Tariffs and foreign direct investment – a nuanced relationship

Isabella Moder, Tajda Spital, Virginia Di Nino, Lorenz Emter and Michael Fidora

Economic Bulletin Articles, 2026, vol. 3

Abstract: Tariffs have re-emerged as a key policy tool amid rising protectionism, renewed industrial policy activism and growing geopolitical fragmentation. This article analyses the conditions under which tariffs can encourage new greenfield foreign direct investment (FDI) projects, with a focus on the manufacturing sector. The results indicate that tariffs can encourage “tariff-jumping” greenfield FDI projects aimed at serving local markets. However, high-intensity tariff increases tend to deter new greenfield manufacturing FDI in sectors that are deeply integrated into global value chains and that rely heavily on imported intermediate inputs, such as manufacturing. A case study of US inward greenfield FDI following the 2025 US tariff announcements finds little evidence of a tariff-driven surge in US inward investment or of a decline in US outward investment. From a euro area perspective, the risk that increased outward FDI could have a dampening effect on domestic investment in the euro area is therefore limited. However, increased outward FDI may further weaken exports to the United States in addition to the negative impact of the US tariffs. JEL Classification: F13, F21, F23, F68

Keywords: gravity model; greenfield foreign direct investment; protectionism; Tariffs; trade policy (search for similar items in EconPapers)
Date: 2026-05
Note: 2769592
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbart:2026:0003:1

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