EU’s AI Act has a global reach, but leaves European innovation behind

THE EU’s status as a laggard on artificial intelligence, compared to powers such as the US and China, has led to much soul-searching within the bloc. However, Europe remains a global force in one area: the regulation of this new technology.

Aug 2, the date when the EU’s AI Act came into full effect, may be the most important moment yet in the legislation of the technology. To be sure, the European Act is by no means the first to cover AI.

But it is the most comprehensive and strictest set of measures in the world. Companies failing to comply with its rules face fines of potentially as much as 35 million euros (US$40.4 million), or 7 per cent of their global revenue.

The regulation’s reach is extraterritorial. Specifically, its scope extends to any company whose AI systems are utilised in the EU, or whose outputs affect citizens or organisations in the 27 member states.

Hence, companies that follow the EU’s rules may extend some of those obligations to markets outside the bloc. After all, it is often inefficient to develop separate models for multiple different markets.

This is the latest example of the so-called “Brussels effect” of Europe developing legislation that becomes the de facto global standard. 

By implementing far-reaching regulations that have such a significant bearing on the global environment, the EU ensures that its values shape business decisions in a wide spectrum of areas, such as sustainability, antitrust, data privacy, and consumer health and safety.

EU as a regulatory superpower

The influence that the EU AI Act is already having on businesses is underlined in insights collated by the Thomson Reuters Foundation’s AI Company Data Initiative (AICDI). The data set comprises more than 100,000 data points from almost 3,000 firms.

The AICDI database indicates that some 47 per cent of corporations citing the European policy in governance disclosures are not headquartered in the EU, although many have a significant market presence in the region.

Asian-headquartered firms account for around 28 per cent of the non-EU companies citing the regulation. This is a comparable number to firms in non-EU European countries such as the UK, Norway and Switzerland, which make up some 24 per cent, reflecting the close business ties of these nations to the Brussels-based club.

Yet, it is companies in North America that make up the largest proportion of non-EU firms referencing the bloc’s AI Act in their disclosures, coming in at just under 40 per cent, with tech firms making up almost half of that cohort.

This reflects the fact that leading US players such as Google, Microsoft, xAI and OpenAI have, so far, chosen to adopt key parts of the EU’s AI framework – amid some pushback – to try to keep access to the 27-member market.

One driver is that the US has so far adopted a light-touch approach to AI regulation, with no major federal law in place.

This fact will not have been lost on US President Donald Trump, who has been critical about the impact of tech-specific EU rules, such as the Digital Markets Act (DMA), on US firms. 

The DMA, which came into force in 2022, imposes obligations to ensure fair and contestable digital markets. In July, it led Brussels to fine Google some 890 million euros for non-compliance with the Act.

But EU lags behind in AI race

When the EU adopted the AI Act in 2024, then internal market commissioner Thierry Breton claimed that it was “much more than a rule book – it was a launch pad for EU startups and researchers to lead the global race for trustworthy AI”. 

Since then, however, Europe has continued to struggle with developing and commercialising AI. This was emphasised in the competitiveness report of former European Central Bank president Mario Draghi.

Ironically, the report also highlighted that the EU’s ambition to strengthen its role as a global tech leader is being undermined by increased regulation that may stymie what companies can do and how much they can push the boundaries of technology.

The EU AI Act is the latest example of this. Its full force kicked in on Aug 2, imposing the strictest regulations on high-risk systems, new data disclosure obligations on AI services, and restrictions on the use of facial recognition technology, among others. Consumers will also be given the right to complain about firms that flout these rules.

Hence, as much as the AI Act is reinforcing the Brussels effect, early evidence indicates it may be doing little to help the bloc fulfil wider goals of boosting tech-led innovation and productivity.

With a new digital era dawning, the EU urgently needs to double down on raising its game, beyond legislation, to improve the bloc’s global competitiveness.

The writer is an associate at LSE Ideas at the London School of Economics