Bilateral protectionism reduces foreign affiliates by 1.3 percent
A one percentage point increase in bilateral protectionism reduces foreign subsidiary presence by 1.3 percent, according to a study by Banco de España and Joint Research Centre researchers. The operational hostility of discriminatory subsidies outweighs tariff-jumping incentives.
Operational hostility drives corporate exits
Researchers Luca Barbaglia, Marina Diakonova, Luis Díez-Catalán, Corinna Ghirelli, Alice Lia, Javier J. Pérez, and Stefano Verzillo constructed a bilateral Geoeconomic Protectionist Index using Global Trade Alert data across 60 countries from 2010 to 2021.
Estimating a gravity model with three-way fixed effects, the authors find that a one percentage point rise in bilateral protectionism lowers subsidiary counts by 1.3 percent and greenfield investment flows by 1.2 percent.
The contraction is driven by an operational hostility channel—such as discriminatory subsidies, which make up 59 percent of distortive measures, and public procurement exclusion—which dominates the positive 0.8 percent tariff-jumping effect.
Services absorb the heaviest toll
The deterrent effect concentrates in services and infrastructure, including transport and business services, where local physical presence is required and tariff-jumping cannot occur.
In contrast, manufacturing and trade show muted responses because cross-border goods can bypass local operational barriers through exports.
When examining geopolitical risk, the authors find that only extreme three-standard-deviation risk spikes reduce affiliate counts, with policy remaining the primary driver.
Enacted barriers beat perceived risks
The paper delivers a vital empirical benchmark for the real costs of geoeconomic fragmentation.
It demonstrates that discriminatory subsidies inflict far more damage on foreign investment than conventional border tariffs.
Corporate location choices respond to concrete policy penalties rather than vague geopolitical rhetoric.