Impact of the U.S. Inflation Reduction Act on the Bavarian Economy

The US Inflation Reduction Act (IRA) leads to competitive disadvantages for Bavarian companies, but these are limited. There is an incentive to invest in or relocate to the USA, but this is due to the fundamental attractiveness of the USA as a business location.

Promotion of energy and climate protection investments

The Inflation Reduction Act consists of several elements. The focus is on the area of energy and climate protection, which is the subject of this study. Over its ten-year term, spending on energy and climate protection is estimated at USD 391 billion. The IRA will noticeably stimulate climate-friendly investments in the USA, but the overall economic effects are rather small, not least because the IRA also provides for tax increases.

Protectionist elements of the IRA

The IRA contains various measures that distort competition in favor of the USA and can be considered protectionist in some cases. Opex subsidies (operational expenditures), i.e. the permanent subsidization of ongoing operating costs, are particularly distortive. The IRA funding program also leads to a reduction in the cost of renewable energy in the USA. The clean vehicle tax credit is only granted to private consumers for vehicles that are manufactured or assembled in the United States. The tax credit is even higher if a minimum volume of upstream products comes from US companies. There are also so-called domestic content regulations for other areas.

Negative but limited impact on the Bavarian economy

There will be distortions for Bavarian exporters, as the competitive conditions for US companies will improve. However, these are less than feared. For example, the domestic content rules stipulate that 45% of inputs can be sourced from abroad. There are also exceptions if the required primary products are not available in the USA. For electric cars produced abroad, the tax credit is granted if the vehicles are leased. For certain areas of mechanical engineering or electrical equipment, a positive effect is even conceivable if Bavarian special equipment investment goods are in demand for the subsidized investments. Bavarian companies with US locations do not experience any distortions, as they benefit from most of the IRA regulations.

Relocation incentives due to attractive investment conditions in the USA

Due to the better investment climate in the USA, there is an incentive for Bavarian companies to invest in the United States or to relocate parts of their value creation there. The IRA in itself is not decisive for this. However, the discussion about the IRA has brought the USA back into focus, especially as companies are increasingly dissatisfied with the conditions in Germany. In addition to location conditions, market size also plays an important role.

Urgent need for improved location conditions in Germany

Both the European Commission and the German government are urgently called upon to pursue economic policies to improve location quality and business competitiveness in Europe and Germany. The IRA can serve as a model for optimizing European industrial policy and making funding programs less complex, less bureaucratic, and faster to implement.

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