European businesses will be punished with the sane terms as well if they use a service which is non eu compliant. So they can only use compliant services.

Ok. That kinda makes sense.

Does it flow through to subsidiaries or EU citizen owned foreign enterprises? Because it seems like this could lead to a regulatory race to the bottom.

It's not important where your servers are or if you are a European company, what matters is that you offer services to people in the EU (market place principle). I am not fully clear on how this will apply to foreign companies that do not advertise/target EU users though.