The Impact of the U.S. Inflation Reduction Act (IRA) on the German Economy

Tasks

The report presents the measures of the Inflation Reduction Act (IRA) and calculations of national effects. The volume of the IRA is compared with previous subsidy programs in the United States and Europe. Implications arising from the corporate alternative minimum tax are discussed. In order to describe how the IRA affects the German economy, bilateral trade data between Germany and the United States are descriptively analyzed. In addition, the impact of the IRA on the German economy is described qualitatively. In addition, the theoretical rationale and possible effects of subsidies are discussed based on relevant work in the research literature. Finally, the study addresses possible policy implications.

Methods

Descriptive analysis of trade flows and literature review.

Data and other sources

German Federal Statistical Office, OECD ICIO 2021, United States International Trade Commission (USITC), Association of the German Automotive Industry (VDA), BACI, WTO IDB, International Energy Agency (IEA), IMF and CBO.

Results

The impact of the IRA on the U.S. domestic economy is controversial. Empirical studies on the impact of the IRA on trading partners, especially Germany, are not available. Descriptive statistics show that the United States is an important market for German products, especially in the automotive, machinery, and pharmaceutical industries. Possible counter-reactions by the German government or the European Union should be viewed with caution in light of the threat of a subsidy race with negative consequences for all parties involved.