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

Chen et al. (2026) provide a theoretical analysis, an empirical analysis, and a discussion of studies that contribute to our understanding of how cross-country interactions spill over to other parts of the world. Since the late 2010s, the global trend has been turning backward: tariff rates have risen, geopolitical tensions have intensified, and policy uncertainty has increased. Chen et al. (2026) give relevant insights into the current unharmonized world. Section 2.3 of Chen et al. (2026) summarizes key empirical findings from Chen et al. (2025), who investigate how anti-dumping duties imposed on China affected Chinese exports to countries that imposed them and to third countries. Section 3 summarizes key results from Alviarez et al. (2022), who examine the effect of China's foreign direct investment (hereafter FDI) policy on Japanese multinational firms' operations in China and Japan. Section 4 summarizes key results in Chen et al. (2022), who examine the effect of the 2012 island dispute between Japan and China on Japanese multinational firms' operations in China. The first study, Chen et al. (2025), shows that the effects of anti-dumping duties on exports from the imposing country to third countries differ between the country level and the firm level, and this difference arises from firms' entry margins. The second study, Alviarez et al. (2022), highlights the importance of large multinational firms facilitating sectoral reallocation from manufacturing to services in response to FDI policy shifts. The third study, Chen et al. (2022), shows that the island dispute reduced investment by Japanese multinational firms in China, and that their expectations of future sales play a key role in explaining the decline. Thus, all three studies reviewed in Chen et al. (2026) advance our understanding of how multinational firms shape the global economy and give related insights associated with ongoing uncertainty arising from, for example, the US trade policy, rising geopolitical risks, and restructuring global value chains due to the uncertainty. Chen et al.'s (2026) section 2.2 develops a three-country model in which countries A, B, and C compete in a Cournot fashion. It examines how the unilateral imposition of a tariff by country A on country B, τ BA > 0 $$ {\tau}_{BA}>0 $$ , affects trade flows across countries, clarifying three channels: trade creation, trade destruction, and trade deflection. One of my original comments pertained to the four equations that summarize trade flows across countries with tariffs (equations (7–10) in Chen et al. (2026)). In the original manuscript, τ BA $$ {\tau}_{BA} $$ appeared twice on the right-hand side of m BB * * $$ {m}_{BB}^{\ast \ast } $$ (and m BC * * $$ {m}_{BC}^{\ast \ast } $$ ), which made it slightly difficult to interpret the effects of the tariff variable on trade flows. However, the revised manuscript has rearranged the equation by combining the two variables, thereby clarifying the implications of the tariff variable. Chen et al. (2026) provide macro evidence and micro evidence. Interestingly, the two datasets at different aggregation levels suggest different results. Working with a macro-aggregate dataset, the analysis demonstrates that China, country B in the theoretical context, reduced its aggregate exports to countries A and C. This result is inconsistent with the theoretically shown trade deflection effect. On the other hand, analysis of a micro firm-level dataset demonstrates that firms in China increased their exports to country C. This result is consistent with the trade deflection effect. Chen et al. (2026) propose a rich model with several key elements: an arbitrary number of countries, heterogeneous firms, endogenous entry, varying fixed entry fees across different markets, endogenous markups, and separate considerations on iceberg trade costs and tariffs to explain both the macro- and micro-evidence consistently. Their model shows that a unilateral tariff imposition by a country reduces the overall profitability of global markets, thereby decreasing the total number of firms worldwide. This leads to a trade destruction effect at the macro level. On the other hand, individual surviving firms increase their exports to third markets, as demonstrated by the trade deflection effect using the simple model. I would like to note that the simple three-country model provides interesting insights into the effect of the unilateral tariff τ BA > 0 $$ {\tau}_{BA}>0 $$ on the third country's variables. Chen et al.'s equations show that: (1) country C decreases its exports to country B: m CB * * < m CB * $$ {m}_{CB}^{\ast \ast }<{m}_{CB}^{\ast } $$ ; (2) country C decreases its domestic sales, m CC * * < m CC * $$ {m}_{CC}^{\ast \ast }<{m}_{CC}^{\ast } $$ ; and (3) country C increases its exports to country A: m CA * * > m CA * $$ {m}_{CA}^{\ast \ast }>{m}_{CA}^{\ast } $$ . In the context of the US-China Trade War in 2018–19, country A could be the US, country B could be China, and country C could be, for example, Vietnam.1 Existing studies have shown that Vietnam experienced an increase in exports to the US (e.g., Fajgelbaum et al. 2023), which is consistent with result (3) in the simple three-country model. Since the considerations above suggest that the theoretical predictions in the simple three-country model tend to match with micro-level firm behavior, rather than macro-level aggregate statistics, the results and considerations presented in Chen et al. (2025, 2026) suggest the importance of examining not just macro-aggregate statistics but also firm-level intensive and extensive margins. It could be the case that, for example, (1) highly productive Vietnamese firms increased their exports to the US, (2) there was an exit of less productive firms, and (3) the former rather than the latter explains the increase in aggregate exports from Vietnam to the US. A further interesting extension includes international input–output linkages (e.g., Caliendo et al. 2019), spatial heterogeneity within each country (e.g., Choi et al. 2024), multinational production (e.g., Alviarez et al. 2022), and an endogenous determination of tariffs by the government (e.g., Furusawa 1999). Nevertheless, Chen et al. (2025) already include several key ingredients necessary to explain the empirical results they present, and Chen et al. (2026) successfully summarize their contributions and the intuition behind the results. The topics of “trade wars” and “tariffs” were once considered classical research themes that scholars thought no longer needed serious attention, given the lower tariff levels achieved between the 1970s and 2000s and the emergence of a reciprocal era of trade policy (Irwin 2020). However, recent trade frictions and rising geopolitical tensions have brought these issues back from old textbooks onto the urgent research agenda. Chen et al. (2026) provide an excellent review of this resurgence, highlighting how old topics have become new again.