Don’t Follow Europe by Over-Regulating AI
European governments have long been known for their tendency to over-regulate. Recently, in response to the emergence of AI technology, they escalated this regulatory habit, adopting a “regulate first, innovate later” approach. This decision has been criticized as an act of economic self-sabotage.
The Flaws of Preemptive Regulation
Instead of allowing technological innovations to develop and responding with appropriate regulations based on real-world applications, the European Commission chose to impose regulations on AI companies without fully understanding the implications. This preemptive approach is considered misguided, as it attempts to regulate a field that is still in its infancy.
The EU’s new rules aim to impose obligations on AI companies based on presumed risk factors associated with their products. However, assessing these risk factors in advance is challenging, if not impossible. The complexity of determining potential damage before it occurs places an undue burden on companies, particularly smaller startups that may lack the resources to navigate such regulations.
Impact on Competition and Innovation
Under the proposed EU regulations, firms classified as “high-risk” face fines of €15 million or up to three percent of their global revenues, whichever is greater. This regulatory burden is more manageable for large firms like OpenAI, Google, and Meta—entities that can absorb these costs far better than emerging startups. Consequently, it creates an uneven playing field, favoring established companies and stifling competition.
Excessive regulation ultimately harms consumers, who benefit from increased competition that leads to better products and lower prices. By imposing costly compliance obligations, regulators inadvertently ensure that only the largest firms can survive, reducing the variety of choices available to consumers.
Lessons from Data Protection Regulation
The EU’s approach to AI regulation mirrors its General Data Protection Regulation (GDPR), designed to protect personal data but inadvertently favoring large platforms capable of managing the associated compliance costs. Research indicates that GDPR has reduced overall competition and strengthened the market share of major digital companies, resulting in a slowdown of innovation in Europe compared to the United States.
The Investment Gap
Private investment in AI has surged in the United States, with over US$29 billion invested in 2024, nearly 20 times the US$1.5 billion invested in Europe. Additionally, the number of AI companies established in the U.S. was 1,143, compared to just 447 in Europe. The EU has seen a one-third decline in available AI applications and a 47.2 percent decrease in new application entries.
The Economic Potential of AI
AI is poised to enhance productivity across the economy, with some studies estimating that it could increase the productivity of unskilled workers by as much as 14 percent. Given that productivity is closely linked to living standards, stifling AI innovation could have significant repercussions for Canadian workers and the economy at large.
Canada must learn from Europe’s regulatory missteps. Over-regulating AI could preemptively constrain significant economic opportunities for Canadians and diminish the nation’s global competitiveness. The EU’s cautious approach has led to a notable reduction in innovation, with no clear evidence that the proposed protections are effective.
In summary, while the intention behind AI regulation may be to safeguard consumers and mitigate risks, an overly stringent regulatory framework can stifle innovation, hinder competition, and ultimately harm the very individuals it aims to protect.
