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The protectionist gamble: How tariffs shape greenfield foreign direct investment

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  • Moder, Isabella
  • Spital, Tajda

Abstract

Motivated by current events, this paper assesses the impact of tariff increases on bilateral greenfield foreign direct investment (FDI) over the period 2016-2023. Leveraging a comprehensive dataset of announced greenfield investment projects, official FDI statistics, and bilateral product-level tariff data, we estimate a series of gravity equations to uncover key relationships. Our results show that, at an aggregate level, tariff increases are associated with a rise in greenfield FDI, consistent with the tariff-jumping hypothesis. However, this positive effect reverses for greenfield manufacturing FDI, where high-intensity tariff increases significantly deter investment. A sectoral analysis reveals substantial heterogeneity: consumer-facing industries tend to attract more investment following tariff hikes, while input-intensive sectors experience declines. Overall, our findings suggest that using tariffs to stimulate foreign manufacturing investment is a risky strategy. JEL Classification: F13, F21, F23, F68

Suggested Citation

  • Moder, Isabella & Spital, Tajda, 2025. "The protectionist gamble: How tariffs shape greenfield foreign direct investment," Working Paper Series 3144, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253144
    Note: 2769592
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F68 - International Economics - - Economic Impacts of Globalization - - - Policy

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