This week, many American companies will be one step closer to being legally bound to a set of regulations that will impose substantial costs on American consumers and businesses.
No American lawmaker or regulator will make that decision. Instead, it will be a decision of the European Parliament. Perhaps not since the 1770s has a foreign government imposed such punishing taxes and regulations on what is now the United States.
The EU’s imposing substantial costs on American businesses is inconsistent with President Trump’s policies. On July 27, the United States and the European Union issued a joint statement for a “framework on an agreement on reciprocal, fair and balanced trade.” The EU hailed the agreement. The White House said the deal “will provide Americans with unprecedented levels of market access to the European Union.”
There is a hidden catch.
To access EU markets, American businesses must comply with new EU regulations, including the Corporate Sustainability Due Diligence Directive (CS3D) not mentioned in the trade agreement.
Implemented over the next few years, CS3D focuses initially on large corporations and will require the following: monitoring and improving human rights and the environmental rights; limiting corporate conduct and structure; transferring substantial corporate control to “stakeholders” that include workers and activist groups; expanding corporate liability; expanding damages for corporate shortcomings under the directive; and a vast array of reporting requirements.
The “stakeholders” must be consulted on all major corporate decisions, presumably including corporate demise.
By my estimates, the measurable one-time costs to large American corporations to comply are around $1 trillion with annual costs likely in the hundreds of billions of dollars. Immeasurable costs, such as the erosion of corporate control to “stakeholders” and the expansion of corporate liability and damages, are likely much larger.
The measurable cost of CS3D to large American corporations alone will be larger than the entire value of trade in goods between the U.S. and the EU. The US Trade Representative reports in 2024 that American imports from the EU were $605.7 billion in 2024, and exports to the EU were $369.8 billion. But whereas trade is mutually beneficial, CS3D is not.
Large American corporations are not viewed sympathetically by the EU government, and perhaps not by some parts of the American government as well. But it would be naive to assume that CS3D won’t harm small and mid-sized American companies as well. Regulations initially aimed at large corporations have a tendency to spread to all corporations.
Consider the EU’s General Data Protection Regulation (GDPR), designed “to harmonize data privacy laws across Europe.” Under GDPR, business websites ask visitors whether they consent to cookies and various uses of vistor information. Visitors are given a box to click to consent to the use of personal information.
The EU even has a webpage specifically aimed at instructing American businesses how to comply with GDPR. Small American businesses with little or no activity in the EU will often comply with GDPR. Simply stated, GDPR is an EU law written by the EU to protect EU citizens that applies to all businesses outside of the EU including America.
The costs of complying with GDPR are small relative to the costs of complying with CS3D. GDPR has no substantial reporting requirements, no creation of rights for “stakeholders” for consultations to review and to delay and potentially to block practically any corporate decision.
The costs that EU regulations impose on American business are unintentional. They are largely the same costs that the EU imposes on European businesses.
But for the past two decades, European economic growth has lagged that of America. The cause is not lesser human capital or natural resources. Europe is endowed with resources equal if not greater than those in America.
America has grown more rapidly for at least two reasons. First, America has fewer and far less costly regulations than those in Europe. On relative burden of regulations, America wins.
Second, aware of the lesser burden in America, entrepreneurs and innovators from around the world flock to America. The largest corporations in the world, most of which have been formed in the last three decades, are American, and all are in new technologies. Europe has none in this league.
More importantly as a result of lesser regulation here, startups and small business in new technologies begin in America. What follows is a cycle of less regulation, more startups, more new technologies, and more economic growth.
The Europeans could choose to increase economic growth by lessening regulation. Unfortunately, Europe is headed in the opposite direction. CS3D will hobble Europe. America must avoid a similar fate.
