How European Union Market Rules Affect U.S. Firms

Abstract 

The study examines the effects of European Union (EU) market rules on the U.S. firms and suggests an approach the U.S. firms can use to overcome the challenges caused by the EU custom market rules. The study identifies several challenges the U.S. firms face. These include the requirement for disclosure of financial information for securities traded in the EU security and financial market. Lack of effective chemical regulations undermines import and export activities of the companies dealing with chemicals. The U.S. firms have to go through cross-border checks and comply with other requirements to access the EU market. The study suggestion to the U.S. firms is that they should comply with the EU market rules to the extent they stand to gain from accessing the market. They should also focus on other international markets. Additionally, they seek for preferential treatment when accessing the EU market in recognition of their contribution to the growth of the EU market. 

Keywords: European Union market rules, customs union, unfair competition, multilateral trading facilities, regulated market.

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How European Union Market Rules Affect U.S. Firms

The EU market is the largest single market across the globe. This custom union came into existence to allow free movement of people, goods, capital and services within the region. The main goal was to eliminate unfair competition by creating a level playing field for all market players. The EU market is governed by rules and policies intended to ease daily activities of the market participants. The market offers high-quality products and services, lower prices, trade efficiency and encourages healthy business competition. Depending on an individual’s perception the EU market rules can be seen as anti-competitive or protectionist. From the EU policy makers’ perspective, the EU market rules are intended to promote fair playing ground for all market participants and protect consumers from unscrupulous business people (Wallace, Pollack, & Young, 2015). Although the EU market rules have achieved harmonized free market in the region, they have undesired effects on the firms operating outside the region especially the U.S. based companies. The overseas firms have to comply with restrictive policies and regulations to gain access to the EU market. This study examines the effects of EU market rules on the U.S. firms and suggests means to overcome those challenges. 

European Union Market Regulations

EU security and market regulation is a policy objective aimed at consolidating the European market into a single financial market. The Treaty on the European Union (TEU) establishes the market regulation with the aim of harmonising the market to allow free movement of capital, persons, products, persons and services (Moloney, 2014). The aim of the free market was to eliminate competition and reduce barriers to entry players in the market. The EU has established various rules to regulate the free market and ensure it achieves intended goals. The market rules have contributed immensely to the growth of capital and business activities within the region. The market players in the customs union receive fair treatment such as tax duties, fewer restrictions on business operations, free cross-border movement and other benefits (The Financial Times Ltd, 2017). However, businesses operating outside the EU region encounter myriad obstacles that undermine their business activities in this single largest market. For instance, a company established in the U.S. will have to comply with various requirements before they can import or export goods in the EU market. They experience cross-border checks and require several documentations and other restrictive practices (Export.Gov, 2017). There are other requirements such as disclosure of financial information for securities traded in the EU financial market, chemical regulations and digital regulations among others. Different market rules pose various challenges for the U.S. firms as discussed in this document. 

European Union Security and Market Regulation

The Market Abuse Regulation (MAR) was introduced in 2016 in the EU focusing on regulating various instruments and behaviors relating to securities. MAR was an update of the 2003 European Union Market Abuse Directive (MAD) (AMF, 2016). MAD was intended to enhance the integrity of the market and safeguard investors by establishing a fair playing ground for all participants. MAR was enacted to strengthen and broaden the existing rules on security trading. While MAD regulated the financial instruments and derivatives traded on a regulated market, the new regulations broaden the scope to include the financial instruments and associated derivatives trading on multilateral trading facilities (MFTs). MAR is applicable in the entire EU market, and it intends to eliminate market abuse due to insider trading, market manipulations and exposure of inside information (Moloney, 2014). Therefore, MAR influences U.S. firms operating outside the regulated market in the EU.

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MAR has increased the obligations regarding financial disclosure of information by the U.S. companies having financial instruments trading in the EUs MTFs. Article 2(4) of MAR stipulates that all activities related to financial instruments traded in MTFs fall within the prohibitions and requirements of the MAR (AMF, 2016). MAR controls malpractices associated with market manipulation and insider trading activities. 

The market regulations prohibit participants from engaging in certain behaviors that can be construed as deceptive or dishonest regarding the actual value of instruments. The regulations shed light on various practices that amount to market manipulation (The Financial Times Ltd, 2017). It also regulates the attempted manipulation of market practices including benchmarks and spot commodities. Activities such as purposeful interference with the trading venue, building false impression with a goal of intensifying market trend or disrupting the order book fall under MAR prohibitions.

Insider dealing involves illegal use of corporate confidential information for personal gain in relation to trading securities. It is illegal for an employee or another person having business information not available in the public domain to use that information in stock trading for personal benefit (Moloney, 2014). The MAR has also categorized the cancellation or amending orders based on insider information as an insider dealing. Also, it is insider dealing for any person having confidential information of the company to give a recommendation to another person to trade in shares of that company. The main goal of MAR is to promote integrity and fairness in the EU market irrespective of the home country of the participants.

The issuers of financial security in the EU market have broader responsibility than just the requirement for disclosure of financial information. The issuers of financial instruments have a legal duty to make disclosure of all material information related to the securities as soon as it is necessary (Moloney, 2014). Material security information can be defined as any information that could affect financial decision making involving the purchase of securities. In case it not possible for the issuer to make such disclosure the issuer should issue a written notice to the national regulator of the related trading venue informing the regulator of the impending delay of disclosure and the reason for the delay. 

Possible Solution

The security issuers and asset managers can resolve this issue by making timely disclosure of organization’s financial information. The U.S. firms should structure their disclosure of information to ensure they comply with the EU regulations. Insider dealings are risky to the business and managers should ensure information is disclosed as soon as it is necessary to avoid business malpractices. 

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Chemicals Regulations

The EU established chemical regulations under Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) requiring companies dealing in chemicals of more than one metric tonne annually in the European Market to register all those chemicals. Chemical regulations target the identification of “substances of very high concern” (SVHCs) with the intention of issuing authority for using such chemicals under relevant authorization (Environmental Defense Fund, 2009). As a part initiative of implementing REACH, the European nongovernmental organizations on the environment have established a list of various chemicals that comply with the REACH requirements. This initiative is also relevant for identifying SVHCs.

  The U.S. chemical industry has limited regulations compared with the European market. There are several companies involved in manufacturing or importing chemicals considered as SVHCs in the European Union. These companies either market or import some of the chemicals in the European Union market. According to Environmental Defense Fund (2009, p. 11), about 37 states of the United States are involved in the production of dangerous chemicals. Each year, companies in the U.S. produce and import over 85 of dangerous chemicals worth over $1 million and over 15 chemicals worth more than $1 billion. Furthermore, the U.S. has only tested three of the SVHCs under Toxic Substance Control Act (TSCA) and has put two of them (Asbestos and hexavalent chromium) under regulated use.

The strict regulations of chemicals in the European market compared to the U.S. market is expected to have severe consequences on the production and marketing of chemicals in the U.S.  The U.S. companies involved in production or import and export of SVCHs chemicals have challenges in the Europeans market because they cannot sell any chemical that does not meet the requirements of chemical regulations in the European Union (Environmental Defense Fund, 2009). Furthermore, those companies cannot import chemical substances that have not been authorized in the EU market. Considering that EU market is the largest single market globally, chemical companies in the U.S. will have limited access to the EU market, and as a result, the firms will be less profitable. 

Likely Solution 

The U.S. firms have to comply with the EU market regulations to have access to the largest single market globally. The U.S. government should strengthen TSCA and establish a list of chemicals considered dangerous in the EU (Newman, 2008). This will help the firms dealing with import and export of chemicals to comply with the market requirement. Also, this will ensure hazardous chemicals are not traded on the market illegally.  

Single Digital Market

The EU has over 500 million consumers of digital content. The main firms offering digital media are the U.S. companies such as Google, Facebook and WhatsApp (The New York Times, 2016). The EU is suggesting the establishment of digital market that may require the digital media companies such as Google, Yahoo, Facebook and others to pay the publishers of digital content. Publishers of online news such as magazines and newspapers will have the opportunity to demand payment from Google, and other tech companies are making use of that news on their sites such google news, Twitter and Facebook. The regulations also require thorough scrutiny of online calls and messages to the same level of standards similar to the standards exercised in traditional voice calls and messages. Furthermore, these regulations will allow the European consumers the right to purchase and watch digital content such as online streaming.

The main intention of regulations on digital media by the EU is to ensure the consumers have access to the digital information regardless of their location (Govaere et al., (2013). However, these regulations are likely to hurt the digital firms in the U.S. and other countries because of low profitability and less competition among the producers of digital content. The policy makers in the EU claim that such regulations are not targeting any firm, but their aim is to protect the consumers against exploitation by digital companies (Cremona, 2011). However, there is a perceived adverse effect of these regulations considering the previous claims by the EU against Apple over unpaid taxes and antitrust charges amounting to $14.5 billion (The New York Times, 2016). 

Implementing such rules in the EU market is likely to undermine the performance firms operating in the digital market. The firms which are mainly based in the U.S. will experience a decline in profit, and this may lead to a reduction of innovations since firms will have little incentives to invest in technology (Govaere et al., (2013). The move by the EU to review digital regulations could be a deliberate attempt to fight American giant firms in the industry. Europe zone is the largest market for digital content, and the EU could be working to enhance the competitiveness of their firms such as Telecom to face the giant American firms.

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Likely Solution

The EU is the market for American digital firms. It has many Facebook subscribers, and Germany has more Amazon users than the American market. However, U.S. firms offer competitive and most innovative digital services than other firms across the globe. The quality of products and services offered by the U.S. firms is the main factor attracting consumers and publishers from Europe and across the globe. The U.S. firms offering digital content should not subscribe to the EU market rules. They should focus on the global market and intensify the quality of their products and services.

Conclusion

The EU market rules have contributed to the establishment of a harmonious market in the region with free flow of capital, goods, services and the people. The market rules have helped the market players in the region by eliminating barriers and tax exemption as well as reducing unfair competition. However, these rules have imposed challenges on the U.S. firms which have to comply with stringent requirements imposed on external players in the EU market. U.S. companies have to disclose the origin of their goods, face cross-border check, make disclosure of information for securities trading in the EU market and regulate various chemicals considered to be dangerous. The U.S firms should improve their practices in line with EU market rules if those rules can contribute to the profitability of the firm. Also, they should focus on other market away from the EU market. Also, U.S. firms can collaborate or form an agreement with EU governing bodies to demand preferential treatment.