February 14, 2018

US tax reform and its impact on US-German trade

The US tax reform will bring significant benefits to the trade and investment relationships between the USA and Germany.

Strong interest in exports to the US, especially investment products

With US taxes on corporate earnings being low in an international comparison combined with immediate write-offs and special advantages for money spent on research and development, investment in the US will become highly attractive. With tax incentives for repatriating dividends previously received abroad (approx. $2.5 trillion, roughly 20x annual German exports to the US) and tax exemption in the US for all future dividends received abroad, the motivation for US-based businesses to invest in the US will increase considerably. These new incentives are also expected to trigger a tangible increase in US demand for German investment products.

The reduction in income tax should also boost consumption in the US, a development from which German exporters could benefit.

The additional household deficit that goes hand-in-hand with the reform will result in an inflow of foreign currency should the US end up taking out more foreign debt, which will improve importing potential.

Boost in US export potential

The tax break will make it possible for businesses based in the US to lower their prices. The competitiveness of US industry is also expected to improve thanks to higher investments. Both of these factors will boost the export potential of US-based companies. It remains to be seen whether more attractive offers from US-based companies on the US domestic market will put a damper on imports.

Direct German investment in the US to become more attractive, but not without hurdles

Tax incentives for direct German investment in the US will increase tangibly with the US tax reform. However, new, complicated tax regulations in the US in connection with the reform could present hurdles. Because of these restrictions, special financing and licensing relationships with German parent companies may be subject to supplementary tax for investments in inventory. Businesses will need to carefully consider aspects such as German foreign tax legislation before deciding to outsource to the US.

Bavaria becomes more attractive to US investors

Generally speaking, interest among US businesses in direct investment in Germany as a high-tax country is expected to remain low. Compared to the rest of Germany, however, many Bavarian municipalities can expect to see increasing interest in direct investment from the US thanks to highly attractive trade tax rates. That, combined with Bavaria's other advantages, should continue to make Bavaria a popular focus for US investment.


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Dr. Benedikt Rüchardt

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