European Central Bank working paper finds tariff hikes can lift overall greenfield FDI but broad increases deter manufacturing projects

The European Central Bank published a working paper assessing how bilateral tariff increases affect greenfield foreign direct investment (FDI) intentions over 2016–2023. Using announced project data, it finds tariff increases are associated with more greenfield FDI overall, consistent with “tariff-jumping”, but that broad-based tariff increases significantly reduce greenfield manufacturing projects, suggesting tariffs are an unreliable tool for attracting foreign manufacturing investment. The analysis links Global Trade Alert product-level tariff data with Financial Times fDi Markets announced greenfield projects and OECD bilateral inward FDI stock statistics, estimating gravity models with tariff leads, contemporaneous effects and lags, and categorising tariff intensity by the number of product-level measures. Medium-intensity tariff increases (4–1,541 measures) are associated with about a 6% rise in total projects in the following year, while high-intensity increases of more than 1,541 measures are associated with around a 24% rise, but the same high-intensity shocks coincide with roughly a 21% fall in manufacturing projects. Sectoral results show heterogeneity, with positive responses in textiles, motor vehicles, computers and electronics, electrical equipment and machinery, and negative responses in several upstream and input-producing sectors including wood, refined petroleum, rubber and plastics, fabricated metals and pharmaceuticals; OECD stock results point to a modest positive association mainly for low-intensity tariff increases.