Germany at Risk as an Industrial Location, Experts Warn

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03.17.2023 The German economy wants to invest more in the US and build new sites, as the Biden administration lures companies there with generous subsidies. What consequences does that have for Germany? German companies love the United States: about 5,600 of them invest in the US market, according to data from the American Chamber of Commerce in Germany (AmCham Germany). This represents an investment volume of almost 650,000 million dollars (data from September 2022). Not only large business groups such as Siemens, Volkswagen or Linde want to strengthen their presence in the USA, in part, even by building completely new production sites there. “There are different reasons for this,” says Dirk Dohse, an expert on international competitiveness at the Kiel Institute for the World Economy (IfW). “One reason is rising geopolitical tensions. For many companies, the US appears to be a safe haven. Other reasons are comparatively low energy prices and very generous subsidies under the Inflation Reduction Act (IRA).” Cut Inflation Act Attracts Business The Cut Inflation Act is a multi-billion dollar subsidy program of the US Government under President Joe Biden and, despite what its name suggests, is dedicated not to not so much to fight inflation, but more to protect the climate. Of the nearly $430 billion made available by the IRA in total, $370 billion is earmarked for promoting CO2-saving technologies and energy security. The rest should flow to the health sector. These subsidies and tax discounts are linked to the condition that the companies that benefit from them use American products, or produce directly in the US. Therefore, the buyer of an American electric car whose battery has also been manufactured in the US. The US receives a premium of about $7,500. Wind turbines or solar systems with components from the US are also promoted. From the US point of view, preliminary products from countries with which the US has a free trade agreement, such as Mexico or Canada, are also acceptable. Tesla headquarters in Grünheide, near Berlin. Companies are already responding As a result of the US government’s plans under the IRA, there are already delays or the threat of closure of plants that make batteries for electric cars in Germany, for example at Tesla in Grünheide, near Berlin, or in the Swedish company Northvolt, which actually wants to build a factory in Heide (Schleswig-Holstein) and now probably wants to invest in the United States first. Do the alarm bells go off then for Germany as an industrial location? “Indeed, the share of the manufacturing industry in total value added in Germany has been declining since 2016. Of course we are coming from a high level. However, I do not see widespread de-industrialization,” says competitiveness expert Dohse. German Chancellor Olaf Scholz and European Commission President Ursula von der Leyen have already warned Joe Biden about distortions of competition for European companies due to generous subsidies from his government. Soon after, it was announced that Brussels would also respond with a green industrial program to give European Union states more freedom for their own subsidies in the future. Danger of a subsidy spiral “I don’t think we should get into a subsidy race,” says the IfW researcher. “Continuing to use more tax money is not the solution,” adds the expert, saying that he also sees it possible to link individual federal funding programs for young companies with a certain loyalty to place. On the other hand, the rating of several US companies active in the US is positive: “Europe’s largest economy remains an important and attractive location for many US companies,” Simone Menne, president of AmCham Germany, tells DW. “The large number of highly trained specialists, the dense infrastructure networks, the first-class technical colleges and universities, the great political stability, the strong presence on 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, 2023, sounds less optimistic. According to this AmCham Germany survey of US companies in Germany, Germany’s location rating deteriorated in 2023 for the third consecutive year. Among the disadvantages of Germany were the costs of labor, failures in the digital infrastructure, as well as the shortage of specialized personnel. (cp/ms)

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