Sounding Smart but Staying Small: Which U.S. Firms Can Avoid the China Tariffs?

• In Event: Protectionism in the 21st Century

Abstract

Beginning in 2018, U.S. firms that import from China unexpectedly found themselves having to pay across-the-board tariffs on the goods they produce in China or buy from Chinese suppliers. These “China tariffs” remain in place today. This prominent example of new and sweeping protectionism is opaque, ungoverned by global rules, shows no signs of letting up, and likely will spread to new industries and countries in the upcoming years. How these policies are formulated and implemented, and who is most affected by them, remains unclear.

By default, U.S. businesses are expected to pay these tariffs on the goods they import from China – unless they can argue successfully for exemption. Specifically, U.S. firms are allowed to petition the Office of the United State Trade Representative (USTR) for “exclusions” from these tariffs. During the past few years, countless U.S. firms – ranging from family-owned small businesses to major multinational corporations like Apple – have made tens of thousands of exclusion requests, with fewer than 5% being granted.

Little is known about this process, or which firms received these exclusions (and why). To pull back the curtain on this important but poorly-understood process, I compile a random sample of more than 2,400 of these petitions, along with data on the petitioners, the various arguments they made, and the identity of those who prepared or supported their petition.

In this paper, I reveal that bigger and more prolific petitioners are not more likely to receive exemptions – and actually appear to be less successful. Smaller businesses are more likely to receive exemptions on average, particularly those that produce more obscure products. One notable finding is that firms that provide more specific answers to the questionnaire are more than five times more successful than those that provide vague answers, particularly with regard to their efforts to find non-Chinese suppliers. A second striking finding is that firms that hired trade law firms to prepare their answers to the government questionnaire received exemptions at a much higher rate. Likewise, firms that convinced other U.S. companies or local elected officials to support their petition also were more successful. Finally, petitioners located in so-called “red states” were more than twice as likely to receive an exemption than firms located in coastal or “blue” states.

On one hand, these findings suggest that expertise, and knowing how to navigate this emerging and opaque process, matters. This is consistent with past understandings of trade policy. But the process also appears to be highly political in new ways, since the “little guys” – particularly those fitting a certain profile – have been more successful. Many contract employees have been hired at USTR to consider this tsunami of exemption petitions, and it appears they are more susceptible to political considerations than career bureaucrats, and may be relying on obvious shortcuts and stereotypes in making their decisions. On the whole, this research raises new concerns about transparency and fairness in the wave of protectionist trade policy-making that is traveling around the globe, from the U.S. to China and beyond.

Author

• Todd Allee, University of Maryland, College Park