German fears over U.S. Inflation Reduction Act have not materialised – economists

The U.S. Inflation Reduction Act (IRA) is likely to promote German exports rather than harming them, the German Economic Institute (IW) has found. The economists, however, warned that a return of Republican candidate Donald Trump’s protectionist policies could impact German industry.

Introduced by the Biden administration in 2022, the IRA promotes investment in climate protection through subsidies and tax rebates – but stipulates a minimum share of U.S.-produced technology in some areas. However, less than half of the IRA’s schemes favour U.S. manufactures, and trade figures for 2023 show a rise in German exports of machinery and electrical equipment compared to total U.S. exports, the  industry-sponsored think tank IW said.

While it was too soon to make solid judgements, the think tank’s “initial assessment” concluded that, on balance, increased demand for green technology spurred by the act was likely to benefit German manufacturers. The IW also said it is optimistic that concerns over industry relocating from Germany to the U.S. are unlikely to be realised – partly because of attractive incentives offered by some German federal states.

Still, the outlook depended on the result of the U.S. election this week, the researchers added. The IW said that regardless of who wins, Trump or Democratic candidate Kamala Harris, the next administration is unlikely to scrap the IRA altogether. However, Trump could put German manufacturers at a disadvantage by scrapping subsidies for imported e-cars – and even a Harris administration could be forced to make cuts to IRA programmes due to the country’s budget deficit, the researchers added.