Matthias Matthijs & Craig Parsons. Foreign Affairs. Volume 101, Issue 3, May-June 2022.
Which has a more complete single market, the United States or the European Union? Conventional wisdom suggests an obvious answer: the United States. Since 1789, the American federation has pursued its founding mission to guarantee the free flow of interstate commerce. Although many of today’s American progressives want to copy heavy-handed European models of regulation and social welfare, they confront well-organized free marketeers and business interests determined to defend the United States’ system of open capitalism.
Across the Atlantic, Europe’s much newer “single-market project” was conceived in envious imitation of the dynamic American economy. Although Brussels has removed many barriers between the EU’ s member states, observers still see parallels to the United States as aspirational. As The Economist put it in 2019, “In theory, … the EU’s 500m citizens live in a single economic zone much like America, with nothing to impede the free movement of goods, services, people, and capital,” but in reality, Europe’s single market is “creaking,” “incomplete,” and in some ways “actively going backwards.” Brexit, rumbling Euroskepticism on the continent, and the reintroduction of border controls during the COVID-19 pandemic have seemed to confirm this dismal image. The war in Ukraine could mark a shift—rallying EU members to new levels of cooperation on energy and defense—but the EU’s single-market aspirations still face an uphill climb.
What both sides of the Atlantic need to know is that the conventional wisdom is misleading. The United States does enjoy higher flows of interstate commerce and mobility than the EU, but not because it ever completed anything remotely close to Europe’s barrier-removing project. Far from inhabiting a single economic zone today Americans retain many costly interstate barriers that Europeans have either removed or reduced across their famous “four freedoms”: the free movement of goods, services, capital, and people. Relatively greater cultural and institutional homogeneity and norms of mobility encourage Americans to trade and move across states despite such barriers, not because of their absence.
Europe’s project of legislating regulatory openness, meanwhile, has gone further than most people understand. Despite the EU’s aggressive reduction of interstate barriers, however, the union’s heterogeneous citizens still move and trade across borders in comparatively modest numbers. As a result, the economic gains from this project are bought at a relatively high political price. Eu member states have given up regulatory discretion and policy levers that U.S. states retain, and in return, they have gotten cross-border opportunities that appeal to a relatively small portion of their electorates. Eu policies have restricted the room for national-level democratic choices even though there are far more diverse populations across EU member states than across U.S. states.
Understanding the realities of the world’s two largest single markets reveals problems and opportunities on both sides of the Atlantic. The United States’ combination of dense internal flows and taken-for-granted interstate barriers suggests potential gains, both economically and simply in terms of good governance, from adopting some Eu-inspired rules. For EU member states, the comparison to the United States should encourage celebration of their achievements and absolution from the elusive goal of complete regulatory harmony. Recognizing a finish line for the single market agenda will put their Union on a more stable political footing. A clearer understanding of both regulatory arenas can also facilitate transatlantic cooperation—something that has taken on increased urgency in light of Russian President Vladimir Putin’s military invasion of Ukraine and other authoritarian states’ challenges to the liberal international order.
Rules of the Road
A single market is a system of regulations that facilitates trade and mobility across jurisdictions—across state lines in the United States and between member countries in the EU. Of course, the actual economic flows across jurisdictions can be helped or hindered by such factors as culture, geography, language, and technology—variables that are distinct from the regulations that make the market a single space of exchange. Those who overlook this distinction assume that the United States’ higher flows of people and products must mean the country has more open rules for interstate exchange than the EU does.
To see how wrong that view is, first consider the legal principles for interstate exchange in both places. The U.S. Constitution’s Commerce Clause assigned Congress authority over interstate commerce. The Supreme Court then interpreted that clause as implying that state-level regulation cannot unduly burden interstate commerce—but with considerable wiggle room. The legal standard today bars “purposeful discrimination,” meaning that state regulation cannot disadvantage out-of-state actors unless—a big unless—it serves some plausible public purpose. In the 1970s, the Court also carved out a “market participant exception” to the Commerce Clause. When state governments participate in markets rather than regulating them—for example, by spending on public contracts or giving out subsidies—they may favor their residents.
The Court of Justice of the European Union, the arbiter of all EU law, has developed stricter principles for open trade. Starting in the 1970s, it gradually elaborated its interpretation of the EU’s treaties that national measures may not “hinder or make less attractive” cross-border market access. The court also established the principle of “mutual recognition” (also known as “country-of-origin regulation”), whereby goods or services legally sold in one member state may be sold elsewhere without meeting further requirements. Member states may contravene these principles for a long list of reasons, but the court strikes down regulations that it judges to have avoidable “hindering” effects. This is a far more demanding standard than asking if they purposefully make interstate commerce more difficult.
The contrasts between U.S. and EU legal principles have been magnified by the behavior of their respective legislatures. Congress has rarely used its Commerce Clause powers to promote interstate openness. Sector-specific legislation does so in transport, telecommunications, and parts of finance, but most federal regulation privileges such goals as food and drug safety, environmental stewardship, and worker and consumer protection. Typically, such laws set regulatory floors above which states may add further requirements, which means that U.S. states can maintain disparate rules for out-of-state actors more freely than EU countries can. Meanwhile, the EU’s institutions have labored much more systematically to legislate openness. Across goods, services, capital, and people—from toys to pharmacists to securities brokers to temp workers—EU legislation aspires to a unified approach: general rules of mutual recognition, with harmonized rules in areas in which member countries balked at mutual-recognition solutions.
Theory, Meet Practice
How do these legal and legislative differences operate on the ground? Take markets for goods. Implementation of the EU’s openness rules remains a work in progress—and always will. The European Commission struggles to keep up with evolving products and changes in its members’ regulations. It also wrestles with “gold-plating”—when member countries add stricter requirements as they transpose EU directives into national law, much as American states add requirements above federal floors. That said, similar issues typically play out in more pro-openness ways in the EU than in the United States. For example, when Austria passed strong animal-welfare laws in 2004, EU rules required that they apply only to Austrian producers, not to incoming products (such as eggs) that meet common EU standards. By contrast, California’s 2018 animal-welfare law keeps eggs from many states out of its market. Similar comparisons arise even in sectors with relatively strong U.S. federal statutes, such as chemicals, drugs, and toys. Occasionally, the United States achieves systematic rules through “the California effect,” whereby big-state requirements effectively become national standards, but this has been rare outside the classic example of auto emissions. Some goods in American markets lack any coordinated rules: elevator manufacturers tailor different models to varying state or even local standards. The same models are marketable across the EU thanks to its 1995 Lifts Directive.
In services, EU and U.S. arrangements are almost mirror images. The EU has established default rules of openness, with exceptions for certain sectors and ongoing struggles of implementation, whereas U.S. service providers confront legally separate jurisdictions with some exceptional areas of openness. Eu directives for professional qualifications and services define baseline “harmonized” requirements for sensitive professions, such as doctors and architects, and otherwise stipulate that practitioners meet their home country’s regulations. Special deals preserve more national autonomy in certain sectors—especially in energy, transport, and telecommunications—and implementation of harmonized requirements is far from seamless, but there is a drive to improve it. By 2023, for example, each EU member state must offer a “single digital gateway,” an online portal through which workers moving from one country to another can complete 21 important administrative procedures, including asking for recognition of out-of-state qualifications.
In the United States, federal legislation sets largely nationalized rules for transport and telecommunications, but in nearly every other field, service providers must meet each state’s requirements. Professionals seeking another state’s license must pay fees, retest, or repeat training, even when their home state’s requirements are nearly identical. For example, an experienced plumber from Georgia must pass a seven-hour exam to practice in Florida. Interstate compacts offer multistate licenses for a few professions, such as nurses, and private professional associations often reduce fragmentation by selling test-based certifications, but in both cases, states endorse these solutions in a patchwork way. Several recent state laws promise “universal recognition” of out-of-state licenses, but some of these apply only to residents, so they still exclude those offering services across borders. Arizona, for example, will now recognize a psychologist’s California license if she moves to the state, but not if she wishes to see patients in Phoenix from a home base in San Francisco.
Telemedicine offers a timely example of these messy arrangements. The pandemic pushed most states to authorize virtual visits across state lines on an emergency basis, but these measures are now lapsing. Only 14 of the 50 states have authorized cross-state telemedicine permanently. It has been allowed across the EU since the early years of this century.
In the movement of capital, the U.S. federal government plays a much bigger role in governing state-level markets, but here, too, the EU has taken comparatively direct steps to facilitate openness. American federal actors enjoy far greater fiscal resources than their EU counterparts and use them to fund federal deposit insurance that substantially homogenizes the conditions for banking across the United States. U.S. federal agencies also oversee nationally chartered banks and exempt them from most state laws. But for holding companies, state-chartered banks, securities firms, and insurance, varying state rules still create a maze of reporting and regulatory requirements. Even though the same kinds of rules are even more varied across Europe’s national financial systems, the EU has created a set of “financial passports” to facilitate Eu-wide operations across them. Banks, securities brokers, and insurance companies that meet a set of harmonized rules for their activities may operate across the single market while respecting their home countries’ additional requirements and oversight.
For the movement of people, the comparison is also mixed, but even in this area—the most politically sensitive of the “four freedoms”—Europe’s system does more than the American one to facilitate openness. The U.S. Supreme Court established a “right to travel” that requires states to allow migration and to extend residency benefits to new arrivals (with some exceptions, notably in-state university tuition). This means that U.S. citizens can freely choose their residency and right away gain most related privileges but must also immediately meet their new state’s requirements for licensing, working conditions, and so on. In the EU, member states have more discretion over residency but less over mobility tied to work. Member states may make residency that lasts longer than three months conditional on work, study, or resources. If they have a work contract, however, workers may be posted for up to 18 months in another country while mainly meeting their home country’s regulatory requirements.
All told, the transatlantic comparison is unmistakable: in the regulation of interstate exchange, the EU has a more complete single market than the United States. Why, then, is the United States’ interstate trade estimated to be three to four times as high as the EUs and its interstate mobility (depending on the measure) estimated to be ten to 20 times as great? The answer is clearly not that American barriers are costless or that Europe’s single market has made no difference. It is easy to get American firms to testify about their costs from duplicative requirements, and a barrage of econometric studies have shown that EU rules have reduced similar costs in Europe. A telling example plays out in higher education. U.S. public universities typically charge out-of-state students roughly triple the tuition of in-state students, whereas in Europe, single-market rules ban differential tuition for EU citizens. Nonetheless, Americans pursue out-of-state degrees at almost 50 times the rate of Europeans. In this sector and others, the observable pattern is that U.S. interstate flows are not easily deterred by regulatory barriers, while European flows are not easily incentivized.
The answer to this puzzle is not rocket science. It lies in U.S. homogeneity and EU heterogeneity below the level of regulation of interstate exchange. The United States’ shared English language makes a big difference, as do parallel dynamics of cultural identity and the well-documented (although diminishing) American tradition of mobility. Wealthier young Americans and their parents pay out-of-state tuition because it is normal to go away for college. European mobility is comparatively low even within countries. Probably as important, but hard to disentangle from culture, is institutional familiarity. Rules and practices for life and work across American states are much more homogeneous than those across Europe. It may be costly for an Idahoan professional to get licensed in Florida, but the Florida job is familiar in a way that no Italian job is for an Irish newcomer. Of course, the EU’s profound heterogeneity is ultimately the justification for its extraordinary single-market project. But the conventional wisdom about the European Union imitating an imagined United States has obscured important lessons for economic governance on both sides of the Atlantic.
Untapped Potential
This portrayal of the American market as fragmented, sometimes protectionist, and often just poorly governed suggests overlooked opportunities for economic renewal. Americans’ apparent insensitivity to interstate barriers already provides some of the overall macroeconomic fluidity that Europeans envy, but Eu-style steps could still reduce ill-justified costs borne by mobile citizens and enhance U.S. economic dynamism. Given the social conditions favoring mobility in the American internal market, its impediments are mainly regulatory in nature, so regulatory reforms are actually more likely to produce results there than in the European market.
Pursuing such gains in the United States would look different from Europe’s project but would confront no major constitutional problems. Whereas the poorly resourced EU institutions mainly act through legislative requirements that resource-rich member states must enact, the Supreme Court has prohibited similar federal impositions on states. Still, if Washington cannot require states to, say, maintain single digital gateways, it could pay them to do so. It routinely incentivizes state action in this way, but it has almost never used funding specifically to encourage market openness. More significant, although the Supreme Court may not consider itself empowered to require states to mutually recognize licenses or eschew discriminatory procurement, there is little question that Congress can. The United States’ relative homogeneity means that such steps could presumably deliver benefits with fewer implementation challenges than in the EU. For example, compared to in the EU, where national educational systems are very different, in the 31 U.S. states that require out-of-state teachers to take additional training to enter a classroom (unless the teacher is a military spouse), teacher training overall is much less varied. Federalled coordination would not need to be heavy-handed to make life easier for teachers pursuing careers around the country.
It should be possible to identify opportunities for better singlemarket governance without threatening the norms and merits of the American system. There is low-hanging fruit in areas where federal coordination could encourage a fairer and more open national economy. Potential gains stand out in licensing, where federal support for state-run single digital gateways could facilitate interstate mobility and business operations. This would effectively incentivize a broadening of the bipartisan legislation currently moving through Congress that would require states to recognize licenses of military spouses. An initiative for nondiscrimination in procurement could draw on lessons not only from the EU’s experience but also from similar moves that Australia and Canada made in recent decades—both through federallevel proposals to which their respective provinces unanimously agreed. Congressional studies of interstate regulatory issues, like those perennially funded by the EU, could kick off this new policy agenda.
It should be surprising that this discussion is not already happening in the United States, given visible interstate barriers and a plausible federal mandate to address them. The reason is that both political parties have blind spots on these issues. Republicans see themselves as the party of free markets, but their core coalition since Ronald Reagan’s presidency has combined pro-market discourse with states’ rights resistance to federal authority. Republicans have been reluctant to consider federal regulatory action, even for the original commerce-facilitating goals of the federation. Democrats’ lack of interest in internal-market openness is less surprising, but also not preordained. To address concerns about poverty, racial discrimination, the environment, or monopolistic business practices, they have usually tried to impose regulatory floors on conservative states while encouraging progressive states to set higher standards. That strategy makes sense in a diverse federation but generates costs that fall disproportionately on those with less economic power. Big corporations have the deep pockets and staffing to operate across fragmented jurisdictions. It is small entrepreneurs and itinerant workers whose options are most constrained by a maze of rules and fees.
Progressives need not sacrifice the “California effect” strategy on key issues to recognize that removing some interstate barriers would help economic underdogs the most. President Joe Biden’s Democratic administration could portray this agenda in practical terms of economic opportunity and fair competition, much as the European Commission has done. Republicans could support it as a return to the free-enterprise ideals on which the country was founded.
Where is the Finish Line?
To better understand the European Union’s prospects, one must begin by marveling at the immense achievement of its single market. It has established stronger rules for internal openness than any other polity in history. Implementation remains challenging, given more diverse and powerful subunits than those in any federal state, but the project’s progress has been surprisingly steady. Even through a decade of crises in the 2010s—sovereign debt woes, a refugee influx, democratic backsliding, Brexit, a rise in anti-EU populism—steps toward a more complete single market kept coming. Among the innovations in this difficult decade were the single digital gateways, an Eu-wide e-procurement system, and the European Labour Authority, which coordinates national policies and enforcement on labor mobility.
Yet these achievements are simultaneously taken for granted and minimized, leading otherwise well-informed people to hold two wrong views about the single market’s likely trajectory. Most widespread, as seen in The Economists 2019 characterization, is the idea that the single market is woefully incomplete and losing ground. This discourse is partly instrumental, since it helps justify the EUs ongoing agenda but it is also rooted in a sincere belief in the “bicycle theory” of European integration: without continued forward movement, it will crash. The other common presumption is that if the bicycle stays upright and the market reaches completion, Europe will converge on American-style geographic and economic fluidity. This expectation is most common among ardent Europhiles who long for such an outcome but is shared by Euroskeptics who fear the same scenario.
These views respectively discount and exaggerate what the single market can do. National resistance to EU openness has increased since the 1990s, but the prevailing sense of backsliding is more a reflection of how far the project has come than of a deep new rejection of it. The extraordinary level of openness that the EU came to demand by 2005 or so, while also incorporating new members from central and eastern Europe, understandably kicked up a populist backlash. Brexit is the strongest pushback so far, but the process of the United Kingdom’s departure from the union played out so dis astrously that it ended up reinforcing support for the single market. Mainstream politicians across Europe rallied to defend the “indivisibility of the four freedoms” against British hopes for retaining more selective access to the single market. Euroskeptics such as France’s Marine Le Pen felt compelled to downgrade their calls for national “exits” to more run-of-the-mill criticisms of the EUs current trajectory. Covro-19 brought a new host of border-closing pressures, but once the pandemic finally wanes, the single-market agenda will continue to roll forward. Its momentum will likely receive a boost from renewed ambitions for European unity in response to Russia’s military aggression in Ukraine.
Europeans should consider carefully how they want the single market to evolve, however, because American-style fluidity is neither a plausible nor a clearly desirable goal for the EU. Europe’s population is less inclined to flow across interstate borders, and so the removal of each marginal interstate regulatory barrier produces less economic fluidity—and with decreasing returns once the largest barriers have been removed. National heterogeneity also raises the political costs of pursuing higher flows. In practical terms, the more that jurisdictions are institutionally different, the harder it is to cross the last mile (or kilometer) to a single regulatory space.
The advice for Europe, then, is roughly the reverse of that for the United States. Whereas Americans should start a conversation about removing their least justified interstate barriers, Europeans should discuss a completion scenario for the single market. This new phase should be presented as a celebration of Europe’s achievements, not a renunciation of the project.
It could be inaugurated by studies that combine the traditional focus of Eu-funded research on “the costs of non-Europe”—highlighting remaining barriers and potential gains from removing them—with newly frank attempts to identify when and where those costs should be accepted in the name of democracy and flexible policymaking at lower levels.
The key political shift will be to replace the goal of an ever more single market with a more selective prioritization of the remaining tasks. The shift could begin simply with a political recalibration in the European Commission. But given the strength of the single market’s legal principles and the duty of courts to enforce them, further consolidation of a finish line might also require some reworking of directives, not just a selective focus in their implementation. This might roughly follow the precedent of the 2018 revision of the Posted Workers Directive, which strengthened member states’ authority to apply minimum wages and some regulations to incoming workers.
Celebrating a finish line for the single market should also strengthen the case that the EU needs stronger tools of fiscal solidarity and joint investment to manage the asymmetric shocks that inevitably arise in such a diverse space. The EU took a historic step in this direction in the summer of 2020, creating the 800 billion euro “Next Generation EU” fund to both respond to the economic damage from COVID-19 and promote investment in green and digital transitions. Newly progressive governing coalitions in Germany and the Netherlands—led, respectively, by Olaf Scholz and Mark Rutte—have tempered those countries’ long-standing veto of more permanent instruments of fiscal solidarity. A quest for more EU strategic autonomy, including through higher defense spending and energy independence from Russia, could justify further jointly financed EU initiatives. Implementing those measures alongside newly balanced goals for the single market would better align the European project with its motto: “Unity in diversity.”
Stronger Together
Clearer thinking about regulation for a single market holds significant promise for American and European politics even though these issues are not the most pressing ones on either continent. If Americans hope to mend their broken politics, they must find policy agendas with bipartisan appeal as commonsense good governance. As Europeans are galvanized by the tragedy in Ukraine to move beyond their decade of crises, they must find ways to signal that the EU can address big problems while respecting national diversity. By celebrating the European single market as both finite and robust, the EU can build trust that it will balance collective goals and national heterogeneity even as it develops new budgetary powers and cooperates more closely on energy and defense.
Better mutual understanding of American and European internalmarket governance also holds promise for transatlantic cooperation and shared global regulatory influence. If the world’s two largest single markets recalibrated their respective internal projects and aligned more effectively in terms of good practice and regulatory rule setting, they would not only foster their own economies’ dynamism but also offer a formidable alternative to China’s growing influence. Renewed ambitions are evident in this space: the two sides recently took steps to revive transatlantic trade in steel and aluminum, including indicating an intention to negotiate a global agreement on carbon intensity and global overcapacity, and they created the EU-U.S. Trade and Technology Council to address climate change and clean technology, data governance, export controls, investment screening, and secure supply chains.
But as a top EU official in Washington, D.C., once remarked to one of us, EU-U.S. interactions in regulatory politics run into friction between Europeans who “tend to think in terms of rules” for leveling the commercial playing field and Americans who “focus on new tools” to nudge actors in desired directions. This is especially true in how the two sides deal with an increasingly assertive China: while Europe has not given up hopes of getting Beijing to abide by the rules of the liberal international order, the United States is continuing to employ trade and financial sanctions to coerce China into behaving more like a predictable market economy. To press China to take a more cooperative stance, however, the United States itself will need to follow an agreed set of international rules, and the EU would benefit from developing more American-style tools in dealing with direct challenges of unfair competition.
If both sides recognize how much they can learn from each other’s governance structures, the United States could end up being more prosperous by imitating certain Eu-style rules, and the EU could rest on more stable political foundations by adopting some U.S.-style institutional tools. Restoring a sense of stability and predictability in the transatlantic economy would be a welcome change, and it would allow the United States and Europe to jointly face the pressing challenges coming from a revanchist Russia and an authoritarian China.