Primary productivity in terrestrial ecosystems can be significantly altered by the predicted increases in nitrogen (N) deposition, but it is still unclear how N deposition influences the carbon (C) exchange processes especially in dryland ecosystems. In this study, a 3-year experiment with two types of fertilizers and five N addition levels was conducted in a semiarid steppe of Erguna, Inner Mongolia to assess the effects of exogenous N input on net ecosystem productivity (NEP), gross ecosystem productivity (GEP) and ecosystem respiration (ER). Our results showed that enhanced N input significantly increased NEP and GEP when the volumetric soil water content (VWC) was greater than 15% (v/v%), but had trivial and inconsistent effects when VWC was less than that threshold. Moreover, the NEP and GEP increased significantly with increasing N addition but leveled off when the N input reached 10 g N m^–2 year^–1 and the VWC was above 15%. However, the ER showed a significant increase with N addition rates, regardless of soil water content. Our main findings are as follows. First, the ecosystem C exchange can be significantly enhanced by addition of N only when soil moisture exceeds certain threshold, suggesting co-limitation of water and N in the grassland ecosystem that we studied. Second, in addition to concurrent consideration of water, temperature and N as well as their interactions also need to be accounted for. Third, the frequency of days with the VWC being higher than 15% accounted only around one third of days during the three growing seasons. Taken together, our findings imply that the expected increases of carbon sequestration should be minimal under N deposition in the Inner Mongolia grassland ecosystems.