Footloose capital and forced agglomeration: Do “build them here†policies work?

Concerned with persistent U.S. trade deficits, President Trump has taken concrete steps to restrict imports, while leaving the country open for foreign inward investment. His recent tweet “build them here!†suggests he aims to block imports while encouraging foreign inward investment and demanding domestic businesses to stay, so that more industrial goods are produced in the U.S. By using the footloose capital model and introducing the concept of forced agglomeration, this paper offers a theoretical exploration of “build them here†policies. In a two-country setting, it is shown that a country can implement such a policy by banning imports, which raises the returns to capital in that country, to lure in foreign firms and capital. Conditional on non-retaliation by the foreign country and non-opposition by home citizens who suffer (short-term) losses from the import ban, the country can successfully force agglomeration, and it will unambiguously gain (compared to the initial symmetric equilibrium), while the foreign country loses from higher costs-of-living. A stability condition for the forced agglomeration equilibrium is derived; forced agglomeration is more likely to sustain between countries with lower trade costs and in industries with lower elasticities of substitution.