Third-country FDI relocation in response to the US-China tariff war

This study examines the third-country effects of U.S. industry-level tariffs on China, focusing on their impact on third-country firms' outward foreign direct investment (FDI). Using Korean firm-level data from 2016 to 2022, we distinguish the number of foreign subsidiaries from total FDI by incumbent firms to analyze detailed shifts in Korean firms' FDI in response to U.S. tariffs on China. Our findings indicate that higher U.S. tariffs on China increase Korean multinational firms' FDI in the U.S., particularly among larger firms. Conversely, these tariffs reduce the number of foreign subsidiaries of incumbent Korean firms in China, especially for firms with higher import shares and in industries where Chinese firms hold a larger U.S. import market share relative to Korean firms. However, we find no evidence of a decline in total FDI to China; instead, overall FDI increases. Additionally, U.S. tariffs on China drive large Korean firms to expand FDI into third countries such as ASEAN. This tariff-driven shift, especially at the extensive margin, is more pronounced in industries where China holds a higher share of U.S. imports than Korea.