Everyone calm down: The U.S. Inflation Reduction Act isn’t as bad as many make it out to be, the German Economic Institute said on Wednesday.
European politicians are grappling over how to respond to Washington’s $369 billion green subsidy package to keep companies on the continent. But the effects of the act have been wildly exaggerated by media and politicians, the Cologne-based institute argues in a new paper, and launching a retaliatory spending spree could be a mistake.
“Many see this [act] as an attack on Germany as an industrial powerhouse, and more than a few see a continuation of Trump’s protectionism with other instruments. On closer inspection, however, the criticism and scandalization appear to be both self-righteous and exaggerated,” the paper reads.
“Self-righteous, because the U.S. is now taking climate protection seriously and wants to restructure industry by perfectly legitimate means, and exaggerated because there is never just one factor that causes investment locations to erode.”
The paper comes a day after European Commission President Ursula von der Leyen announced a Net-Zero Industry Act, which aims to bolster Europe’s clean tech industry in response to the U.S. subsidy package.
One of the key players is Germany, which seems to have shifted its position in recent weeks from being cautious about subsidies to supporting France’s push for more money for industry.
Yet the German economy could end up benefiting from the U.S. IRA instead of losing out, the analysis found. That’s because the act will likely boost the U.S. economy — and in turn demand for exports from Germany.
A bigger cake
“Figuratively speaking, the cake gets bigger. If parts of [the subsidies] are not accessible due to the discriminatory elements, the German economy will still end up with more than before,” the paper reads.
While the paper focused on Germany, other EU countries will likely face a similar situation, author Jürgen Matthes told POLITICO. “It’s the same logic,” he said.
The IRA itself is also less discriminatory than many make it out to be, the institute argues. So-called local content requirements, which favor domestic products over imported ones for tax breaks and subsidies, is problematic and could be in breach of World Trade Organization rules, the institute said. But their actual impact on companies in Europe could be small.
For example, tax breaks are only granted to products under a certain price — and a large chunk of German cars that get exported to the U.S. are more expensive, according to the research. That would mean that those cars would fall out of the subsidy scheme anyway, with or without local content requirements.
And shifting supply chains is expensive, so even if companies failed to qualify for subsidies because they imported too many parts from Germany, that wouldn’t mean they would shift the production of those parts to the U.S., the authors said.
For all the frenzy in recent weeks, meanwhile, German companies have kept surprisingly quiet on the law, Matthes said. When laws are in the making that are to the detriment of companies’ interests, they usually voice their concerns. “But that’s been happening relatively little over the IRA,” he said. “Companies don’t seem to think there is a massive problem.”
Why then have many politicians slammed the IRA in recent weeks?
“The discussion seems to us a bit as if all those who have always been in favor of more subsidies and more industrial policy now see this as a great opportunity to finally push this through at the European level as well,” Matthes said.