Current Business Matters | September 2022
The complicated dynamic between Beijing and Washington of the recent years and exacerbated by their ties to Taiwan are causing for many U.S. companies to counteract Chinese dependency – especially in a post-pandemic setting after experiencing severe supply chain disruptions and other distortions in their business operations. In this vein, the U.S. companies are pursuing an increasingly reshoring strategy and moving production back to the U.S – with the majority stemming back from China by over 40% (between 2010 and 2021).
The Biden administration is concentrating on strategic priorities for the reshoring of industrial capacities from abroad and the promotion of foreign direct investments (FDI). These include the production of semiconductors, batteries for electric vehicles, medical protective equipment and pharmaceutical products, as well as the exploration and processing of rare earths.
Find more information or statistics on different case studies from companies here.
Inflation Reduction Act of 2022
On August 16, 2022, U.S. President Joe Biden signed the Inflation Reduction Act of 2022. The Inflation Reduction Act provides for total spending of USD 725 billion. The climate protection chapter alone comprises a funding framework of USD 374 billion. The funds are to be allocated over ten years to, among other things, tax credits for purchasers of electric vehicles, green technology goods and green electricity. It also provides for government grants for climate-friendly projects. With the law, the U.S. government is also pursuing the goal of stepping up the transition away from fossil fuels.
Buyers of new electric vehicles may qualify for a tax credit of up to $7,500. To qualify for the first $3,750, at least 40 % of the battery's critical minerals must be extracted or processed in the U.S. or in a country with which the U.S. has a free trade agreement or recycled in North America. The percentage is to increase each year up to 80% in 2027 and will increase to 100% in 2029. To qualify for the other $3,750, at least 50 % of the battery components, by value, must come from North America.
There are also analogous rules for tax credits for the purchase of wind turbines, solar panels, and other clean energy technologies. These, too, must be manufactured in the U.S. The White House says it wants to reduce the U.S.' dependence on China and boost domestic manufacturing. This policy, however, also affects and excludes manufacturers from the EU. A potential transatlantic trade barrier could result from the Inflation Reduction Act. For example, under the new regulations, electric cars from the EU would be priced lower than American models on the U.S. market.
You can find more details about the Act here.
Creating Helpful Incentive to Produce Semiconductors (CHIPS Act)
Shortly therafter, U.S. President Joe Biden had signed the CHIPS and Science Act. A total of 280 billion US dollars (around 271 billion euros) is to be invested in future technologies in the USA. Thereof, 52 billion U.S. dollars will be allocated to the construction of chip factories over the next five years. The rest of the money is to be spent primarily on research in high-tech fields such as artificial intelligence and quantum computers. The CHIPS Act is primarily intended to strengthen the U.S. in economic competition with China, Taiwan and South Korea, where most of all semiconductors are currently produced.
Corporations in the U.S. that want to benefit from the CHIPS Act will not be allowed to make certain investments in China or other potentially "unfriendly countries" for ten years. Semiconductors that do not fall under the current cutting-edge technology and are needed for mass production can continue to be imported from China into the U.S.
The Executive Order in full length can be found here.
The dramatic rise in prices for gas and electricity linked with the unpredictability of energy costs is burdening companies in all sectors and along the value chain. For companies, this is leading to increased internal location competition and difficulties in planning for the future. Some companies fear a decline in the willingness to invest and considerations of relocating production.
As this Der Spiegel article mentions, the crisis has critically impacted the German economy’s competitive power in all sectors by stalling or reducing production and skyrocketing prices passed on to consumers leading already to insolvencies in many cases. Furthermore, the combination of inflation, fear of recession with the mix of labor shortage is creating a bleak picture for the future. Another source describes how this crisis has affected Germany’s export power, pushing Germany to its first trade deficit after three decades.
Within this context, AmCham Germany welcomes the possibility of transatlantic cooperation in the field of energy and climate through the Climate & Energy Partnership that was officially initiated on May 27, 2022 as part of the G7 framework. The aim of the partnership is to foster and facilitate energy cooperation and reach climate neutrality targets as well as secure (sustainable) energy especially in the areas of wind- and hydrogen technologies.