Recent tariff increases have sparked a debate over whether trade protectionism can effectively attract foreign investment. This column analyses how firms adjust their investment strategies in response to tariff hikes. While inward FDI generally tends to rise after tariff increases, this pattern reverses for manufacturing investment, where tariff increases lower the number of new FDI projects due to higher input costs and supply chain disruptions. This is particularly the case for FDI in upstream and intermediate-goods sectors. The findings suggest that sweeping tariff measures are unlikely to foster new manufacturing capacity and may instead deter the type of investment policymakers aim to promote.
Tariffs have once again moved to the centre of economic and policy discussions, amid renewed debates on industrial strategy, rising geopolitical risks, and successive global shocks (Clausing 2025). This shift has been reinforced by the US administration under President Trump, which has imposed and threatened broad-based tariff measures aimed at reshoring production (Gasiorek and Tamberi 2025). In an April 2025 speech announcing sweeping import tariffs, President Trump declared that “companies will build right here, or pay the price”, explicitly framing tariffs as a tool to attract foreign direct investment (FDI).
The descriptive evidence so far provides little support for a (tariff-led) boom of inward investment into the US. Public communications from the White House frequently cite very large figures for new investment commitments. However, these aggregates blend multiple categories of spending, often overlapping with pre-existing plans, and in some cases include projects not yet tied to a specific corporate announcement. By contrast, project-level records from the fDi Markets database track announced greenfield FDI on a consistent, comparable basis across countries. This comparison indicates a clear divergence: the value of inbound FDI captured in fDi Markets is far smaller than the headline numbers frequently cited in policy statements, pointing to a substantial measurement gap between official narratives and observable firm-level announcements (Figure 1, left panel). While the total value of projects announced in 2025 is higher than in the same period of 2024, and above the pace seen under the previous two US administrations, the increase is highly concentrated. Nearly half of announced investment in 2025 originates from Taiwan, with Taiwan Semiconductor Manufacturing Company (TSMC) commitments serving as the main driver of the year-on-year increase (Figure 1, right panel). Moreover, the changes in FDI flows do not appear to correspond to the tariff rates applied across countries, running counter to the argument that the rise in announced FDI is prompted by firms trying to circumvent tariffs.
Figure 1 US inbound greenfield FDI announcements in 2025
Sources: FT fDi Markets and White House website.
Notes: The left panel compares greenfield FDI recorded in the FT fDi Markets database with the list of foreign investments recorded on the official White House website. The right panel shows country decomposition of US inbound FDI flows from the FT fDi Markets database. G7 includes all EU countries, Canada, Japan, and the UK. Latest observation: September 2025.
Focusing on manufacturing projects only also provides little evidence of a tariff-driven investment boom. The number of projects briefly peaked in April 2025, coinciding with the US tariff announcements, but remains well below levels recorded in the same period last year (Figure 2). Taken together, these stylised facts suggest that the recent protectionist policies have not yet translated into a sustained rise in new manufacturing investment in the US. This underscores the need for a systematic empirical assessment of how tariff increases influence firms’ location choices.
Figure 2 US inbound greenfield manufacturing FDI announcements in 2025
Sources: FT fDi Markets and White House website.
Notes: The figure depicts US inbound greenfield FDI with manufacturing as a business function. Latest observation: September 2025.
To interpret these patterns, it is useful to recall that the impact of tariff increases on FDI is a priori ambiguous, as theoretical models point to opposing mechanisms depending on firms’ investment motives (Blanchard et al. 2021). Market-seeking FDI theories, rooted in the ‘tariff-jumping’ hypothesis, argue that higher trade costs encourage firms to invest directly in the tariff-imposing country to continue serving local markets (Markusen 1984, Bhagwati et al. 1992, Brainard 1997). By contrast, efficiency-seeking theories predict that tariffs deter FDI by raising the cost of imported intermediates and disrupting vertically integrated supply chains (Helpman 1984, Helpman et al. 2004, Antràs 2004). Empirical findings remain mixed and context-dependent, reflecting data limitations and sectoral differences in investment motives. Moreover, additional and interrelated factors might be at play. For example, recent evidence suggests that global greenfield FDI flows increasingly align with geopolitical blocs, underscoring how broader international dynamics shape investment patterns (Boeckelmann et al. 2024). In addition, heightened trade policy uncertainty has been shown to dampen firms’ willingness to undertake irreversible investment, amplifying the sensitivity of FDI to policy shocks (Jinji and Inada 2020).
To assess the macro-level impact of tariffs on FDI, in a new paper we combine several data sources within a panel gravity framework (Moder and Spital 2025). Tariff increases are identified using the Global Trade Alert database, which tracks bilateral tariff changes at a highly disaggregated product level. We distinguish between low-, medium-, and high-intensity tariff increases, based on the number of product-level measures introduced in a given year, allowing us to examine whether the breadth of tariff action shapes firms’ investment responses (Figure 3, left panel). These tariff data are linked to project-level information from the fDi Markets database, which records announced greenfield investment projects worldwide. The empirical strategy relates bilateral tariff actions to changes in announced FDI projects, using a gravity-style specification with source-year, destination-year, and bilateral-pair fixed effects to control for macroeconomic conditions, policy shifts, and bilateral country-pair characteristics (e.g. the geographical distance between two countries). By exploiting within-pair variation in tariff increases over time, this approach isolates the impact of tariff changes from broader global trends. We focus on the period of 2016-2023, a period marked by heightened trade protectionism, including the first US-China trade war as well as the disruptions of the COVID-19 pandemic, marking substantial tariff increases at the global level (Figure 3, right panel).
Figure 3 Bilateral product-level tariff data
Notes: The left panel shows the intensity of bilateral tariffs in each year, with each country pair counted as one observation for that year. The right panel shows bilateral tariff measures at the product level, aggregated annually for all countries.
We find three key results. First, tariff increases are associated with a rise in overall greenfield FDI projects into the tariff-increasing country, suggesting that tariff-jumping motives dominate in the aggregate. Firms appear to increase the number of announced projects following medium- and high-intensity tariff episodes, consistent with tariff-jumping behaviour (Figure 4, blue bars). These results align with earlier evidence showing that firms may substitute FDI for trade when facing rising import barriers, particularly in final-goods industries (Blonigen 2002, Barry et al. 2016, Cardamone and Scoppola 2015).
Figure 4 Impact of tariff increases on number of FDI projects
(estimated semi-elasticities of greenfield FDI projects to tariff increases)
Note: The figure displays estimated semi-elasticities derived from Poisson Pseudo Maximum Likelihood (PPML) coefficients of regressions linking the number of greenfield FDI projects to tariff increase dummies. Semi-elasticities are computed from the estimated coefficients to represent the percentage change in the expected number of new FDI projects associated with a tariff increase. Results are shown separately for all projects (blue bars) and for manufacturing projects only (red bars).
For each group, the first bar corresponds to the specification using a single tariff-increase dummy, while the next three bars capture low-, medium-, and high-intensity tariff increases, respectively. Positive coefficients indicate that higher tariffs are associated with an increase in project numbers (consistent with tariff-jumping behaviour), whereas negative coefficients imply a decline in project numbers (consistent with efficiency-seeking motives). (***) significant at the 1% level; (**) significant at the 5% level; (*) significant at the 10% level.
Second, the direction of the impact reverses when we focus on manufacturing FDI only. We restrict the analysis to greenfield projects with investment into manufacturing (i.e. the business function of the FDI project, once completed, will be manufacturing), an investment category that policymakers often prioritise. We find that high-intensity tariff increases, defined as more than 1,500 bilateral product-level tariff measures in a single year, are associated with a sizeable decline in announced greenfield manufacturing FDI (Figure 4, red bar). This suggests that when tariffs affect a wide range of inputs, the efficiency-seeking mechanism dominates: manufacturing projects rely heavily on imported intermediates and integrated supply chains, so broad tariff actions raise input costs and reduce the attractiveness of the tariff-imposing economy. This result is consistent with earlier firm-level evidence showing that tariff hikes reduce investment in supply-chain-intensive industries (Du et al. 2014, Ghodsi 2020), and with studies highlighting the sensitivity of global value chains to trade policy shocks (Alfaro et al. 2019).
Third, we observe considerable heterogeneity across manufacturing sectors (Figure 5). Tariff-jumping responses appear in downstream, consumer-facing industries – including motor vehicles, electrical equipment, machinery, and certain electronics – which benefit from proximity to final demand and can more easily reorganise around changes in input costs. By contrast, upstream or input-intensive industries – such as refined petroleum products, rubber and plastics, fabricated metals, and pharmaceuticals – tend to reduce investment following tariff increases, reflecting their greater exposure to higher intermediate-input costs.
Figure 5 Impact of tariff increases on the number of greenfield FDI projects in manufacturing sectors
(estimated semi-elasticities of greenfield FDI projects to tariff increases)
Notes: The figure reports estimated semi-elasticities derived from PPML coefficients of sector-specific regressions based on Equation (3). Each bar represents the estimated percentage change in the expected number of greenfield FDI projects in a given manufacturing sector following a tariff increase. Positive elasticities indicate that higher tariffs are associated with an expansion in FDI projects (tariff-jumping), while negative elasticities indicate a contraction in investment (efficiency-seeking). (***) significant at the 1% level; (**) significant at the 5% level; (*) significant at the 10% level.
Overall, the results suggest that the renewed use of wide-ranging tariffs by the current US Administration could significantly reshape global FDI patterns. While tariffs may attract some investment aimed at bypassing trade barriers, the ‘protectionist gamble’ is unlikely to deliver sustained gains in manufacturing investment. Instead, large-scale tariff increases risk raising supply-chain costs, discouraging efficiency-seeking investment, and ultimately undermining the very manufacturing competitiveness they seek to protect.
Source : VOXeu
