A Critical Analysis of the Google Decision

Introduction

Judge Amit Mehta’s decision in the Google Search case[1] is commendable in many respects. He seems to strive to credit counterarguments wherever doing so is sensible, rather than trying to “bullet-proof” his opinion (as other “Big Tech”-related decisions often do) by discounting every argument put forward by Google. He is not gratuitously dismissive of Google’s experts. And, as he did in dismissing the entirety of the states’ “self-preferencing” claims at summary judgment,[2] he is willing to reject various of the plaintiffs’ arguments here—finding, for example, that some of their proposed relevant markets were not relevant markets and/or that Google was not a monopolist in them. The decision is also very clearly written and, at 275 pages, admirably thorough.

That’s the good. Unfortunately, where it counts the most, Judge Mehta’s decision is seriously lacking, to the point that his primary legal conclusion—that Google’s default search distribution deals were anticompetitive—is untenable. In this paper, I explain why.

I. The Core Legal Defect: Misapplication of the Causation Standard for Exclusionary Conduct A. Misreading Microsoft I start with a quote from the decision that brings us directly to the heart of the matter. Quoting the D.C. Circuit Court of Appeals’ decision in Microsoft,[3] Judge Mehta holds that, as a matter of law:

[C]ausation does not require but-for proof. The plaintiff is not required to show that but for the defendant’s exclusionary conduct the anticompetitive effects would not have followed. Such a standard would create substantial proof problems, as “neither plaintiffs nor the court can confidently reconstruct… a world absent the defendant’s exclusionary conduct.” “To some degree, ‘the defendant is made to suffer the uncertain consequences of its own undesirable conduct.’”[4]

But, as Judge Ginsburg—widely regarded to be the primary author of the per curiam Microsoft opinion—has written, that is a misreading of Microsoft.[5] In fact, this decision—this case—is the paradigmatic example of why that is a misreading of Microsoft.

As a general matter, the plaintiff must establish that the defendant’s conduct has the “requisite anticompetitive effect”[6]—that is, that it caused the alleged competitive harm.[7] The “reasonably capable of” standard has “limited applicability”[8] and permits an inference of causation only in special circumstances: 1) when the competitive threat allegedly affected by the defendant’s conduct is nascent; 2) when that conduct was already proven to have anticompetitive effect; and 3) in a government (as opposed to private) enforcement action.[9] “Only when these conditions are met may the government avoid having to show that the threat would have become a real competitor but for the alleged exclusionary conduct.”[10]

The intuition behind this is as follows: There might be multiple reasons—including ones not involving the defendant’s exclusionary conduct—that prevent a competitive threat from materializing. Normally, a plaintiff has to show that the defendant’s conduct—and not one or more of these other factors (like, e.g., that the rival was of such low quality that it couldn’t realistically have mounted a real challenge)—was the but-for cause of the challenger’s failure. But where that threat is inchoate, proving the hypothetical course of future competition in the market is effectively impossible. Thus, in circumstances where we’re confident that lessening the plaintiff’s burden won’t systematically lead to erroneous outcomes, we allow it to make out its prima facie case without demonstrating but-for causation:

The court pointed out that “neither plaintiffs nor the court can confidently reconstruct a product’s hypothetical technological development in a world absent the defendant’s exclusionary conduct.” Given this “underlying proof problem,” the Court may infer causation.[11]

According to Judge Ginsburg’s clarification of what the Microsoft court held, the limited circumstances that satisfy this standard are: 1) as noted, the threat is of the sort that can’t actually be proven—that is, the allegedly thwarted competition must arise from a speculative, but realistic, process that can’t be falsified; 2) the defendant’s conduct must be proven to be, in fact, sufficient to impede the materialization of such a threat (“[o]f critical importance is that the court’s causation standard was conditioned on its having found anticompetitive effects”[12]); and 3) the plaintiff must be a government enforcer.[13]

Obviously, the Google Search case involves a government enforcement action. But for Microsoft’s lighter causation standard to apply, it must also involve a nascent threat and conduct proven sufficient to prevent rivals from achieving minimum efficient scale. Arguably, neither is true in Google Search.

The holding in Microsoft that causation need not be perfectly proven was a function of those specialized facts. It was not, contra Judge Mehta’s approach to this case (and that of many others before him), “a matter of general tendency.”[14]

1. Causation may be inferred only when the competitive process is speculative The key question in Microsoft was the foreclosure of competition by a nascent competitor—where the entire theory of the case was built on a set of suppositions about the progress of technology, speculation about the unpredictable role the nascent competitor could play in disrupting competition in an established market, and uncertainty about whether Microsoft viewed it (Netscape Navigator) as a competitive threat.

That is not really the case in Google Search. Bing, obviously, and Yahoo! and others before and after it are/were not nascent competitors. Nor is Bing bringing an innovative disruption to the market that will follow an unknown course. Rather, it is a direct, close substitute for Google Search. And, of course, this is obvious to Google. It is distributed the same way; it is used the same way; it is not unknown or uncertain in its competitive relationship with Google Search. None of which means it was actually a competitive threat to Google (more on this later). But it does mean that the competitive process is well understood.

Why does this matter? Because it means that much less speculation is required about whether and how Bing could act as a competitive constraint on Google. We do have actual competition and consumer behavior to assess in understanding the extent of its competitive threat and whether Google’s challenged conduct impaired it. And we do not have to create an entirely hypothetical world in which establishing causation would be impossible.

None of that was true in Microsoft.

We know this, in part, because of another case the same court decided a few years after Microsoft: Rambus v. FTC.[15] With respect to the speculative extent of the but-for world and the viability of demonstrating causation, the facts in Rambus are more similar to the facts here than are the facts in Microsoft. In Rambus (which involved the selection by a standard-setting organization (SSO) of technology to be included in an industry standard) competition was direct and well-understood. The sole question was whether Rambus’s conduct (deception over its patent holdings, which led to the inclusion of its technology in the industry standard) enabled its technologies to monopolize the relevant markets to the exclusion of its rivals, or whether, had it disclosed and the SSO obtained assurances it would license its technology on RAND terms, it would still have obtained its dominant market position.

Of course, in Rambus—as everywhere—it was impossible to truly know the but-for world (i.e., what Rambus’s market position and that of its competitors would have looked like under different licensing terms). But the competitive process by which such an outcome could arise was straightforward, and its competitive alternatives were known. The same could not really be said of Microsoft.

B. Misreading Rambus In Rambus, the question was whether Rambus’s behavior led to the exclusion of rivals, or whether, even absent its behavior, rivals would have been excluded. That is the identical question that should have been asked here: Was Bing’s failure to gain more market share proved to be a function of Google’s distribution deals, or was it a function of consumer and distributor preferences for Google over its rivals?

As the court in Rambus found, the FTC’s reasoning (from which the court heard the appeal) was logically flawed, in exactly the same way the court’s reasoning is flawed in this case. It is therefore odd that Judge Mehta distinguishes Rambus and rejects the applicability of its legal standard on grounds that are superficial and unrelated to the relevant question of when a given legal standard should apply.

The consequence of this decision for the Google Search case was enormous. By relieving the plaintiffs of having to show but-for causation, Judge Mehta relieved them of the burden of proving their case. This is exactly why Rambus is so important.

1. What Rambus Says So, here’s what the court said in Rambus. First, the court laid out the standard:

The critical question is whether Rambus engaged in exclusionary conduct, and thereby acquired its monopoly power in the relevant markets unlawfully.

To answer that question, we adhere to two antitrust principles that guided us in Microsoft. First, “to be condemned as exclusionary, a monopolist’s act must have ‘anticompetitive effect.’ That is, it must harm the competitive process and thereby harm consumers. In contrast, harm to one or more competitors will not suffice.” Microsoft, 253 F.3d at 58…. Second, it is the antitrust plaintiff—including the Government as plaintiff—that bears the burden of proving the anticompetitive effect of the monopolist’s conduct. Microsoft, 253 F.3d at 58-59.[16]

Applying these principles, however, the implication of the FTC’s argument was ambiguous:

The Commission’s conclusion that Rambus’s conduct was exclusionary depends, therefore, on a syllogism: Rambus avoided one of two outcomes by not disclosing its patent interests; the avoidance of either of those outcomes was anticompetitive; therefore Rambus’s non-disclosure was anticompetitive.[17]

The Rambus court acknowledged that the first of these possible outcomes would be anticompetitive,[18] but on the second it found the causal link unclear.[19] And because this alternative was not inherently anticompetitive, the Rambus court rejected the FTC’s argument based on its failure to prove that Rambus’s conduct, and not simply its inclusion in the standard (even on less-favorable terms), led to its market position:

Here, the Commission expressly left open the likelihood that [the SSO] would have standardized Rambus’s technologies even if Rambus had disclosed its intellectual property. Under this hypothesis, [the SSO] lost only an opportunity to secure a RAND commitment from Rambus. But loss of such a commitment is not a harm to competition from alternative technologies in the relevant markets….

…Thus, if [the SSO], in the world that would have existed but for Rambus’s deception, would have standardized the very same technologies, Rambus’s alleged deception cannot be said to have had an effect on competition in violation of the antitrust laws.[20]

If the court was correct that only one of the two outcomes was anticompetitive, then its conclusion was inescapable. As Josh Wright has long (since 2009) maintained, “the D.C. Circuit’s causation standard [in Rambus] should not be controversial and appears eminently reasonable.”[21]

Both the Commission and the D.C. Circuit accept that there must be a causal showing that deception significantly contributes to some anticompetitive effect. The disagreement is over whether both possible paths actually involve anticompetitive effects. If one agrees with the Commission that both causal paths violate Section 2, a requirement that a plaintiff specify precisely which path resulted in an anticompetitive effect is unnecessary and likely unwise. However, if one believes that only one causal path constitutes a violation of Section 2, such a requirement is necessary….[22]

Importantly, the Rambus court held this despite recognizing that Rambus’s deception made the inclusion of its technology in the standard “somewhat more likely.”[23] That wasn’t enough, because the FTC failed to show that that wouldn’t have happened even without—that is, but for—Rambus’s deception. “The critical point is that the Commission bore the burden of demonstrating that Rambus’s deception caused the unlawful acquisition of monopoly power.”[24]

C. Misconstruing the Legal Standard Under Microsoft and Rambus Here, we can rewrite Rambus’s conclusion using the facts of the Google Search case and readily see its applicability:

Thus, if [distributors like Apple and Mozilla], in the world that would have existed but for [Google’s default distribution deals], would have [chosen] the very same [default search provider], [Google’s conduct] cannot be said to have had an effect on competition in violation of the antitrust laws.[25]

This is not how Judge Mehta assesses the Rambus decision, however. Instead, he distinguishes it on the tenuous grounds that it involved a different type of exclusionary conduct, in a different factual setting, and that, as a result, it is inconsistent with his reading of Microsoft:

Rambus does not establish a categorical rule that the anticompetitive effects of an exclusive agreement must be measured against a but-for world. That case involved deception to a standards-setting organization, a form of exclusionary conduct particularly susceptible to a finding of materiality…. In such circumstances, the D.C. Circuit deemed it appropriate to demand proof that Rambus’s deception in fact resulted in competitive harm. Nowhere, however, did the court suggest that such a strict standard of proof was required to demonstrate anticompetitive effects for other forms of exclusionary conduct, particularly exclusive dealing arrangements. Such a holding would be contrary to Microsoft, and the court in Rambus nowhere questioned that precedent. Rambus therefore does not require Plaintiffs to prove substantial foreclosure against a but-for world.[26]

But “deception to a standards-setting organization” is not a circumstance “particularly susceptible” to a but-for analysis compared to that of default search distribution deals. Indeed, it has more in common with the circumstances here than Microsoft does. That’s because, as noted, the but-for world in that case is easy to understand and analyze (even if, as in all cases, the but-for world is never a simple or certain calculation). It is in the Google Search case, as well. The but-for world in this case, as in Rambus, involves an essentially binary choice among known alternatives with a direct line between the relevant conduct and that choice. In Rambus, it was a choice by an SSO between two licensing regimes (one less restrictive, and one more restrictive) for Rambus’s patents in its standards, and Rambus’s deception could clearly affect that choice. Here, it is a choice by users between (essentially) two search engines, and the choice of default search provider can clearly affect that choice (because the cost of using the non-default is inherently higher).

Moreover (and as noted above), according to Judge Ginsburg, Rambus is not a special exception to Microsoft’s general rule; Microsoft is a special exception to Rambus. It is the nascency of the threat in Microsoft (which didn’t exist in Rambus) that leads to its uniquely truncated analysis and not the specific context of Rambus that somehow cabins its applicability:

Reading Microsoft and Rambus together, the key takeaway is that only when anticompetitive effects are shown (as required by Microsoft and Rambus) does the “reasonably capable of” causation standard apply to allegations that exclusionary conduct killed a nascent threat. Only when these conditions are met may the government avoid having to show that the threat would have become a real competitor but for the alleged exclusionary conduct.[27]

Nevertheless, misconstruing the legal standard under Microsoft and Rambus, Judge Mehta holds that Microsoft’s lighter, “reasonably capable of” standard applies:

The key question then is this: Do Google’s exclusive distribution contracts reasonably appear capable of significantly contributing to maintaining Google’s monopoly power in the general search services market? The answer is “yes.” Google’s distribution agreements are exclusionary contracts that violate Section 2 because they ensure that half of all GSE [general search engine] users in the United States will receive Google as the preloaded default on all Apple and Android devices, as well as cause additional anticompetitive harm.[28]

D. How We Know It Is Wrong

It is immediately obvious why, even if it weren’t a misreading of the case law, this cannot possibly be the correct standard—and why it makes no sense to suggest that a less strict standard of proof is particularly appropriate for exclusive-dealing arrangements.

We don’t need to ask if the agreements “reasonably appear capable of significantly contributing to maintaining Google’s monopoly power” because of course they are “reasonably… capable” of contributing to Google’s monopoly power. That’s why we have scores of antitrust cases looking at the effects of distribution agreements. If all that were required to win such a case were the reasonable capability of an agreement to contribute to a dominant firm’s competitive position, then no exclusive or quasi-exclusive agreement would ever be legal.[29]

We ask whether exclusive agreements “reasonably appear capable” of maintaining monopoly, instead of asking whether they actually maintained monopoly, only when the connection between what is being excluded and monopoly maintenance is unclear—as in Microsoft, where it was unclear if Netscape Navigator could actually constitute a competitive threat to Microsoft’s operating-system dominance. But here that is not a question.[30] Where the rival is a direct competitor with a close substitute product, an exclusive deal by a dominant incumbent is always capable of foreclosing the rival. In such circumstances it is simply not consistent with the plaintiff’s burden of proof to allow them to show only that the challenged conduct is the sort that could maintain monopoly, rather than that the defendant’s conduct in fact caused anticompetitive harm.

Difficult as it may be, demonstrating this in an actual competition case like Google Search is not impossible. Indeed, as I discuss below, there is copious evidence in the case that the cause of Bing’s limited market share was not Google’s default distribution deals, but Bing’s lack of quality. Any comparable evidence in Microsoft would have been wholly speculative—but not here.

As Judge Ginsburg notes (again challenging the general applicability of Microsoft’s truncated legal standard):

As in Microsoft, the “but-for” world in Rambus was highly uncertain.[[31]] In both cases, one could reasonably find the defendant’s conduct may have caused the defendant to acquire or maintain its monopoly power. At the same time, it was also possible that the defendants in those cases would have acquired or maintained their monopoly power even absent their anticompetitive behavior. The court in Rambus held the government must bear the burden of that uncertainty. This burden applies in all Section 2 cases….[32]

But it is also arguably the case that, properly construed, Google’s default distribution deals were not capable of excluding Bing from the market. We turn to this next.

II. The Failure To Prove That Defaults Are Exclusive Judge Mehta holds that Google’s distribution deals had anticompetitive effects “because they ensure that half of all [general search engine] users in the United States will receive Google as the preloaded default on all Apple and Android devices.”[33] He derives this conclusion (which he repeats several times) from the testimony of one of the plaintiffs’ economic experts, Michael Whinston, who finds that “50% of all queries in the United States are run through the default search access points covered by the challenged distribution agreements.”[34]

Judge Mehta’s claim is that, because users don’t switch away from defaults very often, and because the “market realities” of the search market—given Google’s default distribution deals—are that half of all relevant searches occur through access points covered by those deals, we can conclude that those deals foreclose competitors from 50% of the general search market (a big enough amount to constitute anticompetitive foreclosure).

But this is not how you measure foreclosure, and the assertion that that number shows that Google’s default deals—and not something else—“significantly contribut[e] to maintaining Google’s monopoly power”[35] is fallacious.

Just because the government shows there is “significant” usage of Google’s default services ex post—meaning, given Google’s default deals, and after consumers have chosen which search engine to use—does not mean it has proven that 50% of the market was foreclosed from access by competitors. Nor does it mean that the government has met its burden of proving that this was caused by the agreements. Perhaps all of those consumers are inframarginal consumers who would have chosen Google Search anyway, even if it weren’t the default. Perhaps all of them were perfectly capable of accessing Bing, but simply chose not to. In that case, the ex-post usage data would tell us nothing about the extent of foreclosure.

Demonstrating foreclosure requires comparison to the but-for world; it requires showing that, absent Google’s deals, Bing would have had access to and been used by substantially more marginal consumers (those who view Bing and Google as effective substitutes and wouldn’t expend extra cost to use one search engine or the other).[36] This is so for three reasons.

First, these agreements are not, in fact, “exclusive.” That matters, because it is much harder to infer that it was the agreements, and not consumer preferences for a particular product, that caused Google’s dominance when consumers have ample opportunity to exercise their preferences to not use Google Search.

Second, and relatedly, looking at the share of searches ex post that go through these defaults is less telling, and the number can’t simply be accepted at face value, when searching via the default service is not the only option. As in Rambus, Google’s maintenance of a large share of these searches is just as consistent with a non-problematic set of facts (consumers simply prefer Google Search and, knowing that, distributors offer Google as the default) as with a problematic one (consumers use Google Search only because it is the default service, and distributors offer Google Search as the default only because Google pays them to do so).

Finally, failing to demand that the plaintiffs demonstrate that Google’s default distribution deals actually foreclosed competitors, and allowing them effectively to prove their case by showing only that the deals made Google’s large market share “somewhat more likely,”[37] erases the requirement that plaintiffs can win only if they prove that challenged conduct causes anticompetitive harm. This is an invitation for dramatically erroneous decisions.[38] As Judge Ginsburg and Koren Wong-Ervin write:

Without requiring proof of but-for causation, there is great risk of erroneously condemning [conduct] that may be procompetitive. Consider, for example, Herbert Hovenkamp’s proposal presumptively to condemn acquisitions by a monopolist of “any firm that has the economic capabilities for entry and is a more-than-fanciful possible entrant, unless the acquired firm is no different from many other firms in these respects.” “More-than-fanciful” is an invitation to speculate, not a standard of proof.[39]

Let’s examine these problems with Judge Mehta’s legal standard based on Michael Whinston’s market-share numbers a little more thoroughly.

A. Establishing the Amount of Competition: Minimum Efficient Scale So much of Judge Mehta’s conclusion that Google’s default deals were exclusive (despite not actually being “exclusive”) turns on his contention that defaults are the best way for search engines to distribute themselves,[40] and, therefore, that Google tying up default access was sufficient to establish the requisite exclusivity for an exclusive-dealing claim.

But as the Rambus court points out, “conduct [does] not violate antitrust laws where absent that conduct consumers would still receive the same product and the same amount of competition.”[41] This is a statement that the but-for world matters, and the relevant question is the relative “amount of competition.”

So, how do we measure the “amount of competition”? Well, we can’t measure it as Judge Mehta and Prof. Whinston do, by looking at what people choose ex post.[42] This is a fairly useless statistic. It says next to nothing about what share of marginal searchers use Google because it is the default, and what share use Google because they prefer it. (And, of course, it says nothing about what share are inframarginal consumers who would use Google regardless of the cost of accessing it). That, in turn, tells you nothing about the amount of competition that existed before they made their choices.[43]

Nor can we simply look at the scope of the default distribution agreements. If people can still easily choose other search providers despite the default deals, those deals cannot be said to foreclose competition—at the very least, not in proportion to the share of the market covered by those deals.

We can, however, examine whether rival search providers were able to achieve minimum efficient scale in such an environment—that is, whether the conduct at issue was capable of precluding otherwise viable competitors from gaining enough customers to sustain themselves as a competitive alternative. Indeed, this is exactly what Google argued was required: “[Google] contends that Plaintiffs have failed to establish a link between the agreements, the denial of sufficient scale to rivals, and anticompetitive effects….”[44] It is also what Judge Ginsburg says is required: “The court [in Microsoft] inferred harm to the competitive process from these findings, in essence recognizing that minimum-efficient scale is the mechanism by which exclusionary conduct harms competition.”[45]

Yet nowhere does Judge Mehta effectively grapple with the minimum-efficient-scale question. He does discuss the importance of scale in search, and he holds that Google is of higher quality than Bing and other competitors, in part, because of its scale. But he never really asks or answers the questions 1) whether this difference is uniquely attributable to Google’s default distribution deals, and 2) whether those deals preclude rivals from effectively competing, or simply make it harder for them to compete because they raise the cost of achieving comparable quality.

Now, the evidence here, as far as we can assess it from the decision, is not entirely clear-cut. But the answer isn’t really the issue. The real issue is that this is an essential question, on which the government bears the burden of proof, and it was simply missing from the opinion. In other words, this means the holding in the government’s favor is unsupported as a matter of law.

B. De Facto Exclusivity

Even so, let’s assess how well the evidence supports the conclusion that the default deals were really “de facto” exclusive, and that they prevented rivals from achieving the minimum efficient scale.

We have no idea if the default deals had anything to do with it, but we do know that Neeva, a once-promising general search engine, apparently had a hard time competing for users and went out of business after about four years.[46] On the other hand, Bing, Yahoo!, DuckDuckGo, Ecosia, and Brave all exist and continue to compete in this environment. Yes, they have relatively small market shares, but apparently they have enough scale for viability.

Similarly, on the one hand, there has been clear “competition for the market” between Bing and Google with respect to the default access points on Apple devices and in Mozilla’s Firefox browser. On the other hand, there is less clear competition with respect to Android OEMs (in Google’s favor)—but there is also less clear competition (actually, there is none) between them for default placement in Edge (in Bing’s favor).

1. Misunderstanding the ‘power of defaults’ With respect to the conclusion that the cost to users of choosing the non-default option is higher, that is inherently true, of course. But it is arguably trivially so. Judge Mehta spends a fair amount of time on this question (although not in the proper context of this but-for assessment) before arriving at his conclusion that being a non-default is tantamount to being excluded. His analysis, however, is unconvincing.

First, the analysis is heavily influenced by the assertions of the government’s behavioral expert, Antonio Rangel.[47] As I will discuss below, some empirical data specific to the context at hand is used to bolster the more general behavioral claims of the government’s expert (which I believe cuts in many respects against Judge Mehta’s conclusions). But it is clear that any ambiguity was resolved by Judge Mehta in favor of asserted general behavioral patterns:

That users overwhelmingly use Google through preloaded search access points is explained in part by default bias or the “power of defaults.” The field of behavioral economics teaches that a consumer’s choice can be heavily influenced by how it is presented. The consensus in the field is that “defaults have a powerful impact on consumer decisions.”[48]

There are access points other than the default that can be used to distribute a GSE, but those channels are far less effective at reaching users. That is due in part to users’ lack of awareness of these options and the “choice friction” required to reach these alternatives.[49]

[A]s Dr. Rangel convincingly explained, the combination of user habit, Google’s brand, and choice friction creates a powerful default effect that drives most consumers to use the default search access points occupied by Google.[50]

The main problem with this is not so much that behavioral science is wrong (surely, it is correct that the more friction there is to switch from a default, the less likely someone will switch), but that it is not dispositive. This makes it a weak basis for meeting the plaintiffs’ burden. It is also not clear that general behavioral theories have the same traction in the specific environment at issue. As my colleague Dan Gilman has discussed, the learnings of behavioral science were established in settings quite different than search engine defaults.[51] “Generalizing findings from, e.g., cereal-box placement to the durability of search engine defaults seems a stretch (or entirely speculative).”[52]

To be sure, Rangel’s testimony did purport to apply those learnings in context.[53] But what really matters in this case is not the direction of the behavioral assumptions, but the magnitude. (Again, no one disputes that defaults grant some benefit, nor that promoting one’s products—i.e., marketing—can influence consumer choice). The claim here is that the availability of switching does not sufficiently negate the effective exclusivity of defaults to permit rivals to compete. That claim depends on the extent to which users tend not to switch away from defaults, not just the fact that they sometimes don’t.

Among other things (more of which are discussed below), it must be noted that, even when users are presented with a neutral option (e.g., a “choice screen”), they appear to make essentially the same choices as when presented with a default. In Europe, where Google has since 2020 implemented a search engine choice screen on Android following the EU’s 2018 antitrust decision against it,[54] Google’s share of the search engine market has barely budged.[55]

By the same token (at least when Google is the non-default) users are apparently quick to switch from a less-preferred default in order to get access to Google Search:

In a 2016 experiment, Mozilla switched the default GSE on both new and existing users from Google to Bing. By the twelfth day, Bing had kept only 42% of the search volume. After some additional time, those numbers dropped to 20–35%….[56]

It is exceedingly difficult to square these facts with the court’s conclusions on the functional irrelevance of non-default options.

C. Overlooking Evidence of User Switching Behavior and Impressionistic, Not Quantitative, Conclusions The majority of the decision’s discussion of consumers’ behavior around defaults is largely impressionistic, not quantitative. For example, Judge Mehta notes that:

Another non-default search access point is the bookmarks page on a browser. The Safari “Favorites” page, for instance, contains preloaded icons to access Google, Bing, and Yahoo. A user also can add a new search engine on that page. But few consumers use this channel, as it first requires finding the Favorites page in a new Safari tab, which requires an “extra click.” Google itself receives only 10% of its searches on Safari through the bookmark.[57]

Strictly speaking, 10% is “quantitative,” but the decision’s conclusions based on this data are decidedly impressionistic. Judge Mehta asserts that Google receiving “only” 10% of searches on Safari through the bookmark is an insignificant volume. But in that setting—where Google Search is already the default on Safari and can be accessed simply by typing in Safari’s URL bar, and in which it is alleged that virtually no one ever uses anything other than default search on Safari—why would there be any searches on Google via the bookmark? If that number of searches is at all different from zero, it would appear to demonstrate that it is indeed a relevant channel by which consumers can find search engines, including non-default ones. In other words, 10% may be “insignificant” as a share of Google searches, but it is quite significant with respect to the relevant legal standard.

Indeed, “nearly 40% of queries on Apple’s mobile devices flow through non-default search access points, such as default bookmarks or organic search.”[58] Judge Mehta dismisses this by arguing that “the fact that some consumers access search on non-default access points is not dispositive on exclusivity.”[59] “Not dispositive” is not quantitative. While the statement is true, the burden of proof is on the plaintiffs, and this not being dispositive cuts against them, not against Google.

Elsewhere, Judge Mehta also rejects the actual evidence of people switching to the non-default on PC desktops. It turns out that a lot of Windows desktop users download Chrome and use Google Search there, rather than relying on Bing, which is the default search engine in the Edge browser:

To be sure, downloads of an alternative browser occur with greater frequency on Windows desktop computers. On such devices, Edge is the default browser and Bing is the default search engine. Yet, Google’s search share on Windows devices is 80%, with most of the queries flowing through the Chrome default, which means Chrome was downloaded onto the device.[60]

Despite this, Judge Mehta is quick to note that, for those users who still use Edge, Bing is the most used search engine:

The power of defaults is evident, however, from the share of Bing users on Edge. Bing’s search share on Edge is approximately 80%; Google’s share is only 20%. Even if one assumes that some portion of those Bing searches are performed by Microsoft-brand loyalists, Bing’s uniquely high search share on Edge cannot be explained by that alone. The default on Edge drives queries to Bing.[61]

One might suggest that all this shows is that people really prefer Chrome to Edge, not that they prefer Google Search to Bing enough to switch away from the default (on either browser). Except that, as the opinion points out, “Google’s dominance on Windows cannot, however, be attributed simply to the popularity of Chrome. Google had an 80% search share on Windows when Chrome first launched, and that share has remained steady ever since.”[62] If that’s the case, it can mean only that the default search on Windows desktops isn’t very sticky—and it isn’t just because users prefer Chrome to Edge; apparently it’s because they prefer Google Search to Bing.

So how does the court conclude that it supports the “power of defaults” that, of those users who don’t switch to Chrome on Windows desktops, approximately 80% use Edge’s default? If most Windows users who prefer Google Search to Bing switch from the default by downloading Chrome instead of by switching the default in Edge, then of course most of those who remain on Edge will use Bing. If they preferred Google to Bing, they would have switched to Chrome.

As Judge Mehta notes elsewhere, “[m]any users do not know that there is a default search engine, what it is, or that it can be changed.”[63] Perhaps. But then again, apparently, many users do know that Chrome gets them access to their preferred search engine. Whatever “choice friction” impedes the movement away from the default search engine on Windows desktops, it is not strong enough to prevent people from maneuvering around it in spades—they just don’t often do so directly by switching the default search engine in Edge.[64]

The opinion also brushes off these examples of default switching by asserting that they merely “confirm that the default effect is weaker when the alternative is a dominant firm with high brand recognition backed by a quality product.”[65] First, this is pretty hand-wavy and impressionistic. Maybe it’s true; in fact, I’m sure it’s true to some extent. But for an opinion that otherwise regularly says we have to look at “market realities,” not the world as it might be, this is a weak basis to conclude that evidence of people switching away from defaults doesn’t really show that people switch away from defaults.

Regardless—isn’t the ability to attract users because you are widely used, have good brand recognition, and have a demonstrably high-quality product pretty much the definition of competition on the merits? Indeed, one could recast Judge Mehta’s statement as precisely the opposite of the decision’s holding: Google’s default agreements can’t be deemed to have caused anticompetitive harm because defaults are readily overcome by high-quality, reputable alternatives.

It should also be noted (but, unfortunately, Judge Mehta doesn’t say it) that Microsoft is also a “dominant firm with high brand recognition backed by a quality product.”[66] What’s good for the goose is good for the gander: Microsoft has plenty of market heft to ensure that its products don’t languish in obscurity in the face of consumer inertia.[67]

III. The Scale and Quality Argument: A Double-Edged Sword All of which raises the question: Is Bing a comparably high-quality product or not? Determining that seems like a pretty important prerequisite to determining whether its small market share is a function of anticompetitive exclusion or a failure to compete on the merits. Yet Judge Mehta is, at best, equivocal on this. First, he notes that:

Everyone agrees that Google’s distribution agreements did not cause Microsoft’s past underinvestment in search. Microsoft “missed” the mobile revolution and was unable to improve its browser, Internet Explorer, until it used Google’s rendering engine, Chromium. Some of Microsoft’s quality issues also were attributable to its poor index.[68]

Yet, “[u]ltimately, Microsoft committed significant capital to search.”[69] And “[t]hat investment (combined with secured distribution on Windows devices) has allowed Bing to achieve quality parity with Google on Windows desktop devices.”[70]

Elsewhere, however, Judge Mehta concludes that “Google’s exclusive agreements… deny rivals access to user queries, or scale, needed to effectively compete,”[71] and that “[t]his perpetual scale and quality deficit means that Microsoft has no genuine hope of displacing Google as the default GSE on Safari. As Apple’s Eddy Cue testified, there was ‘no price that Microsoft could ever offer [Apple]’ to prompt a switch to Bing, because it lacks Google’s quality.”[72]

I admit that it’s unclear to me why Bing’s apparent quality parity in desktop search doesn’t redound to its benefit in mobile search. Indeed, it has to be noted that the court did not identify separate relevant markets for mobile and desktop search; it identified a single “general search services” market.[73] So, it’s a little unclear, but it seems that, according to the court, ultimately Bing simply isn’t up to Google Search’s quality standard.

A. The Failure to Distinguish Between Exclusion and Low Quality: A Catastrophic Legal Blunder The problem is that it is precisely past decisions and their alleged influence on current outcomes that the court uses to establish the proposition that Google’s default deals are anticompetitive. As I keep pointing out, however—and as Judge Mehta appears here to recognize—plaintiffs cannot meet their burden of proof that Google’s deals were exclusionary by pointing to Bing’s limited success, if the court agrees that Bing’s low quality could also have caused it. And here, Judge Mehta also concedes that those deals didn’t cause Bing’s lower quality, either (“Google’s distribution agreements did not cause Microsoft’s past underinvestment in search.”).[74]

For the court to sustain its claim that Microsoft is the appropriate guiding precedent (and thus, that the government has made its case under Microsoft’s “edentulous” legal standard), it has to be the case that Bing could have outcompeted Google on quality if not for the agreements—that is, that it “reasonably constituted [a] threat.”[75]

By conceding that Bing was unable to secure distribution deals comparable to Google’s because of its low quality, however, the opinion (and the government, of course) fails to do this. As such, they fall right into the trap explained by Greg Werden:

But if operating at a much smaller scale than Google makes rival search engines uncompetitive, their fate was sealed when Google achieved a dominant share. The government posits no scenario in which any rival search engine could have substantially closed the scale gap…. If the government’s scale contentions are fully credited, the conduct that is at the heart of the case did not maintain Google’s dominant share. And any conduct that could not have maintained dominance most likely served a legitimate purpose. One way or another, the elements of the monopolization offense cannot be established under the government’s view of the facts…. But the government does not contend that rival search engines ever posed a real threat to Google’s monopoly. Indeed, it claims to have proved just the opposite.[76]

That’s a catastrophic problem for the opinion’s holding. Nevertheless, Judge Mehta does find that Bing is not a viable competitor on mobile. Yet he refutes Google’s claim that this is because of Microsoft’s own business failures, rather than its inability to gain scale:

Google also maintains that the quantity of user data is less important than how it is used, and if its rivals had Google’s business foresight and drive to innovate, they too could win default distribution. But that position blinks reality. Apple’s flirtation with Microsoft best illustrates this point. Microsoft has invested $100 billion in search in the last two decades and its quality now matches Google’s on desktop search. Yet, Microsoft’s failure to anticipate the emergence of mobile search caused it to fall behind, and with Google guaranteed default placement on all mobile devices, Microsoft has never achieved the mobile distribution that it needs to improve on that platform.[77]

Isn’t Microsoft’s “failure to anticipate the emergence of mobile search” precisely the sort of competitive failure that Google is talking about? How is Microsoft’s diminished scale attributable to Google’s conduct if it was Microsoft’s independent business decisions that denied it the ability to compete effectively?

This is exactly why a plaintiff must prove that the defendant’s conduct, and not an excluded rival’s own mistakes, were the cause of the rival’s inability to compete. Otherwise, the law would be enlisted to rectify competitors’ poor business decisions, rather than to protect the competitive process.

1. Even Judge Mehta knows ‘reasonably appears capable of’ is the wrong standard It also bears noting that Judge Mehta already—and properly—threw out exactly this sort of claim on summary judgment when he dismissed the plaintiff states’ claims that “Google’s targeting of SVPs [specialized vertical providers] caused anticompetitive effects in the proposed markets.”[78] But the basis on which he did so is shockingly at odds with the basis for his decision in the government’s favor in this case. Citing Microsoft, in fact, Judge Mehta held in his summary judgment opinion that:

Speculation that Google’s conduct “can reasonably be expected,” “might,” or “could potentially” degrade SVPs and make them less attractive partners to Google’s rivals is not evidence of anticompetitive effects in the relevant markets. Plaintiffs are required to show with proof “that the monopolist’s conduct indeed has the requisite anticompetitive effect,” and they have fallen well short.[79]

And, as he notes elsewhere in his summary judgment opinion, also citing Microsoft, “[t]he sole issue for the court to resolve is whether Google has maintained monopoly power in the relevant markets through ‘exclusionary conduct’ as opposed to procompetitive means.”[80]

The words “can reasonably be expected”—rejected by Judge Mehta in his summary judgment decision—might ring a bell, as they are awfully close to the “reasonably appear capable of” standard adopted by the court in this decision.

B. Less-Efficient Channels of Distribution: Misapplying Microsoft Again Finally, there is another problem with the legal sufficiency of the exclusivity claims, and it stems, once again, from a misapplication of Microsoft.

Judge Mehta claims that “mere user access to these less efficient channels of distribution does not render the browser agreements non-exclusive.”[81] A significant part of the defense of this position turns on an analogy to Microsoft and the argument there that it was sufficient that Microsoft foreclosed access to the best method of distribution. Indeed, the next sentence after the quote above is, “Microsoft again illustrates the point.”[82] But does it?

Judge Mehta says this case is the same as Microsoft where the court “reject[ed] the argument that Microsoft’s licensing agreements with OEMs were not exclusive ‘because Netscape is not completely blocked from distributing its product,’ as ‘although Microsoft did not bar its rivals from all means of distribution, it did bar them from the cost-efficient ones.’”[83] He then asserts that “[t]he record here resembles that in Microsoft. Users are free to navigate to Google’s rivals through non-default search access points, but they rarely do.”[84]

But this elides a couple of key things.

First, the Microsoft court didn’t look ex post at what consumers did (which, as I tire of pointing out, could be attributable to either anticompetitive conduct or consumer preferences); it looked at which channels of distribution were available and if they were viable substitutes, regardless of whether they were actually used or not.

The analogy to Microsoft fails most obviously on the point that the “market realities” have changed a lot since the late 1990s. Downloading Netscape from the internet was wholly unfamiliar, exceedingly complex, and truly difficult for PC users back then—a real “choice friction” and thus not really a viable alternative. But downloading a competing search engine or browser today is trivially easy, and users do it all the time (to the tune of 12.6 billion app downloads in the United States in 2023 alone).[85] In this environment, the fact that users don’t download or use competing general search engines sufficiently to displace Google Search despite the ease of doing so suggests that it is consumer preference for Google Search, not the relative inefficiency of the channel of distribution, that causes this result.

Instead, Judge Mehta concludes that, while “a user can download Chrome, Edge, or [DuckDuckGo] onto an Apple device,” “[t]his, too, is not an easily accessible search point, as it involves similar choice friction as acquiring a search application. Google receives only 7.6% of all queries on Apple devices through user-downloaded Chrome.”[86]

Not only is downloading an application trivially easy, but the fact that Google receives only 7.6% of search queries on Apple devices through Chrome, but “most”[87] of its queries on Windows desktops through user-downloaded Chrome is decidedly ambiguous. Maybe that shows that people download Chrome on Windows not to get easy access to Google Search but because the Chrome browser is superior to the Edge browser, while it is not any better than Safari. But it is also consistent with the conclusion that people aren’t prevented from accessing their preferred search provider (Google Search)—they just don’t need to download Chrome on Apple devices to get easy access to it, while they do need to do so on Windows devices.

Second, the opinion says that “[t]he court in Microsoft did not say that these contracts caused zero market foreclosure merely because Internet Explorer had other, less-efficient means of reaching users.”[88] True. But the court in Microsoft also didn’t say that any amount of difference in distribution efficiency was sufficient to maintain that a non-exclusive agreement was effectively exclusive. As noted, it is now trivially easy to switch search providers on virtually every platform and at multiple decision points on each. Defaults don’t prevent that, and prioritized placement (from, e.g., a spot on the Android home screen) doesn’t even crowd out alternatives once they are downloaded (which can then be similarly accessed from priority positions on the home screen). “Very slightly less efficient” could still be “efficient.” The fact that the difference between the foreclosed and available channels of distribution in Microsoft was large enough to matter does not mean that the difference between them in Google Search is big enough to matter.

1. So, Dentsply is good law, but Rambus isn’t? In response, Judge Mehta goes back to ex post user conduct to hold that the fact that users don’t often use these alternatives shows that the difference does matter here, and that Google’s default distribution deals are effectively exclusive and lead to foreclosure:

Sure, users can access Google’s rivals by switching the default search access point or by downloading a rival search app or browser. But the market reality is that users rarely do so. The fact that exclusive agreements allow users to reach rivals through other means does not make the foreclosure number zero.[89]

But it cannot be a sufficient argument that “the market reality is that users rarely do so.” That market reality is exactly what is at issue in the case. Using the lack of user uptake from trivially easy alternative distribution channels as evidence that those alternative distribution channels aren’t relevant assumes the conclusion. It’s poor legal reasoning.

Judge Mehta is correct, however, that “‘[t]he mere existence of other avenues of distribution is insufficient without an assessment of their overall significance to the market.’”[90] If only he had demanded such an assessment.

The Dentsply case that Judge Mehta cites for this proposition was (in my opinion) wrongly decided. It shouldn’t be held up as the standard of analysis and, in any case, it was in the 3rd U.S. Circuit Court of Appeals and not binding precedent. But even so, Dentsply dealt with exclusive agreements that included a term explicitly prohibiting authorized distributors from selling rivals’ products, thus arguably making it extremely difficult for those products to be accessed by the ultimate consumer. This case is different. None of Google’s agreements include terms prohibiting its counterparties from dealing with anyone else. And here, competing products are available to the ultimate consumer, and they show up on users’ devices in locations virtually identical to Google’s.

In any case, the Dentsply court does not rely on ex-post uptake to support its claim that alternative distribution channels are insignificant (although it does look at that statistic on occasion). Instead, it describes in detail the qualitative differences between the channel of distribution foreclosed by Dentsply and the alternatives, finding that the alternatives are decidedly less attractive. Here, by contrast, the only thing that distinguishes default placement from the other channels of distribution is alleged “choice friction.” Otherwise, they are, quite literally, identical (or, as in the difference between, say, search bar integration and a home-page bookmark, trivially different). That makes assessing their “overall significance to the market” dependent on what is being distributed, and not solely the channel of distribution itself.

2. In fact, we know from other parts of the decision that ‘less-efficient’ alternatives can’t be dismissed Later, also quoting Dentsply, Judge Mehta asserts that:

In the end, Google’s dismissal of the importance of scale is inconsistent with market realities. Google often warns that competition is “only a click away.” However, “[t]he paltry penetration in the market by competitors over the years has been a refutation of [that] theory by tangible and measurable results in the real world.”[91]

This misses the mark for the same reason. There is plenty of evidence to demonstrate that competition is just a click away. In fact, some of it was evidence the court used to exclude specialized vertical search providers (e.g., Amazon and TripAdvisor) from the relevant market. Without challenging that conclusion here (although I do think it has problems), it appears eminently “tangible and measurable” to the question of whether users will switch to alternative search engines that, when the alternative is demonstrably superior for the query at issue, they do so in droves:

Google views competition from SVPs as “intense for commercial clicks.” A 2020 Bank of America study reported that 58% of users search Amazon first when they seek to make an online purchase, as opposed to only 25% who go first to Google, demonstrating Google’s secondary status as a starting point for users with high commercial intent….

…Microsoft recognizes that “if Bing or Google were not doing vertical searches well, or at least not having organic results that people could click to get to vertical search engines,” users might bypass GSEs and instead search directly on Amazon from the outset….

…[A]nalysis show[s] that a query sample of Google’s top 25 non-navigational shopping queries attracts more queries weekly on Amazon (3.7 million) than Bing (0.4 million)…, [and] that Yelp’s local query volume is higher than Google’s and much higher than Bing’s.[92]

None of these alternative vertical search engines is installed as the default. And yet, when consumer preference is strong enough—when they produce better results—consumers have no trouble using them. Whether or not this is sufficient to affect the court’s relevant market or market-share analysis, it is surely enough to demonstrate that users are not locked into defaults when the “choice friction” required to switch from them is small relative to the benefit. That, in turn, is a function of the quality of the search provider, not the method by which it is accessed.

IV. Getting It Wrong on the Substantiality of Foreclosure, Too The “substantiality” of foreclosure must also be briefly addressed, for similar reasons. While the opinion downplays its significance as a search engine distribution channel, Windows desktops constitute a substantial share of the distribution market. Windows accounts for 64% of desktop operating systems and almost 30% of all operating systems across all platforms in the United States.[93] On these devices, Bing is the default search engine. So, right out of the box, the share of the market that Google could even possibly foreclose is reduced by Windows’ 30% market share.

Of the remaining 70%, we know that small but non-trivial portions are not actually foreclosed to competitors. We know this from the ex-post data showing, for example, that “5.1% of all searches on iPhones are conducted on a GSE other than Google [where it is the default].”[94] We also know that, on Android, “[a]lthough OEMs must preload the Google Search Widget, users can delete it. As of 2016, there were about 200,000 logged widget deletions daily.”[95] Also, “Samsung already preloads a second browser—its proprietary S browser—on all Samsung devices.”[96]

We also know that “nearly 40% of queries on Apple’s mobile devices flow through non-default search access points, such as default bookmarks or organic search.”[97] Of course, a great number of these searches are performed on Google Search anyway.[98] But these are searches performed by users who demonstrably navigate around the default. By definition, they are not foreclosed to Google’s competitors.

Indeed, simultaneous with the Google default deals, Bing is, in fact, distributed by these counterparties to Google’s deals. Thus, as the result of an agreement with Microsoft, Bing shows up as an option on Safari’s homepage and on the Safari “Favorites” page, “which contains preloaded icons to access Google, Bing, and Yahoo.”[99] Mozilla has a “this time, search with” feature on Firefox “which allows users to select a different search product from its ‘Awesome Bar’ for a given query.”[100]

Again, Android is actually a somewhat unique case, and there the absence of true foreclosure is almost entirely dependent on the availability of end-consumer choice (which, again, is far from irrelevant). But even if we assume zero distribution of Bing on Android devices,[101] it still has unfettered access to distribution on Windows devices and is still distributed alongside Google on Apple devices and in Firefox.

The bottom line is that, even measured by ex-post consumer behavior, rivals are not foreclosed from access to consumers. And measured by the availability of access to rival search engines (whether consumers choose to use them or not), competitors are not actually foreclosed from distribution on any devices or in any browsers at all. To be sure, the remaining effective foreclosure level could be “substantial.” But nowhere does the court’s opinion demonstrate this. As plaintiffs have the burden of proof, the existence of meaningful consumer usage and availability, despite purported exclusive agreements, should have been deemed by the court to undermine the government’s case, not support it.

V. The Fateful Conclusion that Bing Isn’t a Real Competitor and the Problem of Remedy Finally, I have to say a word on remedy here, although I do so for now only insofar as it bears on what I have been arguing; there are many other arguments about remedy that make this holding problematic. But here is one, and it hearkens back to Greg Werden’s Catch-22.[102]

The jig was up for the plaintiffs in this case once they argued that Bing was not a viable competitor to Google Search. In the world of that “market reality,” no reasonable remedy would do any good to rectify the allegedly anticompetitive circumstances. And the court accepted the government’s quality arguments pretty much wholesale:

The market reality is that Google is the only real choice as the default GSE. Apple’s Senior Vice President of Services, Eddy Cue, put it succinctly when, in a moment of (perhaps inadvertent) candor, he said: “[T]here’s no price that Microsoft could ever offer [Apple] to” preload Bing. “No price.” Mozilla stated something similar in a letter to the Department of Justice prior to the filing of this lawsuit. It wrote that switching the Firefox default to a rival search engine “would be a losing proposition” because no competitor could monetize search as effectively as Google. A “losing proposition.” If “no price” could entice a partner to switch, or if doing so is viewed as a “losing proposition,” Google does not face true market competition in search.[103]

But if “no price” could entice a partner to switch to Bing, and Bing is not truly a competitor to Google in search, then, as Greg Werden says, “the conduct that is at the heart of the case did not maintain Google’s dominant share.”[104]

The Microsoft decision relies on the contention that, although unproven, Netscape Navigator was a viable competitive threat to Windows. Thus, the government had to prove in that case that the threats to Microsoft’s operating-system monopoly were real, even if it didn’t have to prove the threats would have succeeded but for Microsoft’s conduct. The government’s burden is at least as high here.

And yet, in the quote above, Judge Mehta essentially finds that the government didn’t meet even this burden. He finds, in effect, that it wasn’t the nature of Google’s agreements that contributed to Google’s continued monopoly power; it was the fact that no distributor would ever choose Bing as the default—at any price. That conclusion means that it was Bing’s low quality that excluded it from default distribution and the reason “Google does not face true market competition in search”[105] is a function of quality, not Google’s deals.

That’s already fatal to the case. The remedy point is this: That same market reality means that no remedy prohibiting Google from entering into such agreements will rectify the situation. It means that Apple, Mozilla, Samsung, et al. will still choose Google as the default, even if Google is forbidden from paying them a revenue share (or even a set price) to do so—they will just forego the revenue from doing so, and Google will get a windfall.[106]

Yet it is hard to conceive of any other remedy that follows from Judge Mehta’s analysis in this decision. The decision is laser-focused on the determination that Google’s default distribution deals were (effectively) exclusive and thus foreclosed a substantial share of the market and deprived rivals of scale. Everything in the decision comes down to the default nature of the deals. It stands to reason that any remedy would be limited to removing the one-deal characteristic that, according to the court, makes the agreements anticompetitive.

Cutting against this somewhat is Judge Mehta’s conclusion that, having been deprived of scale by Google’s distribution deals, no rival is in a position to secure a default deal of its own.[107] But it is by no means clear from the decision that, in the absence of default deals with Google, rivals would be unable to compete effectively through other channels of distribution or compete for such deals in the future. The problem is that, because the court has no ability to prohibit Apple and Mozilla from offering default search engines without a Google deal, even prohibiting Google from entering into those deals doesn’t mean it won’t still be offered as the default, and this may not change the competitive landscape enough to enable Bing and other rivals to compete effectively.

Perhaps one might think that Google should just be compelled to share its data (and/or other “secret sauce”) with rivals so they have the quality necessary to actually win default placement deals. But that doesn’t work either. In the first place, this would be a clear acknowledgment that it is quality, not default distribution deals, that impedes rivals’ commercial success. If that is the only effective remedy, then the necessary legal basis of the holding is undermined.

Secondly, implementing that remedy would entail mandating that Google enter into deals with competitors to help them compete. This is anathema to U.S. antitrust law.[108] So much so that Judge Mehta himself threw out one of the plaintiff states’ claims in this case on exactly that basis:

Plaintiff States seek to bypass the “no duty to deal” doctrine entirely…. …The concerns that animate the no-duty-to-deal principle are equally applicable here. Primarily, adjudicating Plaintiff States’ claim would require the court to act as a “central planner” that endeavors to identify the proper “terms of dealing.” Their claim requires grappling with a host of questions that the court is ill-equipped to handle…. And those thorny questions foreshadow the challenges the court would face in administering a remedy…. A favorable outcome for Plaintiff States thus would mire the court in Google’s day-to-day operations…. The court has learned a lot about Google, but it is “ill suited” for that role.[109]

It is extremely difficult to see how Judge Mehta would countenance a forced-sharing arrangement for Google’s data as a remedy for the remaining claims in this case, given his unequivocal dismissal of other claims on precisely that basis.

As I noted, there is more to say about potential remedies in this case.[110] But for now, the most important thing is that the absence of viable remedies strongly supports the arguments I have presented here that the court’s liability finding was improper.

Japan's escape from deflation

Guest blogger

Tetsuo Harry Ishihara ,

Strategist, Macrobond consultant, and former adviser to Japanese regulators All opinions expressed in this content are those of the contributor(s) and do not reflect the views of Macrobond Financial AB. All written and electronic communication from Macrobond Financial AB is for information or marketing purposes and does not qualify as substantive research. Editor:

Carlyle CEO: “IRR of 28%” Attracted by Japan’s exit from deflation and low interest rates, “the leaders of giant investment funds are flocking to Japan” (Nikkei, June 18). Carlyle’s CEO, Harvey Schwartz noted in an interview1 that their “ROI in Japan is amazing”, with an “IRR of 28%” on their latest fund for Japan. He particularly praised the government’s efforts to revamp Japan – probably referring to the JPX-led push to increase corporate valuations combined with the expansion of tax-free NISA (Nippon Individual Savings Accounts).

Meanwhile, in the public equity markets, non-Japanese flows continue to make headlines. In April, Warren Buffet’s Berkshire Hathaway issued yen-denominated Samurai bonds in 3, 5, 7, 10 and 30 years to support their substantial equity investments here 2. Major pension funds such as the Canada Pension Plan Investment Board (CPPIB) are increasing their weighting, noting Japan’s relatively cheap valuations, and good EPS growth vs the US 3.

A tech revamp is also boosting sentiment. After decades of losing market share following the 1986 US-Japan Semiconductor Agreement, Japan is attracting investments by TSMC in Kumamoto, Samsung in Yokohama, Intel in Toyama, Micron in Hiroshima, and Imec in Hokkaido (as noted in Japan’s Inflation Revolution). On July 9, the Nikkei News blared “5 Trillion Yen for Semiconductor Revamp”, referring to domestic chipmakers’ plans through 2029. The global semiconductor crisis was an obvious catalyst, as Japan became the safe - and experienced - alternative to other Asian nations.

Exit from deflation?

Japan seems to have finally exited deflation – “thanks to” the corona driven supply chain and semiconductor crisis, the spike in food and energy costs post Ukraine and a patient BOJ.

Corporate pricing power is at the highest level since the 80’s, as the upward bars in the next graph imply. In supermarkets, new products abound, as food manufacturers innovate and can finally charge for them. Note that this follows decades of what former BOJ Governor Kuroda called, “the zero inflation norm” - where flat prices were the optimal pricing strategy. The inflation revolution has helped FY23’s corporate profits for listed companies hit a record for the third consecutive year 4.

Separately, the Tankan’s June survey about expected annual capex growth implied 18.4 percent at major manufacturers for FY24 – close to record levels for the June survey. Along with M&A and a rush to borrow before rate hikes, that capex demand drove loan growth at major banks to its highest level since 2001 5 .

Finally, a widely watched proxy for base salaries also shows the highest growth since the 90’s, as the next graph shows. REAL growth (for total compensation including overtime and bonuses) is still negative, but with inflation slowing and wages rising, should turn positive soon.

Beating inflation with stocks?

The NISA expansion mentioned earlier is part of the government’s effort to shift household assets from bank deposits into the capital markets – aka. “Saving to Investing”. Another effort involves lowering the basic minimum transaction size from 100 stocks to 1 stock, which some brokers oppose due to the increased paperwork (dividend notices etc.).

The government’s “Saving to Investing” drive has continued for years, but why does this round feel different? Many retail investors now feel they have to “beat inflation” with stocks.

Interestingly, the expansion is reportedly driving three changes to retail flows: 1) increased automated purchases via NISA’s installment accounts, 2) a surge into “All Country” global equity index funds instead of fixed income funds with monthly distributions, and 3) a move away from “buying on dip” to “trend following” behavior . Jan to May this year saw a nearly 6 fold increase of inflows for the most popular “All Country” fund over the same period last year. June AUM at domestic funds hit a record.

Yen’s “Yin and Yang”

Just 13 years ago, the dollar yen was trading close to 70 yen per dollar; today – after suspected interventions and jaw-boning – today it is still over 150 yen after piercing 160 yen earlier (next graph). Like “Yin and Yang”, there are both positives and negatives from the yen’s weakness – basically higher profits for multinational companies versus higher imported food and energy costs for consumers. Wages rise slower than inflation, putting pressure on the BOJ and the MOF to stop the weakening.

In our last post “Is the yen’s weakness more structural now” we noted that 1) the widened interest rate differential with the US, 2) the automated NISA outflows, 3) the reinvesting of interest, dividends and earnings abroad, and 4) the alarming “FAANG/GAFAM Digital Deficit” of payments for tech services are being cited as reasons.

We might add that 5) excellent US-Japan relations are another tailwind for a strong dollar/weak yen, which keeps the revamped chip industry – which has the backing of the US and EU – globally competitive.

BOJ accommodation means the revolution will continue

On July 31, the BOJ hiked the policy rate target to around 0.25 percent and announced that monthly bond purchases will slow from about 6 trillion yen a month to about 3 trillion yen by March 2026. Perhaps to prevent more yen weakening, their forward guidance was more hawkish than usual as they warned they could continue to raise rates and adjust the degree of monetary accommodation if their inflation outlooks are realized (graph). Expected upcoming Fed rate cuts could make BOJ rate hikes more difficult (eg. due to yen moves), so the BOJ may have felt the need to move sooner rather than later. However, note that real rates are still negative, which will help Japan’s inflation revolution to continue.

Tyler Cowen notes from trip to El Salvador

Here are a few observations from the trip: 1. El Salvador does truly seem safe, arguably “Canada safe” or maybe safer yet.

2. Hardly ever have I had quicker and more convenient airport and entry procedures.

3. Hardly any tourists are there, unless you count returning El Salvadorans from the United States.

4. For a small country, always visit the #2 city, in this case Santa Ana. There is nothing to do there, but that is part of the point. You can stroll through the local Walmart.

5. Mostly you should eat pupusas in less formal settings. The basic corn, beans, and cheese products of the country are excellent, though they get worse the nicer the restaurant.

6. There is one exception to #5: go eat at El XoLo, it is one of the best meals I have had in years. The squash dishes and the cochinita were best, and you get a fun look at the El Salvadoran elite.

7. You can go to lovely ocean spots and no one will be there.

8. I visited the colonial city of Suchitoto again, after a nine (?) year absence. It had perhaps 10x the amount of commerce as last time.

9. El Rosario, the brutalist church, is one of the great landmarks of the New World.

10. The gifted Chinese library in San Salvador is hilarious, here is some photos.

11. Measured gdp growth in El Salvador is a disappointment. But consumption seems to be growing rapidly, both in the numbers and what one sees on the ground. Which series matters more? This is a common paradox in development economics.

12. Taking 3-4 day trips in groups of five or six is very much underrated. Hope you can organize your own outings!

13. People love it when you tell them you are from Virginia.

14. I may consider “future of safety” issues in more detail in a later post.

15. Overall, I would encourage you to go, go, go. From Washington, D.C. it is a simple, direct four hour flight — isn’t that closer than Denver? What are you waiting for?

S&P : post election landscape in India

India's advantages over Association of Southeast Asian Nations (ASEAN) and other regions from a reshoring perspective range from a large domestic market to government support for long-term export growth, demography and wage costs, and lower operational risks in some categories.

On top of a significant domestic market, the Indian government has been focused on building the country's manufacturing base to support long-term growth. That's included a wide range of sectors including electronics and pharmaceuticals.

Political stability and leadership

India's recent parliamentary elections have resulted in Prime Minister Narendra Modi's continued leadership, although the Bharatiya Janata Party (BJP) has lost its majority and now relies on coalition parties for stability and policy passage.

An assessment of initial vote share and seat share data following the parliamentary elections indicates employment availability has been a voter consideration. The impact of this issue on voter outcomes is likely to further drive government intent to promote policies that would help with employment generation, particularly via manufacturing initiatives and to transition labor away from agriculture.

From a supply chain perspective, key roles including ministers for industry, trade and infrastructure are unchanged. Still, the necessities of maintaining a coalition means cabinet reshuffles remain likely to accommodate coalition partners. Implementation of policies related to supply chain objectives will involve greater need for consensus-building with coalition parties and more prominent role of state governments, whose parties are crucial to maintaining central-level political stability.

India's supply chain policies have been designed to deliver manufacturing growth driven by both domestic market and export market considerations. While the election results are likely to affect the pace of domestic reform, there is broad cross-party consensus to prioritize manufacturing initiatives, and there is little to no change in India's attraction as a center for supply chain investments.

The Production-Linked Incentive Scheme

India's Production-Linked Incentive Scheme (PLIS) provides subsidies to 13 sectors over a five-year period from 2020 to 2025. Covered sectors include electronics (including semiconductors and telecoms equipment), pharmaceuticals, autos (both conventional and EV), home appliances, steel and apparel. Payments are made as a percentage of incremental sales above the base year, designed to encourage investment in new manufacturing facilities.

One outstanding question is whether further tranches of incentives will be made available after 2025. The system's success — measured by increased exports in key sectors — will likely mean its continuation, though the needs of coalition government could mean a shift in implementation on a state-by-state basis

The incentives-led growth has also allowed Indian phone producers to outperform the global peer group more recently, with total exports rising by 46% year over year in the past three months. The assembly of phones has led to a surge in imports of parts for phone production, too, with imports of phone parts having increased by 73% in the 12 months to April 30, 2024 versus 2021, according to our data. It's likely that future government policy will look to encourage the onshoring of components.

Domestic semiconductor development has been identified as a strategic objective in India. Indian manufacturers face competition for equipment from those in other countries which have significant state-backed investment programs including the US, EU, Japan and South Korea. There's also few choices available for the latest chip-making machines in terms of suppliers.

Trade policy and tariffs

The previous Modi administration was an active user of trade policy but had signed only limited free trade agreements (FTAs) in the past five years. This is likely to change in the new term with the government aiming to expedite FTAs with several countries, primarily in Asia-Pacific, the Middle East, and advanced economies like the US, the UK and the EU.

The prior government signed a free trade agreement with the European Free Trade Association (EFTA) members in March 2024, including Iceland, Liechtenstein, Norway and Switzerland. That includes removing duties on imports of industrial goods over the next 15 years; it took 16 years to negotiate.

The Indian government previously withdrew from negotiations to join the Regional Comprehensive Economic Partnership (RCEP) in 2019. The country cited concerns about its merchandise trade deficit with the other members — including mainland China — but could join the area at a later stage.

Indian wariness toward multilateral trade agreements is likely to continue, prioritizing bilateral agreements instead where Indian negotiators assess they have greater clout over details pertaining to trade in services, exporting India's digital infrastructure, and negotiating environmental and labor standards.

The active use of tariffs to support industrial policy has been prevalent during the last Modi administration, sometimes with mixed effects. Laptop computer tariffs had to be withdrawn, electric vehicle tariffs may need to be increased and food export controls' future will depend on the monsoon season. Losses for the BJP among farming constituencies probably indicate dissatisfaction with export restrictions.

Drivers of investment in infrastructure

Logistics networks globally have been disrupted over the past year by a mixture of economic and geopolitical factors. Shipping rates for Indian exporters to Europe and the US have been disrupted by shipping via the Red Sea. These disruptions contributed to shipping rates from India to the US east coast to rise to a peak $5,200 per forty-foot equivalent unit (FEU) in February 2024 versus $1,850 per FEU in September 2023, according to S&P Global Commodity Insights data.

The addition of new shipping services, noted by Journal of Commerce, more recently has subsequently led rates to slump to $1,900 per FEU as of June 17, 2024, while those on North Asia to US East Coast routes have surged. That may give exporters from India a competitive advantage — albeit short-lived given shipping lines tend to trim services when rates dip — versus those in mainland China. The reallocation of services, however, has led to a surge in intra-Asia rates, with shipments from North Asia to India having risen, greatly increasing costs for Indian importers.

On top of volatility, Indian exports of containerized freight are forecast to grow by 4.3% annually between 2024 and 2034, our forecasts show. The need to support ultra long-haul growth increases the need for investment in deep water ports and requires the availability of more shipping liners to India-outbound routes on a consistent basis.

Investments in ports have been a consistent policy for the prior Modi administration and appear unlikely to change given Sarbananda Sonowal remains Minister of Ports, Shipping and Waterways — and that coalition partners remain in favor of port expansion to support supply chain ambitions. Tangible outputs can be seen with new facilities at Kerala port reported to be close to opening, but coalition partners — especially from Andhra Pradesh — are likely to demand greater investments along their respective coastlines.

A newer policy comes in reports that the Indian government wants to support the building of 1,000 new container and other cargo vessels over the next 10 years under the auspices of a new, state-owned shipping firm. The existing container lines will provide stiff competition for India's nascent shipping firm, not least through their shipping alliances.

State of the Economy : Jun 24

State of the Economy:

How macroeconomic indicators performed in June 2024? Retail Inflation and Wholesale Price Inflation increased to 5.08 per cent and 3.36 percent respectively snapping months long record; Unemployment rose to 8-month high at 9.2 per cent. Industrial production grew 5.9 per cent, UPI transactions saw a dip, while FPIs witnessed net inflows in June 2024. Read here for the detailed analysis: n June 2024, the Reserve Bank of India announced its bi-monthly monetary policy review, maintaining the repo rate at 6.5 per cent to manage inflation while supporting economic growth. Concurrently, the Ministry of Statistics and Programme Implementation (MoSPI) released GDP growth figures for Q1 FY25, showing 7.2 per cent year-on-year growth.

However, the Bombay Stock Exchange (BSE) Sensex and the National Stock Exchange (NSE) Nifty indices showed mixed performance throughout June. Technology and pharmaceutical stocks led gains, while banking and real estate sectors faced selling pressure due to regulatory concerns and profit-booking. Two key data figures in June 2024 caught significant attention: Retail inflation broke a five-month record of moderation, increasing to 5.08 per cent, with food inflation marking another high at 9.36 per cent. At the same time, unemployment increased to 9.2 per cent. Despite these challenges, there was optimism from international organizations, with the IMF raising India’s growth projections to 7 per cent and the Asian Development Bank maintaining its forecast at 7 per cent.

Here is a detailed analysis of the high-frequency indicators of the Indian economy for June.

Inflation

The annual inflation rate based on the all-India Consumer Price Index (CPI) snaps five month record of moderation and increases to 5.08% in June 2024, up from 4.75% in May. This rate varied between rural (5.66%) and urban (4.39%) areas.

According to the Ministry of Statistics and Programme Implementation, The Consumer Food Price Index (CFPI), which measures changes in food prices, shows a significant increase with a combined inflation rate of 9.36%. The rural CFPI is at 9.15%, while the urban CFPI is slightly higher at 9.55%. Notably, inflation for sub-groups like 'Eggs', 'Spices', 'Meat & Fish', and 'Pulses & Products' has decreased compared to May 2024.

The annual rate of inflation based on all India Wholesale Price Index (WPI) number is 3.36%.

Unexpected and prolonged heatwaves have driven food prices up across many parts of India, potentially creating challenges for policymakers.

Inflation Rates (Jan-Jun 2024) Month

CPI (%)

WPI(%) Provisional

January 2024

5.10

0.27

February 2024 5.09 0.20

March 2024 4.85 0.53

April 2024 4.83 1.2

May 2024 4.75 2.61

June 2024 5.08 3.36

Unemployment

In June 2024, India's unemployment rate experienced a sharp increase, reaching 9.2 per cent from 7 per cent in May, as reported by CMIE’s Consumer Pyramids Household Survey. Both urban and rural areas saw rises in unemployment, with rural unemployment jumping from 6.3 per cent to 9.3 per cent and urban unemployment edging up from 8.6 per cent to 8.9 per cent.

This surge in unemployment coincided with a rise in the labour participation rate (LPR), which increased to 41.4 per cent from 40.8 per cent the previous month, and a decline in the employment rate, which dropped from 38 per cent to 37.6 per cent.

Unemployment Rates (Jan-Jun 2024)

Month Unemployment Rate January 2024 6.8

February 2024 8

March 2024 7.6

April 2024 8.1

May 2024 7

June 2024 9.2

Purchasing Manager’s Index (Manufacturing and Services)

In June 2024, the Indian manufacturing sector demonstrated growth, with the HSBC India Manufacturing PMI rising to 58.3 from 57.5 in May. This marked a sharp improvement in business conditions, driven by strong demand that boosted new orders and output.

Consequently, firms increased their hiring at the fastest pace recorded in over 19 years. Input cost pressures eased slightly from May, yet remained elevated, leading manufacturers to raise selling prices significantly.

Similarly, the Indian services sector exhibited robust growth, with the HSBC India Services PMI climbing to 60.5 from 60.2 in May. This increase was driven by a sharp rise in new business and an unprecedented surge in international sales.

The sector saw the fastest pace of job creation since August 2022, as firms hired both short-term and permanent staff to meet the growing demand. Input cost pressures remained moderate, with a slight increase in selling prices. Despite some concerns about market competition, service providers remained optimistic about future business prospects

Month

PMI (Manufacturing) PMI (Services) March 2024 59.1 61.2

April 2024 58.8 60.8

May 2024 57.5 60.2

June 2024 58.3 60.5

India’s Index for Industrial Production

The Index of Industrial Production (IIP) for May 2024, released in June, indicated a growth rate of 5.9 per cent year-on-year.

The Quick Estimates of IIP with base 2011-12 stands at 154.2 against 145.6 in June 2023. The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of May 2024 stand at 136.5, 149.7 and 229.3 respectively.

Within the manufacturing sector, the growth rate of the top three positive contributors to the growth of IIP for the month of April 2024 are – “Manufacture of basic metals” (7.8%), “Manufacture of pharmaceuticals, medicinal chemical and botanical products” (7.5%), and “Manufacture of electrical equipment” (14.7%).

Sector Growth Rate (%) Mining 6.6

Manufacturing 4.6

Electricity 13.7

Trade Merchandise

Total exports increased by 2.55 per cent year-on-year, reaching USD 35.20 billion compared to USD 34.32 billion in June 2023. The cumulative exports for April-June 2024 stood at USD 109.96 billion, marking an 8.60 per cent growth from the same period last year.

Non-petroleum and non-gems & jewellery sectors were particularly strong, growing by 8.48 per cent to USD 27.43 billion in June 2024. Key drivers of this growth included significant expansions in engineering goods, electronic goods, drugs & pharmaceuticals, coffee, and organic & inorganic chemicals.

Engineering goods saw a notable increase of 10.27 per cent, reaching USD 9.39 billion, while electronic goods surged by 16.91 per cent to USD 2.82 billion. The pharmaceutical sector also showed robust growth, with exports up by 9.93 per cent to USD 2.47 billion. Moreover, coffee exports soared by an impressive 70.02 per cent, reaching USD 0.20 billion, indicating diversified strength across multiple export segments in June 2024.

Merchandise Export Growth Drivers (May 2024) Category Growth (%) May 2024 (USD Billion) Electronic Goods 16.91 2.82

Engineering Goods 10.27 9.39

Drugs & Pharmaceuticals 9.93 2.47

FII and DII Statistics

Foreign portfolio investors (FPIs) recorded net inflows of Rs. 41,157 crore in May 2024. Conversely, domestic institutional investors (DIIs) reported net investments of Rs. 28,633.15 crore. The equity markets ended the month with the NSE Nifty 50 and the BSE Sensex closing at 24,010.60 and 80,716.55, respectively.

Indicator Amount (Rs. Crore) FPI Net Investments 41,157

DII Net Investments 28,633.15

NSE Nifty 50 (closing) 24,010.60

BSE Sensex (closing) 80,716.55

UPI Transactions

The Unified Payments Interface (UPI) took a dip in June 2024, with 602 banks participating, compared to 598 in May 2024. The volume of transactions reached 13,885.14 million, and the value hit Rs.20,07,081.16 crore. UPI Transactions (June 2024) Indicator June 2024 May 2024 No of Banks live on UPI 602 598

Volume of Transactions 13,885.14 Million 14,035.84 million

Value of Transactions Rs.20,07,081.16 crore Rs. 20,44,937.05 crore

By Shrishti Sharma , ETBFSI

Tourist in Shimla

To catch a Lab Leak

In April and May 1979, between 66 and 300 people died from anthrax in the Russian city of Sverdlovsk, now called Yekaterinburg. The Soviet authorities seized doctors’ records and quickly rolled out an explanation: the deaths were an accident caused by contaminated meat.

But American intelligence agencies suspected a more nefarious explanation: the Soviets were secretly developing biological weapons.

Last week, we interviewed Matthew Meselson about his key role in convincing Henry Kissinger and Richard Nixon to ban biological weapons research in the early 1970s. After the Sverdlovsk incident, Meselson was brought in by the CIA to help assess the potential explanations. For more than a decade, he led scientific investigations into the incident. In 1992, after the fall of the Soviet Union, the truth finally came out: the Sverdlovsk incident was a bioweapons lab leak, the most deadly confirmed lab leak in history.

Meselson’s paper confirming the lab leak is an epidemiological classic. For the first time on Statecraft, we’ve doubled up on a guest: the 94-year-old Meselson is back for round two.

What You’ll Learn

How closely does the Sverdlovsk lab leak parallel incidents in Wuhan?

How close are we to genetically targeted biological weapons?

Why didn’t the Soviets know the location of their own research facilities?

I'll start by telling you how I got involved in the Sverdlovsk anthrax outbreak.

I was asked by a man at the Central Intelligence Agency named Julian Hoptman, who was in charge of a small unit dealing with biological threats, to come down and become part of this small working group. They had just learned about this anthrax epidemic and naturally wanted to know what it was. I got very close to Julian because at Langley, in Virginia, where the CIA is, there was no hotel. He invited me to stay at his house, because his daughter's bedroom was not being used. I got to talk to Julian a lot, both in the office and also at home, where we didn't talk about classified stuff.

And the kinds of evidence we had were: first, there was a particular hospital, Number 40 in Sverdlovsk, which had anthrax patients. Now, how did we know that? There was a physician who was in Sverdlovsk during the anthrax outbreak who then emigrated to Israel, and in Israel, he made contact with the agency.

He was one source of information, because he had actually been there and had friends in the medical community. He himself did not attend any of the patients, but his view was that it was inhalation and not gastrointestinal. Whereas the Russians were saying, “Yes, there has been an outbreak,” but they claimed it was gastrointestinal. They published one article with a lot of information in a law journal called Chelovek, which means “Man and the Law.” It was about a lady who lived south of Sverdlovsk whose cow got anthrax, and she had committed a crime by dumping this dead cow into a well.

There was another article in a veterinary journal about the outbreak of anthrax in sheep and cattle, and it named some villages. I don't think anybody but me tried to find out where these villages were, because they're little teeny nothing villages, but somehow I found out. And I noticed four of them were all in a straight line. At the time I thought it might be because there's a highway that goes from down south to Sverdlovsk.

From Meselson’s unclassified memo for the CIA in 1980

Were you the first person to notice that line pattern?

Yes, as far as I know — except for an admiral at the Arms Control and Disarmament Agency. He and I both thought that maybe the Russian explanation was plausible, the explanation that the anthrax outbreak was from rotted meat. The textbooks said the incubation time for anthrax was 5-7 days, but we knew that cases were coming in over six weeks, from early April until middle May. That would be inconsistent with an aerosol cloud, because the cloud goes by and then it's gone, but it could be explained by bad meat that sits in the refrigerator.

Anyway, I thought that the Soviet explanation was at least plausible. I concluded that the only way to find out is to go there. And I wrote an unclassified memo in April 1980. It gives my impressions, and there's some mathematical calculations on cloud travel, with some graphs that I made to calculate what the dosage would be downwind given various initial release sizes and all that.

But I concluded that I had to go there, and the first chance I had was in Geneva. Have you ever heard of the Pugwash Conference? It was created by Bertrand Russell and Albert Einstein. The idea was to have high-level scientists from Russia and the United States meet to try and cool down the nuclear arms race.

It's called Pugwash because a rich Canadian railway magnate named Cyrus Eaton had a resort place at Pugwash, Nova Scotia, where it used to meet. I had a cousin named Martin Kaplan, a leader of Pugwash, also the science advisor of the World Health Organization. He introduced me to a Russian who was visiting Geneva for Pugwash, Kiril Dumayev.

Dumayev was on something called the Military Industrial Committee in the Soviet Union. That's a high-level committee that decides how much money to spend on major projects, both military and civilian, and he was the chemistry guy. So Martin got us together, and I told Dumayev, “I want to go to Sverdlovsk.” He said, “Why not?”

So I sent him a letter for Moscow, describing exactly where I wanted to go. Now, how did I know where I wanted to go? Dating back to WWII, it was known that the Russians had a military microbiological laboratory in Sverdlovsk. German intelligence knew about it. There was something called “the Stern Report” in Germany under Hitler, translated in English, a great big thick thing, and it listed everything German intelligence knew about Soviet chemical and biological weapons, much of it quite correct, and it listed this place at Sverdlovsk.

I talked with John McMahon, who later became the deputy CIA director. He was all for it. He said, “We would love you to go there. We'd like to have an American go there.” He gave me a map, because he said, “When you're there, they may take you somewhere in Sverdlovsk, and they'll tell you it's this place, and it'll be nothing. It'll be a chocolate factory or something. So I will give you the exact longitude and latitude.”

And he gave me directions: you get on the trolley car at the center of town, and you get off at this certain stop, and you walk on this street, and then you turn, etc.

So that you wouldn't be hoodwinked.

It turned out the directions were a little bit wrong. The coordinates were correct, but the street directions would not have got me there. There were a couple of wrong turns.

Anyway, I'm all ready to go, and then the Russians shoot down, probably by mistake, a Korean jet, and everybody died. I get a letter from Dumayev, and he says, “In view of events with this jet, it's not a good time. Unfortunately I cannot invite you.”

Then a little bit later, this group called International Physicians for the Prevention of Nuclear War gets the Nobel Peace Prize, and specifically they give the Peace Prize to an American and a Russian. The Russian was their secretary of health, and the American was a cardiologist here in Boston named Bernie Lown, who I knew. In fact, I think he's some distant relative.

Then I learned somehow that Bernie was going to go see his friend, the health minister in Moscow, in a few weeks, so I asked Bernie if he would take a message from me to the minister, which was, “Can I go to Sverdlovsk?”

A little while later, I get a telex — we didn't have email yet in those days — with a guy named Fedorov, the assistant to the minister of health who handles foreign relations, and he says, “I've gone to Sverdlovsk to save you the trouble, and there's nothing there, don't bother, you can't go.”

Then I got a call from Sergey Kislyak, who later became the ambassador to the United States, He says, “We'd like you to come to Moscow to talk with us about Sverdlovsk, we'll fly you there on Aeroflot. You don't need any passports or anything, just come on, we'll take you to Moscow.”

So I met a bunch of people who were involved in this, including former minister of health Pyotr Burgasov.

Where were you hosted for these meetings?

It was a great big hotel near the big athletics stadium. And we met at the hospital, which was called the Botkina, a very famous, great big hospital. European hospitals in those days were like villages, for example the Children's Hospital in Paris. There'd be a wall around many buildings.

So we met there, and I went to the American Embassy to keep them informed with what was going on. I met with a Soviet general, who told me that the outbreak was caused by bad meat, and I wrote down exactly what they told me, and published it in the Bulletin of the Federation of American Scientists.

At the beginning of my article, I said, “This is what the Russians said to me.” Unfortunately, I should have made it clear that this is not what I believe, necessarily. Maybe it was true, maybe it was not. But a lot of people reading that thought that this was my belief. I had no great belief at the time. I thought maybe they were telling the truth, maybe not. I didn't know. It's still essential to go there.

So I come home, and now I'm accused of being a Soviet apologist by a lot of people because I wrote this article. I caught hell from a bunch of people for that. And it's true, I still thought that maybe they were telling the truth. [Under the Reagan administration, the intelligence community came to a consensus in the early 1980s that the Sverdlovsk anthrax was released from a bioweapons facility.]

Finally, the Soviet Union goes away, and we have Yeltsin and the Russian Federation. I'm in Washington doing some political thing, and I get a call from my secretary at Harvard: “You have a call from the Soviet embassy in Washington. They want you to greet a member of the Soviet embassy who is a physician, and he's coming from Washington into Logan Airport in Boston. And they wonder, because he doesn't know his way around, if you would meet him at the airport and help him out.”

So they gave me his name, and his American Airlines flight and arrival time. They thought I was at Harvard, but actually I'm in Washington. So I decide, “I'll find out if I can meet this guy on the airplane.”

I called American Airlines, and I said, “My partner and I both been doing business in Washington and we become separated, but I know that we're both going back on the same flight. Could you tell me the seat number with Mr. Bourdin? I'd like to sit next to him so we could conduct our business together and save a little time that way. They gave me the seat number, so I get to the airport real early, one of the first passengers there, and I'm sitting in this seat.

Pretty soon down the aisle comes a big, heavy guy, and I say nothing. He sits down next to me, I let him get settled, I wait till the plane starts down the runway. And I say in a perfectly calm voice, “Very nice to meet you, Dr. Bourdin.” He was stunned! Of course, I imagine back home that wouldn't be such a big surprise, but I like doing things like that.

Then he said, “I have a surprise for you, Dr. Meselson.” His surprise was to tell me that an American physicist is living in Sverdlovsk under a United States/Soviet exchange agreement between the two academies: their RAC and our National Academy of Sciences. He’s a guy named Don Ellis, a solid state physicist, he was there during the epidemic. He's a member of the National Academy, and so am I. So I go down to Washington.

Now, normally, trip reports are privileged, but the archivist gives me the trip report. Ellis records that he's there for several weeks, doing solid-state physics with his colleague, a Mr. Gubanov. When he came back to the States, he learned about the anthrax epidemic. He knew nothing about it while he was there, even though he's driving his kids to school every day on weekdays, going right past the police.

So I want to go to Sverdlovsk and nothing is working. Sometime in the 1980s, our National Academy of Sciences invited the Soviets to send a delegation, so we could show them that Fort Detrick was no longer doing anything with biological weapons, because in 1969, President Nixon had renounced biological weapons, and there was no bioweapons work going on at Fort Detrick. [For an account of Meselson’s role in Nixon’s biological weapons ban, see our first interview with him.]

I'm on the welcoming team, and each American was assigned a particular Russian to help them. I was assigned a guy named Alexei Yablokov, Yablokov is a Russian word for apple. This is Mr. Apple.

Have you ever been in Baltimore? They bring a big bucket of crabs to your table, and they put down a sheet of brown paper and they dump the crabs. I thought he might like that, and we went to a jazz bar where we couldn't talk because it was too loud. So I got to know this guy.

In those days, the CIA published something called FBIS, the Foreign Broadcast Information Service, unclassified translations of things from the Russian radio and press [the FBIS was dissolved in 2005]. There I saw an entry that Mr. Yablokov, my crab jazz friend, had become Yeltsin's Advisor for Environment and Health. So he's like a secretary of the Department of Environment and Health. It said that he had been asked by Yeltsin to look into this anthrax outbreak and figure out what happened.

So I sent him a telex saying, “I see that you've been asked by your president to go do this. Could I come and help you?” He said, “You can come to Sverdlovsk, but only if you're invited.”

Bear in mind, this is the former Soviet Union. Everything was loose at this time. Americans were greatly welcomed. People loved Americans. How am I going to get invited? Who do I know in Sverdlovsk? Only one name, this Mr. Gubanov who worked with the American.

Now the next thing will absolutely astonish you. I called Don Ellis. There he is in his office. And I say, “I need to get in touch with your colleague, Gubanov. Could you tell me how to reach him?”

And Don says, “Yes, I'll hand him the telephone. He's sitting right here, he's visiting me.”

That's incredible.

So Gubanov comes on the phone. I tell him I want to be invited, and he said, “Oh, I'm very interested in that outbreak, I'll get you an invitation.” By the way, Gubanov comes back to the United States sometime later, and he ends up as a stockbroker in Florida.

Anyway, pretty soon I get a telex from Mr. Suetin, who's the rector of the local university, which is named after Maxime Gorky. In the Middle Ages, universities taught what was called the trivium and the quadrivium. Do you know what I mean?

I was homeschooled with a classical education, so we did the trivium, yeah. This university in Soviet Russia was teaching the trivium and quadrivium as well as physics and chemistry. But I get this telex from the rector, who says the city is yours, and he assigns to me two guys: a physicist named Borisov, and a younger man who's a physical chemist. So I form a team, including my wife, Jeanne Guillemin, who is a medical anthropologist. And the success of what we did, which proved that it was airborne and not foodborne, was because of her.

So we go to Russia.

Can I interrupt? Yeltsin comes to power and asks for an investigation. But if I'm reading this old Washington Post story correctly, Yeltsin was told by the KGB in the early 1980s that the anthrax outbreak was a lab leak. He already knew.

That's largely true. Almost completely true. We did not know, because when he acknowledged this, we were on transit. We did not know that he had said it, which of course took some of the wind out of our sails, but we had a scientific proof.

In Yeltsin’s book, he says that at the time of the outbreak, he contacted Yuri Andropov, who was the head of the KGB, and he asked him to tell him the cause.

At that time, Yeltsin was the Communist Party leader in Sverdlovsk itself. He says he contacted Andropov, but he never heard back from Andropov. Later, after he became president and could get whatever he wanted, he came to the conclusion that it was not bad meat, that it was a military activity.

Anyway, we arrive in Sverdlovsk, and we have the names of the pathologist and her assistant, a Jewish man who had done the autopsies, and we knew how to reach them. We called on all these people, but they had nothing that would have really given us proof of a lab leak. But Borisov the physicist was a great help.

There was a woman who he knew very well named Larisa Mishustina, who was a member of the Duma. She had been elected to their House of Representatives. She had written a letter to Boris Yeltsin, and she gave me a photocopy: “Dear Boris, my constituents would like to know if the anthrax epidemic of 1979 was the result of government activity. If it was, they are entitled to double pension money.”

Now, I don't know if any money ever got paid out. But what did happen was she receives a letter from the KGB with, I think, 68 million dollars, and it has a list of constituent names, dates of birth, and their addresses.

So my wife Jeanne goes knocking on those doors. She goes straight down the list. We were there twice, 1990 and 1991, and then Jeanne goes back a third time to complete these interviews. Jeanne would go to each of these little houses, knock on the door: “We are from the university,” which is true. “We are studying health,” that's true. “We understand that you lost a husband or a child or a wife during the anthrax outbreak. May we talk with you?” In every case but one, Jeanne told me they were invited in. And the one was an elderly lady who had just come out of the bath and said she wasn't dressed. In all the other cases, they were invited in.

Jeanne Guillamin and a Russian researcher with a Sverdlovsk family Meselson and Guillamin (second and third from right) with their Russian hosts And Jeanne had a questionnaire, which I had written, but which she refined — now remember, she's an anthropologist, she knows how to do this — and she asked a whole bunch of questions. But the question that we were most interested in is, “Where did they work,” or were they pensioners who stayed home? So we could plot a map. In those days, you could buy a nice satellite map of Sverdlovsk from Spot Satellite, a high-res map showing individual houses, a high-resolution map, and I could plot each of these locations on my computer.

After Jeanne left, two professors in Sverdlovsk kept on doing the interviews, and data kept dribbling in. Little by little, it became more like a picture that's appearing when you develop a film. You could see more and more of these locations were in a narrow zone that goes from the military facility down toward the southwest, outside the city, to the villages where the sheep and cows had died. There were two exceptions, but they were the deaths of two men who were truck drivers. So they could have been driving through that band at the time of the lab leak.

The deaths all followed this line, every one of them. The most distant was 50 kilometers.

Also, the World Meteorological Organization has headquarters in Geneva, and many countries belong to it, including the Soviet Union, and every three hours, from all the major airports, they're supposed to report wind direction, wind speed cloud cover, humidity, and so on. All that data is there in Geneva. If you want it, you can buy it. It's expensive, but there was a guy there who was a graduate student and we made pals over the phone. So he sent me this data, I didn't have to pay for it.

And it turns out there's one day and one day only when the wind is in exactly that direction all day long. That's clearly what happened. No question.

Our paper is a classic in epidemiology, quite aside from the subject. I guess I'm bragging, but what could be more clear-cut?

It's a beautiful image. They're beautiful images. I'm very proud. And the credit really goes to my wife, who died in 2019.

Now, let's talk about what happened later.

Let me interrupt. I do want to hear what happened later. But I know throughout the 1980s, you were trying to figure this out. This was your intellectual project for more than a decade. Was it just running in the background for you during the 1980s? Yeah. It’s a remarkably long-term project, I was busy teaching genetics, and a lot of diplomacy. Although President Nixon had renounced biological weapons, there was still the problem of negotiating an international treaty, both for them and for chemical weapons, and the problem of influencing the diplomats to include some sort of verification protocol. I was very deeply involved in that, going back and forth to Washington and the meetings of the Conference on Disarmament in Geneva. Sverdlovsk was definitely on the back burner, but it was an active back burner.

In 1988, you were pivotal in getting Soviet health officials to come to Washington, D.C. to present on the Sverdlovsk case. Yes, that's right.

How did you get them to come? So that group included the minister of health, Pyotr Burgasov. He had invited Jeanne and me to his dacha outside of Moscow. And he tells us how he became Minister of Health. During the revolution, in Moscow, if you wanted certain kinds of jobs, you had to queue: if you wanted to be a carpenter, you wait in the long line, you get to the table, you sign up. So he and his friend wanted to become blow torch welders, but they got in the wrong line by mistake, into the line to become doctors. They say, “So what the hell? We'll become doctors instead of welders.” That's how he becomes a doctor, and eventually minister of health.

Now, I wanted to visit General Karechko, who's in charge of this closed military microbiological facility called Compound 19. I write a letter saying, “I want to meet with your scientists, and nothing but good could come from it.” And I got a letter back, and he says, “My scientists are not here right now. We can't do it.”

Now let's think about this. You are the general in charge of this facility. You have just managed to kill nearly a hundred Soviet citizens. Do you think you're going to call Moscow and say, “Hey boss, I've just managed to kill a whole bunch of people here, and I've managed to let the whole world know that there's a big anthrax outfit here.” You know what happened to him?

He killed himself, right? No, I don't know that, but certainly he's going to deny everything, right? He's going to say it was bad meat.

So when we say the Soviets were lying, it’s true that sooner or later Andropov knew. We know from Russian publications that later the GRU, military intelligence, put microphones and listened to what people were talking about. But initially, I'm sure that the people at Compound 19 [where the anthrax leak originated] were the source of the lie.

I'm looking at the Washington Post story from 1992 about Yeltsin, acknowledging that it was from a lab leak. The very last line of this piece quotes Izvestiya, the Russian outlet, that the chief of the military base committed suicide. Now, whether he actually did, or if something happened to him, I don't know. Wow. Would you send that to me?

Of course.

Is his name there? Was his rank given?



No, it's not. All they say is “the chief of the military base.” There's a lot of details missing. Yeah, I'll bet it was this poor guy.

In November of 1991, Izvestiya printed allegations from a retired general who said he learned from the KGB that “Someone from the laboratory arrived early in the morning and began to work without turning on safety filters and other protective mechanisms.” But it doesn't say when this retired general learned that from the KGB. I can't shed any light on that. I just don't know, and I don't know if the filter story is true or not either. All I know is that it was an airborne release of an aerosol, not just a spill of a liquid. It had to be an aerosol.

Now, why would they be generating an aerosol? Because just like we were doing, they were trying to determine the effective dose via inhalation for monkeys. If you're going to make an anthrax weapon, you're not going to spray liquid anthrax. You're going to disseminate an aerosol.

When you were invited down to Langley in 1980, the Sverdlovsk incident was a major concern for the CIA, because we didn't previously have any idea that the Soviet Union was developing biological weapons, right? There were suspicions. Even in 1963, when I first went to the CIA, I believe I was shown a satellite photograph of the Sverdlovsk facility. I think that we were watching this facility for years, but we weren't sure what was going on there.

We also knew about that island in the Aral Sea. We knew that was a chemical weapons testing ground because you could see on the satellite photographs, as I remember, what looked like test grids, markings for measuring how many kilometers from a central point.

In 1989, you testified before Congress and said that, to the best of your knowledge, “no country has stockpiles of biological weapons or toxins.” Do you believe there are countries with stockpiles today? I'm not connected to any intelligence channels anymore.

But you have the benefit of a long career thinking about this, even if you don't have hard intelligence. What would go through my mind is, if a country does have this stuff, try to imagine how that might have come about. That means that there's somebody or a group of people involved, but not the main leaders of their defense establishment, because this stuff is really shit. It’d be some guys who have a bee in their bonnet, to use an old expression, and they’re nagging and nagging, and sooner or later, they manage to persuade somebody who has the authority to develop them.

If I were in the intelligence business, I would try to get a list of the cast of characters in their Ministry of Defense. I know this is a very remote way to start out, but this is how I would start: are there people there who look like they're not being listened to, maybe even have training in this kind of stuff from the defensive point of view, who have maybe written about it?

Of course, I’d look at the communications information we have, and task the people from overhead reconnaissance to look around and the people who look at the incidence of various diseases worldwide to look for anything anomalous. If people from foreign governments who might know about this stuff are coming to this country, you’d want people from the intelligence community to take them out to dinner very skillfully. Maybe they would like to give us intelligence — or maybe they don't care or they'd like not to — but if we think they're highly placed and we take them to dinner, we’re skillful, maybe we can learn something.

I’d do all these things. The first paper I wrote at the Arms Control and Disarmament Agency was a proposal to detect distant outdoor tests of biological weapons, because, with a suitable fluorescent antibody, you can detect even a single organism.

By the way, long ago, the Israelis had a special guy: he would shoot birds flying out of Egypt, and then they would wash down the feathers and look for pathogens. They probably did it by culturing on petri dishes. I don't know that they've ever found anything. The Israelis had a big biological weapons program. I don't know if they still do.

You mentioned looking at any literature that officials may have published. Last year, it came out that a Chinese general had written about the possibility of genetically targeted biological weapons. How realistic do you think genetically targeted biologicals are as a threat? I think there's no way you could do this rapidly. On the other hand, if it's something you're willing to spend years and years, we know that some genetic polymorphisms are more frequent in one group than in another group.

Let's say we want to kill all the Armenians. Please don't, because I love the Armenians, my grocer is Armenian. So don’t do it. Anyway. A gene that's more frequent in Armenians will also be in other people: after all, Armenians marry other people.

If you find a hundred genes that are more frequent in Armenians, somebody who's got all 100 of them is probably Armenian. Now, that doesn't tell you how to make him sick or kill him, but now that you know what those genes are, maybe you could — in other words, it's theoretically not totally ridiculous. It would have to be based on multiple genetic targets. But it's crazy.

You spoke to the New York Times a couple of years ago about parallels between the Sverdlovsk lab leak and the potential origins of COVID-19. What’s your view today on that parallel? It looks more and more as though at least at one point they were not using an adequate high containment facility. If that's true — and they were certainly working on viruses from bats, they don't deny that, in fact, they're proud — and if in addition to that they were using NIH money to do gain of function research, it’s plausible, certainly very plausible.

I couldn't help but notice this parallel between the Soviet response to Sverdlovsk and the Chinese response to the COVID outbreak: both of them suggested they would welcome an investigation from the World Health Organization. Tell me a little bit more. I didn't know that the Russians ever said we would welcome anybody coming in. Did they say that?

There's a document here from the U.S. State Department team in Geneva, that “Ambassador Hellman received several reports of a possible Soviet initiative to invite the WHO to look into the Sverdlovsk incident.” One report credits Dr. Kaplan with the idea. That's my cousin, the head of the Pugwash conference.

One report credits him, but another describes an incident in a Pugwash meeting in which “[Soviet diplomat] Valentin Falin suggested that the WHO be asked to look into the true causes of the spread of anthrax at Sverdlovsk. [Soviet general] General Milstein reportedly was present and did not demur.” The memo says, if the Soviets are actually proposing a WHO investigation, “Presumably it would be to allow the Soviets to stage-manage the event in such a manner as to make an impossible finding.”

I have no memory of this at all.

But I'll tell you another story about the Soviet diplomats that you'll like. Under the confidence-building measures of the Biological Weapons Convention, every country is supposed to say where their high containment facilities are located, longitude and latitude. The Soviet Union is supposed to give the longitude and latitude of the laboratory in Sverdlovsk — They never denied that they had a high containment lab there, they just didn't say it was doing weapons work.

So now the Soviet foreign ministry has to share the location of this facility to the United Nations. But the ministry of defense doesn't want to give their own foreign ministry the longitude and latitude.

So I meet with Nikita Smidovich in Geneva. I remember there was snow on the ground, and he asked me to come out onto the porch with him. He says, “We need to know the longitude and latitude so we can report it, but we can't get it from the Ministry of Defense. Could you get it for me?”

That's incredible.

I did. I gave it to him. When the Soviets reported the location of Compound 19, they got it from us. They couldn't get it from their own guys.

All of these things are full of stories of human beings and all the nutcakes and crazy things that happened. You've got to make allowance for that in nearly everything.

Why India Cant grow like China

How Putin is still being funded by EU

February 23, 2024 10:25 am CET
By Victor Jack
BRUSSELS — The EU last year added €1 billion to Vladimir Putin’s war chest through fuel purchases despite sweeping bans on Russian oil, a new study shared with POLITICO found.

In 2023, the EU bought an estimated 35 million barrels of refined fuels — mostly diesel — originating at least in part from Russia, according to the analysis by NGO Global Witness based on Kpler shipping data.

These purchases were allowed through a gaping and now well-known loophole: Despite the EU ban on nearly all Russian oil imports, countries can still legally buy Moscow’s crude as long as it’s first refined into fuels elsewhere. The result is a steady flow of Russian fuel entering to the EU via places like India and Turkey — and lots of money flowing back to the Kremlin. The €1 billion figure — equivalent to the cost of around 60,000 of the Iranian-made Shahed drones which Moscow frequently uses to bomb Ukrainian cities — comes as the EU this week agreed to a 13th package of sanctions to mark two years since Russia launched its full-scale invasion.

Those sanctions have been patchy at best in throttling Moscow’s energy revenues, which make up roughly half the Kremlin’s budget. Last year, POLITICO revealed Moscow raked in another €1 billion from a separate EU sanctions loophole in Bulgaria and found EU attempts to cap Russian oil revenues had largely failed.

That’s spurring calls for further action, as the EU begins to prepare its 14th sanctions package, which should be unveiled in the coming months. The latest revelations of Russia’s titanic oil profits — not to mention the death of Russian opposition leader Alexei Navalny — will increase that pressure.

“The Russian regime keeps indirectly profiting from third countries that sell oil products produced from Russian origin crude oil to the EU,” said Estonian Deputy Foreign Minister Erki Kodar. Brussels, he added, must “assess the problem,” suggesting a new rule requiring foreign refineries to inform EU buyers of any Russian imports.

Thus far, however, fears of a diesel price spike and economic recession have scared officials away from taking such steps.

Refined reliance

In 2022, the EU banned Russian seaborne oil imports and, alongside its G7 allies, imposed a $60-per-barrel price limit for sales outside the EU of Russian cargoes using Western shipping and insurance services.

“Thanks to this,” European Commission President Ursula von der Leyen said at the time, there will be “a ban on almost 90 percent of all Russian oil imports” entering the EU, later adding the measures would “reduce Russia's revenues significantly.”

However, the plan had some glaring workarounds that have undermined its effectiveness. In addition to the carve-out allowing EU countries to still buy Russian crude refined outside the bloc, a further exemption was given to EU member Bulgaria, which was temporarily allowed to export limited Russian-origin fuels under strict conditions.

In all, that meant seven refineries processing Moscow’s crude in India, Turkey and Bulgaria continued exporting refined fuels to the EU. Indian facilities supplied the most fuel to the bloc, accounting for two-thirds of the supply.

Those processed fuels were then sold legally, including via Western oil firms and commodity traders, and later arrived at EU ports, according to the report. All refineries involved in the process were also in compliance with current EU sanctions laws. None of the facilities' owners responded to a request for comment.

Global Witness estimated that the fuel exports from these refineries to the EU last year generated between €870 million and €1.3 billion for the Kremlin based on the average tax levied on crude exports leaving Russia combined with the amount of unprocessed crude Moscow sent to each refinery.

“Every penny spent on Russian oil helps pay for the Kremlin’s war of aggression on Ukraine,” said Christopher Lambin, a senior analyst at the NGO who authored the report, adding that “the EU should move to close the refining loophole.”

The result is “obviously wrong,” said one EU diplomat, granted anonymity to speak candidly, as the aim is to completely cut off Moscow’s supplies. The diplomat added that the bloc should ban imports from refineries using Russian oil as long as it can secure affordable alternative supplies.

Everybody knows

The EU is already well aware of the issue.

Last May, the bloc’s foreign policy chief, Josep Borrell, said EU purchases of Indian fuels made with Russian oil “undermine the effectiveness of our restrictive measures” and are “circumventing our sanctions” — and urged the bloc’s capitals to deal with the issue.

A Commission spokesperson said the EU executive was “in regular contact with third countries” on circumvention, adding: “We remain determined to stay ahead of the curve … if need be with additional sanctions.”

But so far, neither Brussels nor EU capitals have moved an inch.

That’s largely because doing so “would be massively disruptive and trigger large price hikes” on diesel, said Eugene Lindell, head of refined products at the FGE energy consultancy. The fuel is already “incredibly expensive” after the EU banned direct oil imports from Russia, and the recent Houthi rebel attacks on cargoes in the Red Sea, he added.

“EU governments are fighting right now to not have their economies go into recession,” Lindell said. And despite the bloc’s desire to drain Russia’s revenues, there’s an “economic imperative which trumps politics even between archenemies.”

German Newspaper article on welfare

How the German welfare state punishes performance

Transfer payments such as citizen's allowance and housing benefit as well as the tax system are poorly coordinated. More gross often leads to less net. Berlin. If the citizen's allowance increases by twelve percent at the turn of the year, there will be a lot of envy: most employees can only dream of a wage increase of this magnitude.

Despite the higher citizen's allowance, someone who works always has more money at their disposal than someone who does not work, says Andreas Peichl of the Munich Ifo Institute . "But the question is how big the incentive to work is," stresses the economist.

Poorly coordinated state benefits such as the citizen's allowance, housing benefit or child allowance often mean that additional work is not worthwhile or, in extreme cases, even leads to lower net income. The Ifo Institute has calculated this for various household types for the Handelsblatt newspaper - and shown how anti-performance the system sometimes is.

The economists took into account the higher citizen's allowance rates and the increase in the maximum amount of the child allowance to 292 euros, as well as tax changes announced by the coalition for the coming year, some of which have not yet been enshrined in law It is planned to increase the basic allowance to 11,784 euros and the child allowance – including the allowance for care and education or training needs – to 9,540 euros.

Calculation example single

An unemployed, single citizen's allowance recipient, for whom the state reimburses rent costs of 650 euros and heating costs of 80 euros, would only have the standard rate of 563 euros available per month.

If the single person were to work full-time for the minimum wage and have the same housing costs , he would earn around 2,000 euros gross. According to Ifo calculations, he would have 911 euros left over net if he claimed the transfer payments to which he was entitled, such as housing benefit. This would mean he would have 348 euros more at his disposal than his unemployed counterpart.

However, if the citizen's allowance recipient takes on a mini-job that pays 500 euros, the wage gap to that of a full-time employee is only 168 euros. For a midi-job with 18.5 hours per week at the minimum wage, the wage gap shrinks to just 20 euros. So for half the work, you get almost as much money as in a full-time job.

Calculation example for single parents

An unemployed single parent with two children aged five and nine and housing and heating costs of 1,055 euros would have 1,553 euros at her disposal with the citizen's allowance. With a full-time job at the minimum wage and a gross income of 2,000 euros, she would have a net income of 2,349 euros - 796 euros more. However, this only applies if she actually claims the transfer payments to which she is entitled, such as housing benefit, child benefit or maintenance advance. Many people who are entitled to benefits do not do so out of shame or ignorance. Without all the transfer payments, the single parent with her full-time job at the minimum wage would only have a net income of 1,015 euros instead of 2,349 euros - 538 euros less than a corresponding recipient of citizen's allowance.

Calculation example for a couple with two incomes

A dual-income couple with two children aged five and nine, who work full-time and each earn 2000 euros gross per month, have a net income of 2686 euros with rent and heating costs of 1235 euros.

The couple therefore only has 887 euros more at their disposal per month than the household receiving citizen's allowance. The absurd thing is that if the model working couple increases their joint income to 5,000 euros, the household's net income falls by 43 euros to 2,643. Criticism from the opposition and coalition

The problem is that rising wages are in many cases eaten up again by the parallel reduction in state transfers and an increasing tax and social security burden. "Work is therefore often no longer profitable," criticizes the labor market policy spokesman for the Union faction , Stephan Stracke ( CSU ). "But performance and hard work must be worthwhile."

Despite falling inflation rates, the federal government has raised the citizen's allowance rates by an average of almost a quarter within two years. The standard rate for single people will rise by 61 euros to 563 euros per month in 2024.

The SPD , Greens and FDP had also already reformed the additional income limits so that benefit recipients of earned income between the mini-job limit of 520 euros and 1,000 euros could keep more than before. But the coalition is thus continuing to privilege part-time employment, criticizes Stracke. The goal must always be full-time employment that meets demand without permanent subsidies. "Anything else is just tinkering with symptoms." The traffic light coalition has not yet implemented its reform promise from the coalition agreement to better coordinate state services in order to create real incentives to work.

And so there are warning voices not only in the opposition, but also in the governing coalition that the welfare state must not destroy work incentives: "Work and performance must be noticeably more and more worthwhile," says Jens Teutrine, the spokesman for the FDP parliamentary group responsible for the citizen's allowance.

It is "absurd" that, in the interaction of the various social benefits, there are currently income ranges where, despite higher income, people have less money in their pockets and working more is hardly financially worthwhile.

Coalition promised reform

A reform of the system "is urgently needed and is long overdue," warns Ifo researcher Lilly Fischer, who carried out the calculations together with Peichl. This includes reducing the transfer withdrawal rates and increasing the tax allowances for employed people. In addition, the two competing social systems of citizen's allowance on the one hand and housing benefit plus child allowance on the other hand would have to be integrated. According to the coalition agreement, the SPD, Greens and FDP want to coordinate tax-financed social benefits in such a way that it really is worthwhile for recipients of citizen's allowance to take up employment subject to social insurance contributions.

As a basis for such a reform, Labor Minister Hubertus Heil (SPD) commissioned a report from the economic research institutes Ifo and ZEW as well as other scientists - as agreed in the coalition agreement. The report, which Handelsblatt had already reported on in advance, was published shortly before Christmas. The research team led by project leader Peichl proposes several reform paths, including the following model: If citizens' allowance recipients earn more than 520 and no more than 2,000 euros per month, only 70 percent of this should be counted towards the citizens' allowance.

Under current law, only incomes between 520 and 1,000 euros are exempt to this extent. According to the Commission's proposal, benefit recipients should be allowed to keep 35 cents instead of zero for every euro earned above 2,000 euros.

This would mean that even with higher earned income, there would be significantly more net income left over from gross income. However, a change in the income limits would also increase the number of people entitled to benefits.

Depending on how the additional income limits are designed, the Commission assumes that over a million more households could receive basic social security benefits, says CSU politician Stracke. This would expand transfer payments and consolidate them for low earners He suggests that social benefits should be reduced at a lower rate for a limited period of time as incomes rise. "This could be a way to pave the way to full-time employment without the disadvantage of permanent subsidies," emphasises Stracke.

Housing benefit reform is still pending

Reducing social transfers as income increases, not too quickly and not too slowly, is always a balancing act, says economist Martin Werding, who also worked on the report. "However, basic security currently still contains real gaps that make it difficult to completely stop relying on transfers."

The next major reform would require housing benefit to be better linked to citizen's allowance, says the Bochum economist. The two benefits are currently poorly coordinated. However, solutions to this problem were not part of the reviewers' task. The coalition will now examine the experts' suggestions as a basis for a reform, even if his group does not adopt all of them one-to-one, says FDP politician Teutrine. "Our goal is to strengthen employment subject to social insurance contributions and to build a stable bridge to the labor market for a wide variety of family constellations."

Until that happens, the welfare state will continue to produce many absurdities.

By Frank specht and Martin Grieve