Economists and political scientists note that free trade is often praised but rarely practiced. Prior research has found that this is due to governments shaping trade policy not only based on economic concerns but also in reaction to pressure from special interest groups. Our research, which is forthcoming in the Journal of Financial and Quantitative Analysis, examines whether political connections affect one aspect of trade policy: the allocation of tariff exemptions. Our findings reveal that the first Trump administration used exemptions to reward its supporters and withheld exemptions to punish supporters of its opponents.

In July 2018, the Trump administration, through the Office of the US Trade Representative (USTR), initiated tariffs on Chinese imports, eventually escalating to cover nearly all $550 billion in annual imports by September 2019, with an average tariff of 20 percent. Simultaneously, the USTR established an exemption process for tariffs on individual products without the oversight applied to earlier steel and aluminum tariffs administered by the Department of Commerce. The exemption process aimed to mitigate harm to US interests, prioritizing applications where tariffs significantly impacted American businesses, alternative sources were unavailable outside China, or products lacked strategic importance to China.

We analyzed tariff exemption applications and correlated them with companies’ political ties, which we determined by 2016 campaign contributions, lobbying expenditures, and hiring of former or future Trump administration lobbyists. Our analysis shows that the 1,022 approved exemptions stemmed from companies with greater campaign contributions and lobbying expenses than the 5,993 rejected applications. Without these political connections, approvals would have been about 10 percent lower—roughly 94 fewer approvals. This net figure, however, understates the full impact of political influence, which affected both approvals and rejections.

Approved applications were linked to larger contributions to Republican politicians and smaller contributions to Democrats. Specifically, a one-standard-deviation increase in Republican contributions raised approval probability by 3.94 percentage points, while a similar increase in Democratic contributions decreased it by 3.4 percentage points. Contributions to influential politicians, such as senators on the Senate Finance Committee, had a greater impact.

Increased lobbying expenditures, as a fraction of firm assets, also significantly boosted approval odds. A one-standard-deviation increase in lobbying raised approval probability by 2.15 percentage points. Hiring former or future Trump administration lobbyists also increased the likelihood of receiving an exemption. These effects are substantial, considering the average approval rate was 14.6 percent.

We also analyzed how markets reacted to announcements of the approval or rejection of exemption requests. Exemption announcements were associated with a 0.55 percentage point abnormal stock return over a five-day window, increasing the median firm’s market capitalization by $51 million, totaling $57 billion for all approved exemptions in our dataset.

Our research also finds that the market seemed to have correctly anticipated the higher likelihood of approval for firms politically connected with the political party in control of the White House. Market analysis indicated that exemptions for firms without strong political connections yielded about 2 percent abnormal returns, while those with connections showed no significant returns, implying market awareness of political influence on approvals.

Our findings confirm that campaign contributions and lobbying increased the likelihood of tariff exemptions. Though applications meeting stated criteria were also favored, the process was partially swayed by political favoritism, rewarding Republican supporters and penalizing Democrats, a trend increasingly relevant in a polarized US business environment. While our findings are specific to a single administration—we are only now obtaining data on the relatively few exemptions processed by the Biden administration—the main takeaway is that our federal institutions do not prevent an administration from using the tariff exemption process to reward supporters and punish opponents.

Note
This research brief is based on Veljko Fotak et al., “The Political Economy of Tariff Exemption Grants,” Journal of Financial and Quantitative Analysis, January 2025.