PolicySphere and Baron Public Affairs are collaborating on a series of articles exploring the impacts of EU regulation on U.S. industry. This series is sponsored by Baron Public Affairs.

Previously: Understanding CS3D: The New EU Law That Could Cost U.S. Industry Trillions

Last week, we described how the EU’s pending new directive, the Corporate Sustainability Due Diligence Directive (CS3D), poses a significant threat to American businesses, with compliance costs potentially reaching into the trillions.

On Monday, the European Parliament’s Legal Affairs Committee (JURI) approved a compromise version of CS3D. This outcome paves the way for a vote by the full European Parliament later this month.  Trilogue negotiations between the European Parliament, Commission, and Council will then decide the final text later this year or early next year.

You might think that the EU’s apparent willingness to narrow CS3D is a victory for business and for those frustrated by the EU’s expansive environmental mandates.  In substance, however, the revisions don’t alter the directive’s core principle: that in-scope companies, including American ones, must change their behavior to comply with EU environmental standards. 

The version approved reflects a centrist-progressive compromise, with the EPP (main center-right party) and Renew Europe (centrists) securing support from parts of the Socialists & Democrats (main center-left party) to advance a streamlined text and prevail over the more conservative factions that sought greater reductions to the directive.  The revised text narrows CS3D’s scope to cover companies with more than 5,000 employees and €1.5 billion in annual EU revenue, while shifting to a risk-based approach under which companies request information from business partners only where there is “a plausible prospect of an adverse impact.”  It removes EU-level civil liability (leaving liability to national law); however, it retains a requirement that companies prepare a climate transition plan to align their strategy to the Paris Agreement.

Observers should not be fooled; this is only a temporary recalibration of the EU’s regulatory ambitions in response to mounting political fatigue and economic headwinds.  Once these pressures ease, Brussels is likely to reassert its busybody agenda with renewed vigor: facing declining economic, military, and demographic power, Eurocrats see regulation as the EU’s primary instrument for exercising influence on the world stage.  

CS3D remains a central element of the EU’s “sustainability and corporate accountability agenda,” which itself is merely an expression of the multilayered way in which the EU exploits and saps American economic strength. As the latest report from Baron Public Affairs, “Europe’s Economic War on America,” convincingly demonstrates, this is not accident, but deliberate strategy. 

Regulatory Imperialism

The EU is open about its ambitions as a “regulatory superpower.” The logic is simple: because of the size of the EU’s consumer market, multinational companies have to comply with EU regulations; multinational companies want to save up on regulatory costs, so they will usually comply with the most demanding set of regulations and apply those standards globally; therefore, by imposing regulations in the EU, the EU can, in many cases, apply those regulations de facto globally. 

That’s the theory, which is already dubious. The practice is that these regulations, surely only for coincidental reasons, seem to always apply more stringently to American companies than to European—or sometimes even Chinese—competitors. 

For example, the General Data Protection Regulation (GDPR) has imposed billions in fines, overwhelmingly levied on US tech companies, and forcing them to rewrite privacy policies globally, and not just for the EU. The Digital Markets Act (DMA) targets six American firms—Alphabet, Amazon, Apple, Bytedance, Meta, and Microsoft —while sparing European competitors. Digital Services Taxes, introduced piecemeal by EU member states since 2019, have already extracted over $9 billion from American companies.

Or take the Carbon Border Adjustment Mechanism. It is a de facto penalty on US exporters: companies can deduct carbon taxes paid at home…except American companies, because America doesn't have European-style carbon pricing. Of note: China has had an “Emissions Trading System” similar to the EU’s carbon cap-and-trade system, except that it’s an unwritten rule that the system is largely fictitious; Chinese exporters can therefore deduct their fake carbon costs at the EU border. The mechanism is therefore both a penalty on American exporters and a subsidy to Chinese exporters. Some might wonder why we are paying for this continent’s defense… 

And, naturally, compliance costs for these overlapping mandates run into the hundreds of billions, creating a regulatory tax that falls overwhelmingly on American shoulders.

Tax Haven Hypocrisy

While Brussels lectures about “fair taxation,” its own members act as corporate tax shelters. Ireland, the Netherlands, and Luxembourg famously allow multinational corporations to dodge corporate taxes. 

The details are, of course, fiendishly complicated, but the basic principle is easy to understand: a company, let’s call it Globosoft, creates a subsidiary in Ireland which holds the rights to the company’s intellectual property (brand names, algorithms, patents, etc.); the company’s other subsidiaries then pay large “licensing fees” to that subsidiary for the use of that intellectual property, thereby reducing their taxable profits and therefore their corporate income tax bill. 

EU members siphon more than $100 billion in US tax revenue–revenue generated by American research and development, American investment, and American economic dynamism–every year by offering low-rate havens for American multinationals, according to an analysis by CBPP.

It’s exquisite. Europe captures global tax revenue from US firms while shifting compliance costs onto American shareholders. 

Strategic Free-Riding

The EU leeches off American economic dynamism because it has so little of its own. For example, as President Trump's recent executive order noted, the United States has less than five percent of the world's population yet funds roughly three-quarters of global pharmaceutical profits. Yet European governments use price controls and centralized procurement to pay a fraction of what Americans pay. 

The same dynamic holds in defense. US taxpayers continue to fund most of NATO’s budget while most European states fail to meet their own spending pledges. 

The Draghi Report, commissioned by the European Commission itself, candidly admits that “the safety of the US security umbrella freed up [European] defence budgets to spend on other priorities.” Those “other priorities” include subsidizing European competitors to American firms: billions in state aid for battery manufacturers, semiconductor producers, and green energy companies. American taxpayers fund NATO while European governments use their defense savings to tilt the economic playing field against American industry.

Decision Point

The EU’s regulatory agenda is not just economic but civilizational. All these rules, including CS3D, the other regulations, the tax rules, and the pharmaceutical and defense free-riding, are not coincidental. They represent multiple prongs of the same strategy. It is an attempt to define the rules of global commerce according to the moral idiosyncrasies of the EU leadership class: privacy absolutism, speech restrictions, climate extremism, and bureaucratic nanny-stateism. The attempt is only sustainable because the EU has been able to outsource innovation and security to the US. (It should also be noted that these Euro-values are alien not only to America, but also to many if not most of the actual citizens of the EU, who have almost no say in all this.) Meanwhile, Brussels presents its behavior as ethical leadership when it is, in reality, parasitical and imperialistic.

American policymakers must decide if they want to continue underwriting this arrangement. As the Baron report argues, reciprocity is overdue: trade retaliation, tax reform, and defense cost-sharing are not acts of aggression but of balance. The transatlantic partnership, which is in the interest of both blocs, can endure only if it is founded on fairness.

This article was developed in collaboration with Baron Public Affairs. For further information, please contact Baron Public Affairs.