Tax competition for mobile capital can lead to either too low or too high tax rates on capital, depending on the level of external trade protection. When a country's central government can set tariffs, tax competition results in inefficiently low tax rates. However, without tariffs, tax rates can be too high. Regions may even choose to subsidize capital to benefit from favorable trade terms, but this subsidy may end up being too low. These findings have implications for the European Union's Single Market, where non-EU firms have increased foreign direct investment in response to trade protection measures.