Research highlights the cost of unpredictable rules—and why policy stability matters for exporters.
MARKET INSIDER — Unpredictable trade policy can discourage foreign direct investment more sharply than trade restrictions themselves, according to research examining almost four decades of cross-border investment flows.
The study finds that, after one year, a standardized shock to trade-policy uncertainty reduces bilateral FDI by an amount equivalent to roughly 50% of its sample average, compared with approximately 15% for a trade-restriction shock.
The findings challenge the assumption that raising import barriers reliably attracts overseas factories. They also carry an important lesson for Vietnam and other Asian manufacturing economies: opportunities to capture relocated production can weaken when businesses lack confidence in future market access.
Key Highlights
- The estimated first-year impact of a trade-policy uncertainty shock is more than three times that of a trade-restriction shock.
- The research covers investment into 35 OECD economies through 2023; it does not measure the direct impact of the latest U.S. tariffs.
- For Vietnam, predictable regulation could strengthen investment appeal, but announced projects still need to translate into actual spending.
What the research measures
The analysis examines annual bilateral FDI flows from 243 source countries into 35 host economies between 1985 and 2023. It separately measures changes in trade restrictions and uncertainty surrounding trade policy.
The authors include economist Jonathan D. Ostry, who discussed the findings in a September commentary on U.S. trade policy.
Two distinctions are essential when interpreting the results.
First, the estimated reductions are expressed relative to average investment flows in the sample. They do not mean that every country experiencing policy uncertainty loses half its foreign investment.
Second, the comparison uses a one-standard-deviation increase in each policy measure. It compares statistically standardized shocks, rather than identical policy changes or equivalent increases in business costs. The restriction measure also encompasses barriers beyond tariffs. Authors’ research summary on VoxEU
Because the historical sample ends in 2023, the findings provide a framework for interpreting today’s trade tensions. They are not a measurement of investment losses caused by President Donald Trump’s current policies.
Why uncertainty can be more damaging
A manufacturer can incorporate a known tariff into its investment calculations. It can assess whether to absorb the charge, increase prices, change suppliers or produce closer to customers.
That calculation becomes harder when the tariff itself, its exemptions or its duration may change.
Factories involve substantial upfront spending on land, machinery, training and supplier relationships. Much of that expenditure cannot be recovered easily if market conditions deteriorate.
Waiting can therefore become more attractive than investing. A company may retain cash, extend existing capacity or postpone a new production line until it has a clearer view of future costs.
Ostry’s argument is that governments pursuing protectionist objectives still have an incentive to make their policies predictable. Uncertainty can impose an additional investment penalty beyond the cost of the restrictions themselves. Ostry’s September commentary
Why tariffs do not automatically attract factories
Trade barriers can encourage companies to establish production inside a protected market. Manufacturing locally may preserve access to customers while avoiding duties on finished imports.
But the opposite pressure also operates.
A factory may depend on imported components, machinery and materials. Higher trade costs can make the proposed investment less profitable even if its finished products would benefit from protection.
This creates a distinction between investment aimed at serving a domestic market and investment designed around an international production network.
A company building mainly for local customers may have a stronger reason to move behind a tariff barrier. An exporter relying on components crossing several borders may instead reduce or delay investment.
The research’s negative overall result suggests that the costs to cross-border production and the incentive to wait can outweigh investment attracted by protection.
Watch investment execution, not just announcements
For investors assessing industrial property, logistics and manufacturing businesses, the key question is whether interest in new capacity becomes committed spending.
An announced project can take time to secure financing, obtain approvals and begin construction. Registered investment, disbursement and operating production represent different stages of that process.
Company disclosures about capital-expenditure approvals, construction progress, equipment orders and tenant commitments can therefore reveal more than headline investment pledges.
There is also a timing risk. A project that remains commercially attractive may still be postponed if management expects greater clarity in several months. Such delays can affect the revenue assumptions of suppliers and infrastructure providers well before a project is formally cancelled.
The research strengthens the case for treating policy predictability as an economic asset. For governments seeking foreign factories—and investors financing the businesses around them—the credibility of the rules can matter as much as the incentives on offer.
