The Brussels effect and regulatory arbitrage
The “Brussels effect” describes the process of EU regulation influencing regulation internationally. It’s often held in positive regard, with GDPR as the flagship example.
The EU hopes that the EU AI Act will have a similar impact. It was the first comprehensive AI legislation passed into law, aiming to balance innovation and risk. But, could this hoped first-mover advantage actually become a first-mover disadvantage?
The situation
AI regulation is necessary. But the EU AI Act is ~150 pages long, full of ambiguity, and carries severe penalties for non-compliance. And it’s one more regulation on top of a lengthy list.
It took years to write and will take years to fully implement, adding to the confusion. Policy is moving slow. AI is moving fast. That’s not an environment that encourages innovation, whatever policymakers say.
Why this matters
Startups and talent will look for easier places to work. That’s regulatory arbitrage: moving to where the rules are lighter. If those countries start attracting more startups, talent, and investment, why would they copy the EU?
There’s evidence of this. Research shows a growing gap in AI adoption between the UK and the EU. Jacob Beswick, Senior Director of AI governance at Daikatu saying: “The EU AI Act has raised more questions than answered, and in the process, businesses within its jurisdiction have become increasingly hesitant about their AI programs”.
There are counterarguments. The Act is risk-based, so not every system faces the same burden. The EU is a big enough market that firms will comply if they want access. Too much divergence could create friction and hurt global interoperability. And if a major AI incident happens in a lightly regulated country, Brussels may be proven right.
The EU AI Act will influence global AI regulation. But will it be as a success story or a tale of caution?
References / Related reading
How Europe Became the World's Top Tech Regulator (CNBC)
Raise the Bar: Leveraging the EU’s Regulatory Power (Chatham House)
EU AI Act: First Regulation on Artificial Intelligence (European Parliament)