The protectionist gamble: How tariffs shape greenfield foreign direct investment

Isabella Moder and Tajda Spital

No 3144, Working Paper Series from European Central Bank

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

Keywords: gravity model; greenfield FDI; protectionism; tariffs; trade policy (search for similar items in EconPapers)
Date: 2025-11
New Economics Papers: this item is included in nep-fdg and nep-iaf
Note: 2769592
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20253144

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