New research from Veljko Fotak, Hye Seung Grace Lee, William Megginson, and Jesus Salas shows that the United States tariff exemption process during the first Trump administration was not just about protecting American interests—it was also a tool for rewarding political allies and punishing opponents. By analyzing thousands of exemption applications and political contributions, the authors find strong evidence of a quid pro quo system that shaped trade policy.
Starting in July 2018, the Office of the United States Trade Representative (USTR) under President Donald Trump imposed tariffs on an initial set of Chinese imported goods. By September 2019, tariffs had grown to cover almost all $550 billion worth of annual merchandise imported by the U.S. from China. At an average rate of about 20%, tariffs were expected to raise approximately $110 billion annually.
In reality, far less was raised—about $34 billion per year. This difference is due, at least in part, to the exemption process that was established simultaneously with these new tariffs. While exemptions were not a novel concept, the USTR implemented a de novo process through which importers could apply for exemptions on individual products. For example, products without non-Chinese substitutes were deemed eligible for exemptions, as well as products critical to national security. Importantly, the Chinese tariff exemption grant process was not subject to effective legislative or regulatory oversight.
In our study, “The Political Economy of Trade Tariff Exemptions,” in the Journal of Financial and Quantitative Analysis, we examine whether political connections played a significant role in the awarding of tariff exemptions. In our research, we document that this process worked—at least partly—as an effective spoils system, allowing the Trump administration to reward its political friends and punish its enemies.
The tariff exemption process we study was initiated with the stated purpose “to prevent harm to American interests.” However, it also had the aim of targeting specific products and industries that China deemed “strategically important.” But shortly after the first adjudications, the press started reporting unexpected patterns in the allocations of exemptions. While exemption decisions were supposed to be at the product level, American firms with similar products were reporting different outcomes. In addition, anecdotal evidence of political interference started emerging, amplified by then-President Trump gingerly tweeting about personally granting or withholding exemptions—for example after dining with Tim Cook, Apple’s CEO—in a process that was supposedly arms’ length.
The media blamed the inconsistent outcomes on the fast-moving style of the first Trump administration. We were a bit more cynical. The idea that exemptions cumulatively worth tens of billions of dollars were being “sloppily” allocated did not seem entirely plausible to us. We wondered whether there were other reasons for the observed allocation patterns. That led us to examine empirically whether actual exemption grants are based on political connections. Our analysis largely confirmed our initial suspicions.
Politics and trade
We are not the first to investigate the links between trade policy and politics. Economists have long faced a puzzle when it comes to trade, as “free trade is often preached but rarely practiced.” Researchers have shown that this disconnect is largely due to pressure from firms and special-interest groups. While there is a common (mis-) perception that firms tend to pressure politicians to reduce red tape, since the early work by Joseph Stigler, we know that firms tend to push for restrictions and regulation as long as it is more hurtful to their competitors than their own business.
Accordingly, while extant literature has established that political connections lead to favorable treatment of firms (including when it comes to tariffs), there is open debate as to whether the evidence points to a somewhat-legitimate information effect or a more sinister quid pro quo channel.
That is, the rationale for allowing political expenditures by firms in the first place is that such expenditures allow for a better communication channel between firms and regulators, which presumably, in turn, leads to better regulatory outcomes. This “information channel” explains many of the findings linking corporate political connections to favorable outcomes. And, yet, there is also a plausible, and less benign, “quid pro quo” hypothesis—politicians “trade favors” with firms. In this case, campaign contributions in exchange for trade tariff exemptions. We claim that our evidence points strongly to this quid pro quo channel. In particular, we focus on the treatment of firms that were contributing to the other political party at the time of rising U.S. tariffs—firms contributing to Democrats—and show that they are much more likely to be denied exemptions. How, exactly, did we reach this conclusion?
Exemptions to friends, tariffs to foes!
We—and our unfortunate research assistants—rolled our sleeves up. We downloaded over 50,000 applications for exemptions and extracted relevant information. We then matched this data to public databases on political expenditures to identify companies (and their employees) making campaign contributions or reporting lobbying expenditures during the 2016 electoral cycle. We used “older” campaign contributions to prevent reverse causality—on the assumption that both Trump’s victory and the extent and nature of the imposed tariffs were “surprises.” We also identified firms hiring individuals previously or subsequently working in the Trump administration, looking for “revolving-door” connections.
Even simple descriptive statistics revealed interesting patterns. Our final, usable sample, related to exemption applications with full data, spans about 7,000 applications. The 1,022 eventually accepted proposals in our sample originate from firms with greater total, aggregate campaign contributions and with greater lobbying expenditures, compared to the 5,993 eventually rejected applications.
Of course, during the period we study, the executive branch is controlled by a Republican administration. Accordingly, we hypothesize that during this period, while campaign contributions to the Republican Party might increase the likelihood of approval, campaign contributions to the Democratic Party might have the opposite effect. Consistent with our hypothesis, as we disaggregate total contribution by party, we find that firms that receive exemptions donate, on average, more than twice as much to Republican politicians ($3.8 for every $1 million of assets) than those whose applications are rejected ($1.7). In contrast, firms that receive exemptions contribute less to Democrat politicians ($0.31) than those whose applications are rejected ($0.57).
In the rest of the paper, we run more sophisticated tests, relying largely on probit models and regression analysis and do a lot of work to rule out alternative hypotheses and alternative explanations. By and large, these supplementary efforts confirm our main findings: having contributed to the (Republican) party in power increased the likelihood of obtaining exemptions—supporting the (Democrat) opposition had the opposite effect.
The economic impact we document is meaningful. The unconditional probability of receiving an exemption for the applications in our sample is 14.6%. We estimate that a one standard deviation increase in lobbying expenditures increases the probability of approval by 2.15 percentage points. A one standard deviation increase in contributions to Republican candidates increases the probability of approval by 3.94 percentage points. In contrast, a one standard deviation increase in contributions to Democrat candidates decreases the probability of approval by 3.40 percentage points.
“What about Biden?” The unanswered questions…
We recognize that our evidence originates from a single program, under a single administration. The natural question—and one we receive a lot—is whether these results generalize. The truth is, we do not yet know. The process we document was initiated by the Trump administration. The Biden administration did not make any significant changes to the process and only allowed for new applications for tariff exemptions in October 2024—that is, very recently. Data is only now emerging, but very few, if any, exemptions have been so far adjudicated.
And yet, we think that question misses the main point of our contribution. What we show and think most important is that our institutions are not robust to an administration that decides to use the exemption system as a spoils system, to reward its own supporters and punish supporters of the (perceived) opposition. We are less interested in the fact that a specific administration has chosen to behave in a specific manner—that is for journalists and historians—than in revealing, documenting, and warning that our institutions are vulnerable.
Our work carries some additional policy implications. In additional analysis, we show that the market at least partially “anticipates” the distortion of allocation of tariff exemptions due to political connections. In short, the positive market reaction we observe when firms receive exemptions—on average, a market capitalization gain of $51 million—is more muted for firms with the right political connections. The implications are somehow dire—transparency is not a cure, and this quid pro quo happens in plain sight, suggesting that the current regulatory regime, focused on reporting and transparency, is not sufficient nor effective in preventing these political distortions.
Author’s Disclosures: The authors report no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
