Ginn argued for a spending growth limit tied to population and inflation. That seems to work well enough for Colorado through its multifaceted Taxpayer’s Bill of Rights (TABOR), which voters approved by initiative in 1992.
But there’s another, more promising option for budget goals: structural balance targets that tie the spending and revenue trends together.
The Trump Administration
To truly let America prosper, Trump must advance a free market agenda rooted in limited government, fiscal discipline, and economic freedom.
As someone who worked in Trump’s first White House Office of Management and Budget and collaborated with national and state-level think tanks and experts across the country, I have seen firsthand what works — and what doesn’t. The best strategies are clear: cut government spending, simplify taxes, restore energy independence, expand free trade, overhaul immigration, and slash burdensome regulations. Together, these policies will unleash economic growth and create the conditions for a more prosperous future…
Stimulus
Governments often turn to temporary cash transfers as a quick fix during economic downturns, believing that putting money in people’s pockets will boost consumption and jumpstart growth. A new paper by Valerie A. Ramey presents compelling evidence that this approach does not work…
Tariffs
Earlier this month, we learned that the U.S. trade deficit in goods hit a record high of $1.2 trillion in 2024. President Trump has vowed to determine the cause of our “large and persistent annual trade deficit in goods” and to close the gap. As a mercantilist, President Trump believes that trade deficits are bad and that other countries are responsible for them.
Such mistaken notions have afflicted many sovereigns and elected officials throughout history…
A lot of critics of Trump’s various proposals for higher tariffs have suggested that they will raise inflation and force the Fed to tighten money (either by delaying reductions in interest rates or by raising interest rates). Trump says, on the other hand, that a reduction in interest rates “would go hand in hand with upcoming Tariffs.” Who’s right?…
State governments should fix their poor tax policy by broadening their sales tax base to include all final consumption and eliminating tax liability for intermediate goods. The federal government has nothing to do with it, and it’s not Europe’s fault that states have poorly designed sales taxes. Europe is a continent full of terrible ideas on taxation, but the VAT is admirable for preventing double taxation on consumption. The U.S. should learn from that rather than mistakenly brand it a tariff.
Benzarti and Tazhitdinova are appropriately modest in their conclusion by hedging with “unlikely.” It’s a complicated world out there, and there are probably some cases somewhere of VATs affecting trade flows. But in addition to being trade-neutral in theory, the evidence suggests VATs are trade-neutral in practice. They certainly aren’t an enormous rip-off justifying a global trade war…
To conclude, yes VATs have many features that should worry those who don’t love big government. But countries with VATs are penalizing themselves the most, even if companies doing business there are caught in the net of this bad policy. But they aren’t penalized any more than domestic companies are. But we always knew we have better taxes than many other countries have. Why screw this up by imposing tariffs on ourselves, especially if these countries never remove their VATs?
“Reciprocal tariffs” are framed to sound like a simple matter of fairness. But there’s nothing fair about letting other countries make U.S. tax policy, and that’s what the Trump administration’s proposal amounts to….
Tax
For years, those of us working on tax policy have pushed back against international efforts to “harmonize” taxes. Despite its pleasant name, tax harmonization really means other countries using international bureaucracies to force higher tax rates on lower-tax nations….
Electric Vehicles
[Porsche] had scaled back its EV targets last year. And like so many other German automakers, it has been struggling in China (sales down 28 percent last year!). They have been hit by a deadly trifecta: The rise of Chinese EVs, the increasing preference of Chinese consumers for Chinese brands and, more generally, the weaker Chinese economy.
Vaping
Not so long ago, United States policy on e-cigarettes seemed to represent a success story in the nation’s efforts to protect public health. This light-touch regulatory approach aimed to reduce youth access to vaping products while still allowing adult smokers to use e-cigarettes as a less harmful alternative to traditional cigarettes. This approach sought to balance harm reduction with preventing a new generation from developing nicotine addiction.
But this success story is now under threat. China’s tobacco monopoly is flooding the U.S. market with illicit e-cigarette products, ignoring U.S. federal safety standards…
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