Comment on “Trade and FDI Policies in an Interdependent World: Lessons From East Asia”

Chen et al. (2026) provide timely evidence on how trade and foreign direct investment (FDI) policies generate spillovers that extend beyond the countries that implement them. At a time when geopolitical tensions, economic security concerns, and supply chain disruptions are reshaping the global economy, understanding these third-market effects is of first-order importance. By combining firm-level evidence, a conceptual framework, and a synthesis of several episodes in East Asia, Chen et al. (2026) demonstrate that policies designed as bilateral interventions—anti-dumping tariffs, FDI liberalization, or even politically induced uncertainty—propagate through global value chains (GVCs) and reshape production, employment, and investment decisions across multiple countries. A central contribution of Chen et al. (2026) is that trade and investment policies cannot be evaluated within a purely bilateral framework once production is internationally fragmented. In a world characterized by multinational production and inter-market linkages, firm-level decisions transmit shocks across borders through entry, exit, and reorganization along supply chains. This emphasis on firm heterogeneity and network structure gives Chen et al. (2026) a coherent foundation that unifies otherwise distinct policy episodes. Chen et al.'s (2026) first major contribution is to clarify the seemingly conflicting evidence on trade deflection versus trade depression. Earlier studies suggest that exporters targeted by tariffs redirect shipments to alternative markets. In contrast, other work documents broad export contractions. Drawing on detailed Chinese customs data and a difference-in-differences framework, Chen et al. (2026) reconcile these findings by distinguishing firm-level and aggregate-level responses. While surviving firms may successfully reallocate exports, the number of exporters declines on the extensive margin, producing an overall contraction in trade. This distinction between micro-level flexibility and macro-level fragility is particularly illuminating. It implies that aggregate trade resilience depends critically on entry and exit decisions, not merely on the intensive margin of surviving firms. The accompanying three-country model further sharpens this insight. By embedding firm entry into an interdependent Cournot framework, Chen et al. (2026) show how unilateral tariffs can reduce total exports even when some firms expand in third markets. The model's tractability is valuable because it transparently illustrates how inter-market linkages amplify the contractionary effects of trade barriers. In doing so, the paper offers a theoretical lens through which recent episodes—such as the U.S.–China trade war—can be better understood. The second contribution concerns the role of FDI policies in deepening international interdependence. Building on evidence from China's 2002 FDI liberalization, Chen et al. (2026) show that Japanese multinationals expanded exports from their Chinese affiliates back to parent firms rather than primarily serving the Chinese domestic market. Production became more fragmented across borders, domestic manufacturing employment in Japan declined, and service-oriented and R&D activities expanded. Rather than substituting for trade, FDI intensified cross-border linkages through regional value chains. This episode complements the analysis of tariffs by demonstrating that liberalization, much like protection, reshapes multinational production in ways that reverberate internationally. The third contribution broadens the notion of policy barriers to include intangible shocks such as geopolitical disputes and health crises. The evidence that uncertainty alone—without formal tariffs or regulations—can depress firm sales, investment, and expectations suggests the importance of beliefs as an economic transmission channel. These findings also suggest a useful connection to the broader literature on uncertainty and firm dynamics (Bloom et al. 2025), where expectations and forecasting ability play an important role in shaping firm decisions. In this sense, trade and FDI policies operate not only through prices and quantities but also through the credibility and stability of the policy environment. Taken together, these three lines of evidence deliver a coherent message: once production is organized through GVCs, no policy is purely local. Tariffs affect entry decisions abroad, liberalization restructures employment at home, and political shocks alter investment plans across borders. Chen et al. (2026) are particularly effective as a synthetic contribution that integrates several related studies into a unified narrative on interdependence and policy spillovers. At the same time, several issues merit further reflection. First, the external validity of the findings deserves further discussion. East Asia, and particularly the China–Japan nexus, is characterized by dense production networks, geographic proximity, and historically deep economic integration. These features may amplify spillover effects relative to other regions. It would therefore be useful to clarify whether similar trade-depression dynamics or FDI-induced restructuring should be expected in settings with weaker supply-chain integration, different institutional environments, or less developed multinational networks. More broadly, while Chen et al. (2026) link trade policy, FDI liberalization, and uncertainty shocks under the common theme of interdependence, the mechanisms through which these different policy episodes propagate across countries may operate differently depending on whether they induce mere trade rerouting or broader production reallocation within global value chains (Alfaro and Chor 2023). Second, the analysis primarily emphasizes short- and medium-run adjustments. The longer-run dynamics of reconfiguration remain less explored. Over extended horizons, firms may diversify suppliers, relocate production, invest in automation, or innovate to mitigate policy risks. Moreover, these organizational changes raise important measurement issues that deserve greater attention. As production is increasingly fragmented across borders and intra-firm trade expands, observed improvements in productivity or trade performance may partly reflect accounting reallocations of value added rather than purely technological gains. For example, when multinationals offshore low-value stages while retaining high-value services or R&D at headquarters, measured productivity at home can rise mechanically even if underlying efficiency changes little. Recent research using Japanese customs data suggests that offshoring can bias firm-level productivity estimates when imported intermediate inputs are not properly measured in production function estimations (Fukao et al. 2025). Similarly, the growing importance of intra-firm transactions and transfer pricing may complicate the interpretation of recorded trade values and profits across locations, as related-party export prices may respond systematically to tax differentials across countries (Hasegawa et al. 2026). Recognizing how global value chains affect the measurement of productivity and firm performance would therefore be a fruitful direction for future research and would complement the paper's emphasis on real adjustment mechanisms. These points should be interpreted as avenues for extension. Chen et al. (2026) already provide a valuable framework for thinking about how policies interact with firm organization in an interdependent world. Its combination of micro data, a conceptual framework, and policy-oriented interpretation makes it particularly well suited for recent discussions of supply chain resilience. Importantly, the finding that firm-level adaptability does not necessarily translate into aggregate resilience offers a cautionary lesson for policymakers who expect market adjustments to offset the effects of targeted policy interventions. Overall, Chen et al. (2026) offer a persuasive and carefully argued demonstration that trade and investment policies cannot be assessed in isolation. In a world of fragmented yet tightly connected production networks, interventions aimed at one country or sector inevitably generate broader consequences. By highlighting the roles of entry, multinational production, and expectations, the paper deepens our understanding of globalization's transmission channels and provides a solid foundation for future research on how firms and governments navigate an increasingly uncertain international environment.