Inflation Reduction Act attracts German companies to the USA

Companies from Germany love America: According to the German-American Chamber of Commerce, around 5,600 of them are investing in the US market. This corresponds to an investment volume of almost 650 billion US dollars (as of September 2022). Not just big corporations like Siemens, VW or Linde currently want to increase their commitment in the United States – in some cases even with completely new production facilities.

“There are various reasons for this,” Dirk Dohse, an expert on international competition at the Kiel Institute for the World Economy (IfW), told DW. “One reason is the increase in geopolitical tensions. The USA appears to many German companies as a ‘safe haven’. Other reasons are the comparatively low energy prices and the very generous subsidies under the Inflation Reduction Act.”

Inflation Reduction Act (IRA) attracts companies

The Inflation Reduction Act (IRA) is a multi-billion dollar subsidy program of the US government led by President Joe Biden and – despite the name – is dedicated less to combating inflation and more to climate protection. Of the approximately 430 billion dollars that the IRA pot provides in total, 370 billion are earmarked for the promotion of low-carbon technologies and energy security, and the remainder is to flow into preventive health care.

However, the subsidies and tax credits are linked to the fact that benefiting companies use US products or produce them themselves in the USA. For example, the buyer of an American electric car whose battery was also made in the USA receives a premium of around $7,500. Wind turbines or solar systems with US components are also promoted. From the American point of view, preliminary products from countries with which the USA have a free trade agreement – such as Mexico or Canada – are also acceptable.

Companies are already responding

As a result of the US government’s IRA funding plans, there are already delays or impending shutdowns of battery plants for electric cars in Germany – for example at Tesla in Grünheide near Berlin or the Swedish company Northvolt, which actually wants to build a factory in Heide (Schleswig-Holstein) and now probably wants to invest in the USA first.

So alarm for Germany as a business location? “In fact, the share of the manufacturing industry in the total value added in Germany has been declining since 2016. However, we also come from a high level. However, I do not see a blanket de-industrialization,” says competition expert Dohse.

Chancellor Olaf Scholz and EU Commission chief Ursula von der Leyen have already made representations to US President Joe Biden and have warned of distortions of competition for European companies compared to US competition as a result of the lavish US subsidies.

Shortly thereafter, it was announced that Brussels, too, would counter with a green industrial program and want to give the EU states more freedom for their own subsidies in the future.

Danger of a subsidy spiral

Economists consider this confrontation dangerous. “I don’t think we should get into the race for subsidies,” says IfW researcher Dohse. “At the end of the day, it’s taxpayers’ money. You have to think carefully about whether this will pay off for society in the long term.”

It is indeed extremely unpleasant when innovative companies, for example in the field of ‘green technologies’, which have been raised with German or European taxpayers’ money, are lured to the USA by subsidies. “But throwing more tax money is not the solution.” Dohse believes, however, that one could think about linking individual federal funding programs for young companies to a certain loyalty to the location.

Location Germany: Praise and criticism from US companies

So if many German companies are investing more in the USA in order to benefit from the IRA subsidies – how do internationally active US companies rate Germany as a location?

“Europe’s largest economy remains an important and attractive location for many US companies,” said Simone Menne, President of the American Chamber of Commerce in Germany (AmCham Germany), when asked by DW. “The many very well trained specialists, dense infrastructure networks, first-class technical colleges and universities, great political stability, the strong presence in the EU market and other factors are important arguments for investing in Germany.”

However, the annual Transatlantic Business Barometer, the latest edition of which was published on March 16, sounds less optimistic. According to this AmCham Germany survey of US companies in Germany, the location rating in 2023 deteriorated for the third year in a row.

In the Business Barometer survey last year, 59 percent of the US companies operating here gave the location a “good or very good” rating; in 2023 it will only be 34 percent. The quality of the employees (94 percent), the supplier networks (68 percent) and research and development (68 percent) are praised. However, only 38 percent of US companies expect that Germany will improve as a business location in the next three to four years; in 2022 it was still 43 percent.

High energy prices are a deterrent

But it is also a fact that many of the US companies surveyed in Germany in 2022 were able to record an increase in sales (68 percent), employees (42 percent) and investments (42 percent). For the year 2023, 53 percent of those surveyed expect increasing sales and just as many state that they will expand their activities in the next three to four years.

In Germany, they see disadvantages in terms of labor costs, the digital infrastructure and the lack of skilled workers. What they criticize most, however, is the high energy prices, even by international comparison, even before the start of the war in Ukraine instigated by Russia. “They play an important role in location decisions, especially for energy-intensive companies,” says AmCham President Menne. The location must therefore convince all the more with other facts and improve, especially in terms of securing skilled workers, reducing bureaucracy and broad digitization. “That not only helps to attract investments from the USA,” believes Menne.

In this context, IfW economist Dohse refers to a decision by Apple: The US technology giant wants to expand its chip design center in Munich with another billion euros. “If Germany invests wisely in research, education and infrastructure instead of wasting tax money on subsidies,” says Dohse, “the location will continue to be attractive for foreign investors in the future.”

Author: Klaus Ulrich