New research set to be published in The Journal of Financial and Quantitative Analysis reveals that politically connected companies were significantly more likely to receive valuable exemptions from the tariffs imposed on U.S. imports from China during the Trump administration.
The authors, Veljko Fotak (SUNY Buffalo), Grace Lee (Fordham University), William Megginson (University of Oklahoma), and Jesus Salas, associate professor of finance (Lehigh University), found that companies that made substantial investments in political connections to Republicans prior to and during the beginning of the Trump administration were more likely to secure exemptions for products otherwise subject to tariffs.
Conversely, companies that made contributions to Democratic politicians had decreased odds of tariff exemption approval.
“Our findings reveal that politicians not only use exemptions to reward their supporters, but also withhold exemptions to punish supporters of their opponents,” Salas said. “The tariff exemption grant process functioned as a very effective spoils system allowing the administration of the day to reward its political friends and punish its enemies.”
The Tariffs and Exemption Process
Enacted in 2018, the “Section 301” tariffs increased the cost of a wide range of goods imported from China by an average of about 20%. Announced as retaliation to Chinese trade policies that were seen as harmful to U.S. business interests, the tariffs initially covered $34 billion worth of goods and were expanded over a period of 14 months to cover approximately $550 billion in imports.
The U.S. government created a system for companies to request an exemption from tariffs. The government considered the following factors when adjudicating the exemption applications:
- Whether tariffs would impose significant harm on American business interests
- Whether substitute products were available outside China
- Whether the products were “strategically important” to China
According to the researchers, the Section 301 exemption process was unusual in being administered completely by the Office of the U.S. Trade Representative (USTR), without Congressional oversight and without an appeal process.
This process stood in contrast to other programs, including those for steel and aluminum tariffs that were also implemented in 2018. Exemptions for the steel and aluminum tariffs were administered with greater transparency under the watch of a Commerce Department Inspector General and with Congressional oversight.
Unlike the Section 301 tariffs, the researchers found no significant relation between companies’ political activity and exemption decisions regarding the steel and aluminum tariffs.
Political Influence and ‘Quid Pro Quo’
The study analyzed 7,015 applications for exemptions filed with the USTR, political activity data from the nonpartisan research group OpenSecrets and business information from the Compustat database to determine the extent to which lobbying and campaign contributions influenced tariff exemption outcomes.
A clear theme emerged: Spending to build political connections was a good investment for U.S. companies — if you spend it on the right candidates. A longstanding puzzle in the literature on political contributions has been understanding why firms don’t donate more. Results from the study, Salas said, suggest that contributions to the wrong party could harm firms.
Of the exemption applications reviewed, only 1,022 (14.5%) were approved. Researchers found that, in addition to submitting persuasive applications in conformity with the guidelines, companies could increase their odds by investing more in lobbying.
Among companies in the dataset, a one standard deviation increase in lobbying expenditures boosted approval chances by 2.15 percentage points.
Companies that had previously contributed to Republican candidates via their Political Action Committees (PACs) improved their odds even more. A one standard deviation increase in contributions to Republicans raised the likelihood of exemption approval by 3.94 percentage points. Conversely, the same increase in contributions to Democrats decreased approval odds by 3.4 percentage points.
Given that roughly just one in seven applications were approved, these advantages were substantial.
According to the authors, political connections generally yield benefits through two channels: helping companies navigate regulations (the “information channel”) and rewarding firms for their political support (the “quid pro quo channel”). Identifying why specifically firms benefit from contributions is of utmost importance, they said.
“While our findings linking lobbying expenditures with a higher probability of approval are consistent with both channels, our findings linking contributions to the party in power to a higher chance of approval and contributions to the opposition to a lower chance are strongly indicative of quid pro quo arrangements,” Salas said.
“While there is ample evidence in the broader literature that firms benefit from their political connections — with quid-pro-quo arrangements on both sides of the political aisle — this study is the first to document punishment for supporting the opposition.”
According to OpenSecrets, U.S. companies spent over $3 billion on lobbying in 2016, in addition to funneling hundreds of millions of dollars to political campaigns via PACs. In 2024, lobbying expenditures totaled more than $4 billion.
Researchers also examined other forms of political influence, including personal campaign contributions by company executives and donations to influential representatives, such as those on finance and leadership committees. Both of those actions further enhanced the likelihood of securing exemptions.
However, employing former government officials as directors, à la the “revolving door” between the corporate world and the federal bureaucracy, did not have a significant impact.
While political connections played a substantial role in exemption decisions, the authors noted that the stated criteria were not entirely disregarded, and applications that met the criteria were more likely to be approved.
Economic Impact and Market Reactions
Economists with political leanings on either side of the aisle tend to oppose tariffs because they often lead to retaliatory measures, higher prices and economic losses. Past studies cited by the authors document that tariffs have a strong negative effect on the U.S. economy, leading to monthly real income losses of $1.4 billion and a net economic loss of $7.2 billion.
But companies that received exemptions from the China tariffs benefited greatly. The study found that announcements about exemptions were linked to abnormal returns of approximately 55 basis points in stock prices within the five-day window around the announcement.
For a median company in the sample, one with a market capitalization of $10 billion, this reaction represented a valuation increase of about $51 million.
“The biggest surprise to us was that the U.S. government was punishing firms that contribute to Democrats,” Salas said. “There is plenty of evidence that political connections are valuable to firms. The finding that the government could be vindictive to supporters of the opposition was very surprising to us.”
The forthcoming article is available on the website of the Journal of Financial and Quantitative Analysis.
Story by Dan Armstrong