After the Midterms: Populism, Elections and the Multinational's Political Risk Map
Ask most executives whether an American midterm election matters to their international strategy. I am sure the vast majority of them will be indifferent. Well, the reason might be that, in the United States, formal institutions remain strong no matter what happens in the elections. Strong courts, a free press, freedom of speech, and a constitution that makes sudden change difficult. You could say midterms just change a few faces in Washington, but not the rules of the game. That belief has aged badly. Over the past two years, the world's largest economy has produced more uncertainty about trade policy than at any point in the four decades for which we have trade-related measures. And truth being said, the results of the midterms did not end that uncertainty. If anything, it reopened it.
A vote that reopens the trade question
On 3 November, Democrats won control of both the House of Representatives and the Senate. Before the vote, House Democratic leader Hakeem Jeffries said he would bring bills to the floor in 4-5 days, including moves to end President Trump's tariffs and restore Congress's power over trade. But what does this mean to an average multinational doing business in the United States? Well, for a multinational, this is not a simple victory for free trade. The President keeps his veto and his remaining trade powers. The Supreme Court already ruled in February 2026 that emergency powers (IEEPA) cannot be used to impose tariffs, yet 50% tariffs on steel, aluminum, and copper remain under a different law. What the midterms create is a new round of negotiation between a populist executive and a legislative body that now wants a say. For companies deciding where to build their next plant, that means two more years of not knowing the exact rules.
Why firms wait when a vote is coming
The link between elections and investment is well documented in the literature. Julio and Yook (2012), writing in the Journal of Finance, find that firms around the world cut investment by an average of 4.8% in national election years compared with other years. The reason is simple. Setting up a new factory is hard to undo, and if you do, it comes at a huge cost. When a vote could change taxes, tariffs, or regulation, waiting until the result is known has real value, what economists call the option value of waiting.
The effect is stronger across borders. In a later study in the Journal of International Economics, Julio and Yook (2016) show that US companies' investment in their foreign affiliates falls considerably just before a host country's national election. The drop is larger when the race is close and when the country has a history of reversing its policies. Portfolio investment, which can be sold in a day, shows no such pattern. It is the irreversibility of foreign direct investment (FDI) that makes it so sensitive to politics.
For decades, the United States itself barely registered on this radar. Figure 1 shows how that has changed. It plots the trade policy part of the Economic Policy Uncertainty index developed by Baker, Bloom and Davis (2016), which tracks how often major newspapers discuss trade policy together with uncertainty.
The 2016 and 2024 elections both triggered sharp jumps. But after 2024, the index moved to a different scale altogether. It peaked in April 2025, the month of the so-called "Liberation Day" tariff announcements. In September 2026, it still stood at about eleven times its long-run average. For international managers, the United States is no longer the stable benchmark for measuring other countries' political risk.
Populism and the paradox of the biggest market
In my July article on populism, I discussed two studies that are worth recalling here. Carballo Perez and Corina (2024), in the Global Strategy Journal, show that US multinationals invest less in democracies governed by populist leaders, although strong institutions soften the effect. Jandhyala, Kunczer and Lindner (2026), in the Journal of International Business Studies, find that a highly populist government is associated with a 28% lower probability of receiving a foreign investment. Yet they also show that a pro-business populist government can attract investment, while an anti-immigration stance pushes it away.
The United States adds a twist to this story. If uncertainty deters investment, we should expect foreign companies to have pulled back sharply. Figure 2 shows what actually happened.
Investment did fall in 2025, to its lowest level since the pandemic year of 2020. In the first quarter of 2025, as the tariff threats piled up, inflows ran at an annual rate of just $148 billion. But in the first half of 2026 they recovered to an annualized $336 billion, above the long-run average.
Why? Because uncertainty is not the only force at work. When a market is very large and is protected by tariffs, foreign firms have a strong reason to produce inside it rather than export to it. Trade economists call this “tariff-jumping investment”, and Blonigen (2002) showed decades ago that protection can pull foreign production into the protected country. Populist trade policy can therefore deter and attract at the same time. Companies that must be inside the tariff wall invest. The rest play the waiting game.
Some final thoughts
We should be careful not to read too much into one night's results. A Democratic Congress cannot remove tariffs on its own, since any bill must still survive a presidential veto. The evidence I have discussed also describes averages across many countries and elections, and individual industries will respond very differently. FDI figures are revised often, and half a year of data is not yet a trend.
Three questions remain open. Will a divided government reduce trade policy uncertainty, or simply replace one kind of uncertainty with another, as each side tests the limits of its power? Will the companies that jumped the tariff wall in 2025 and 2026 stay if the wall comes down? And will other governments read the American experience as a warning, or as a model?
What we can say is that the United States has joined the list of countries where political risk must be continuously (re)assessed. For international managers, that is a significant change, and a single election will not reverse it.
References
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636.
Blonigen, B. A. (2002). Tariff-jumping antidumping duties. Journal of International Economics, 57(1), 31–49.
Carballo Perez, A., & Corina, M. (2024). Foreign direct investment in the context of rising populism: The role of institutions and firm-level internationalization. Global Strategy Journal, 14(1), 84–115.
Jandhyala, S., Kunczer, V., & Lindner, T. (2026). Populism, regime characteristics, and MNC location choice. Journal of International Business Studies, 1-20.
Julio, B., & Yook, Y. (2012). Political uncertainty and corporate investment cycles. The Journal of Finance, 67(1), 45–83.
Julio, B., & Yook, Y. (2016). Policy uncertainty, irreversibility, and cross-border flows of capital. Journal of International Economics, 103, 13–26.
Data sources
Federal Reserve Bank of St. Louis. (2026). Economic Policy Uncertainty Index: Categorical index: Trade policy [EPUTRADE]. FRED.
US Bureau of Economic Analysis. (2026). Rest of the world; foreign direct investment in the US; liability, transactions [ROWFDIQ027S]. Retrieved from FRED, Federal Reserve Bank of St. Louis.
