Selling Indulgences: The Political Economy of Tariff Exemption Grants

We investigate whether firm-level political connections affect the allocation of exemptions from the tariffs imposed on $550 billion of Chinese goods imported to the United States annually beginning in 2018. Firms reporting higher political lobbying expenditures in prior years are more likely to receive exemption approvals. Our evidence points to politicians not only rewarding supporters, but also punishing the opposition: past campaign contributions to the party in power increase approval likelihood, while past contributions to the opposition party increase the chance of rejection. These results strongly suggest quid pro quo arrangements between politicians and firms, trading campaign contributions for tariff exemptions, rather than an “information” channel linking access to politicians to regulatory outcomes. Event study results show that tariff exemptions are valuable to applicants: approval announcements increase market capitalizations of applicant firm by approximately $51 million, while rejected applicants experience negative abnormal returns. Markets correctly anticipate that politically connected firms are more likely to receive exemptions, indicating that these quid pro quo arrangements are transparent to market participants.