Tariffs boost overall FDI, deter manufacturing investment
A new European Central Bank article reveals that while tariffs generally increase greenfield foreign direct investment, they can deter manufacturing FDI. The analysis, published in the Economic Bulletin, examines global data from 2016 to 2023.
Tariff-jumping vs. global value chains
Tariff increases are generally associated with a rise in greenfield foreign direct investment announcements, supporting the 'tariff-jumping' motive.
A low-intensity tariff increase leads to a 4% rise in announced projects, while a high-intensity increase boosts them by 24% in the year before and after.
However, this direction reverses for manufacturing FDI.
High-intensity tariff increases lead to a 21% fall in announced manufacturing projects in the same year, highlighting the importance of input costs and vertical linkages in global value chains.
The impact also varies significantly by sector: textiles, motor vehicles, computers, electrical equipment, and machinery show positive effects, often producing final goods.
Conversely, sectors like wood, refined petroleum, rubber, plastic, fabricated metals, and pharmaceuticals, which are upstream and capital-intensive, show negative FDI responses.
This suggests tariffs are ineffective at boosting manufacturing greenfield FDI and can even deter it.
Beyond simple trade barriers
The relationship between tariffs and foreign direct investment (FDI) is complex, depending on the investment type.
Tariffs can spur 'tariff-jumping' FDI to serve local markets, or deter it by raising production costs for firms in global value chains.
This dual effect is key to understanding tariff policies.
The analysis uses announced greenfield FDI data from 2016-2023, noting limitations like not tracking actual implementation or disinvestment.
The article also examines US inward and outward FDI post-2025 tariff announcements, highlighting risks for the euro area from trade barriers aimed at onshore production.
Protectionism's mixed blessing
This ECB analysis provides a crucial empirical lens on the complex interplay between trade policy and investment, confirming protectionist measures yield varied outcomes.
While tariffs broadly attract investment, their counterproductive effect on manufacturing FDI highlights the critical role of integrated supply chains.
Policymakers must therefore exercise caution, as broad tariff measures risk undermining the industrial resilience they aim to foster.