Economic Study: Section 301 Exclusions Were More Likely for Republican Donors

But a paper awaiting publication by Jesus Salas, finance professor at Lehigh University; Veljko Fotak, finance professor at State University of New York Buffalo; William Megginson, finance professor at University of Oklahoma; and Grace Lee, accounting professor at Fordham University, said the reasons for accepting or rejecting exclusion requests for goods on lists 3 and 4a, or those from lists 1 and 2 that weren't part of China's Made in 2025 ambitions is completely murky. Trade lawyers who submitted those requests had the same view at the time (see 1906280038).

Salas, in a telephone interview with International Trade Today, said he and his co-authors analyzed requests and whether they were granted from 400 publicly traded companies, so they could control for firm characteristics, such as profitability. With more data available for publicly traded firms, they had a better sense of "how important was this product for the company’s survival in the future."

But, he said, although the researchers looked at whether substitute products were available outside of China and whether the product was an intermediate good for U.S. manufacturers or a consumer good, none of those factors correlated with more exclusions (or more rejections).

The professors tried to directly measure how important an import was to a company by looking at what the requests said about sales volume of those goods, "and that data was just so sloppy," he said, "basically, it's useless."

Beyond the strategic goods, the only factor that seemed to matter in whether the Office of the U.S. Trade Representative granted exclusions during the Trump administration was how generous the firm's political action committee and executives were in donating to Republican senators and House members.

With regard to exclusion decisions that were made in 2018 and 2019, the authors looked at the contributions from 2016. While some companies' PACS did donate the $5,000 maximum to Donald Trump in his 2016 presidential race, very few did. Even among those that did, the vast majority of the funds went to congressional candidates because each politician can receive only $5,000.

"Our belief is not necessarily that Trump himself gave a call to USTR: Give an exemption to this company or this other company," Salas said. "If there was some sort of individual intervention, it came from Congress. I really wish I knew the inner workings -- how this all happened."

Companies generally tend to favor incumbents, and in 2016, both the House and Senate had Republican majorities. However, Salas said, even aside from incumbency, corporations tend to give more money to Republican Party candidates. "In general, 80% of the [PAC] contributions are to Republicans," Salas said. "When Democrats are in power, maybe 70% to Republicans."

"We looked at firms that donate to both parties at the same time," he said, and looked at the proportion given to Republicans. "The same pattern emerged, the bigger the ratio, the more likely you're going to get an exclusion."

In the peer review process for the paper, other professors asked the researchers to test the data various ways to make sure they weren't making a connection that wasn't there. They took out companies headquartered in red states. They excluded industries such as autos, chemicals, and oil and gas that generally support Republican candidates. They tested whether the number of employees in the U.S. mattered, "maybe USTR was trying to maximize employment," he said.

But with each way the analysis was done, "the result was always there," that exclusions were more likely to be granted to big companies that donated more heavily to Republicans.

They looked at decisions to extend previously granted exclusions in 2020, and compared those with donations to Republican congressional candidates in 2018, and the extensions also were more likely with more donations to Republicans.

Overall, 14.6% of exclusion requests were granted. Overall, large companies' exclusion requests were granted at a very similar rate. But for the firms that donated more heavily to Republicans, 18.5% were granted.

The paper says that the Section 232 exclusion decisions were much more easily understood. If U.S. firms objected to an exclusion from the 25% tariff on steel or the 10% tariff on aluminum, it made it much less likely to be granted. If there was one objection, there was a 70% chance of denial. If there was more than one, there was a 99% chance of denial.

In contrast, with the Section 301 tariffs: "There were barely any objections, and we did find objections, they just didn’t seem to matter."

Salas acknowledged that favoring domestic objections in the Section 232 process might not be a fully objective decision, because the reviewers had to decide whether an objection or a counter-objection was more credible.

"I felt bad for the Department of Commerce trying to figure this out," he said. "It’s like kids having a little argument," with a domestic company saying it can provide the product the requester is seeking to import, and the requester saying it's not exactly the same. Or, a counter-objection saying the company solicited the domestic objector for the product, and the company saying it couldn't produce it in the time frame needed, and the objector says that didn't happen.

The authors also looked at the Biden administration's evaluation of exclusions that expired at the end of the Trump administration. At that time, USTR said it would make decisions on restoring the exclusion based on whether the product is still available only in China, the prices and volumes of imports over the previous three years, the volume of the same products from other countries over the previous three years, the purchasers' gross revenues during that time, and whether the product was an input or not. It also said it would consider the likelihood of "severe economic harm" to importers if the tariffs were not waived.

Salas said that for those exclusions that existed at the end of the Trump administration, 90% were restored by the Biden administration.

"They didn't do much questioning, it seemed," he said. "We didn’t see any evidence of political interference in the Biden administration."

Salas said, with the possibility of blanket tariffs on Mexican and Canadian goods of 25%, he wonders, if those come to pass, if there will be exclusions offered again. If there are, he and his co-authors will continue to analyze which ones are granted.

"Law firms are very happy right now," he said. "Lobbying firms are getting hired left and right. Ultimately, we believe these are the big winners from all this."