Escaping Trump’s tariffs has required navigating a ‘broken’ system vulnerable to corruption, businesses and academics say
New York
CNN
—
In 2018, Bobby Djavaheri feared his family's appliance business faced an existential threat from the Trump administration's tariffs on Chinese air fryers.
Djavaheri, president of Yedi Houseware Appliances, consulted with a customs attorney and applied for a tariff exclusion with the United States Trade Representative to avoid the 25% levy on the Chinese imports.
Yedi's application, like most others, was swiftly denied.
"They didn't even give me an explanation," Djavaheri said, adding that his LA-based company had to lay off workers and cancel plans to expand. "We were on the up and up. And this just halted our growth."
Many US businesses have tried, and often failed, to avoid the costs from US tariffs on China. And it underscores frustrations with a tariff exclusion process launched during the first Trump administration that is often described as murky and messy.
"The exclusions process is broken. It's convoluted and incredibly confusing," said Tom Madrecki, vice president of campaigns and special projects at the Consumer Brands Association, a trade group that represents Coca-Cola, General Mills, Molson Coors and dozens of other packaged goods companies.
Now, President-elect Donald Trump is vowing to impose even bigger tariffs on China in the coming months and years.
It's not clear how or when those higher China tariffs will take effect, nor whether businesses will again have the opportunity to apply for exclusions.
But what is clear is that the USTR's tariff exclusion process during the first Trump administration raised significant concerns in Corporate America.
Lawmakers and companies worried that the USTR was picking winners and losers. Some businesses complained about an opaque process that could be vulnerable to political favoritism, a suspicion supported by academic research.
Brian Hughes, a Trump-Vance transition spokesman, told CNN that Trump will "implement economic and trade policies to make life affordable and more prosperous for our nation."
"President Trump has promised tariff policies that protect the American manufacturers and working men and women from the unfair practices of foreign companies and foreign markets," Hughes said.
The Trump transition did not provide details on what a tariff exclusion process will look like in the new administration.
‘Potentially corrupt'
In 2018, the USTR launched a tariff exclusion process that would allow businesses to apply to have certain products shielded from the levies on China.
To win a badly sought-after and potentially lucrative exclusion, companies were asked to demonstrate that the tariffs would cause "severe economic harm" to the firm or US interests. They also were asked to prove that substitute products were not available outside China or that the product wasn't strategically important to China.
Between 2018 and 2020, USTR received about 53,000 exclusion requests and denied 87% of them, according to a Government Accountability Office review.
The GAO review found "inconsistencies" in how USTR reviewed applications and that the agency "did not fully document all of its internal procedures."
Relatedly, the Commerce Department's inspector general in 2019 found shortfalls with a separate exclusion process run by that agency for Section 232 tariffs on other countries besides China. The review found "a lack of transparency that contributes to the appearance of improper influence in decision-making for tariff exclusion requests." A subsequent inspector general report released in 2021 concluded that US companies were "denied exclusions based on incomplete and contradictory information."
The murky and unpredictable nature of the process during the last Trump administration is making some fear exclusions will be used as a way to curry favor with special interests.
"The process is potentially corrupt because it allows winners and losers to emerge from a decision that is not transparent," one business executive told CNN on the condition of anonymity.
That fear is backed up by academic research.
Companies whose executives donated to Republican candidates had a better chance of getting approved for exclusions from Trump's Section 301 tariffs on China, according to a peer-reviewed study set to be published in the Journal of Financial and Quantitative Analysis.
That research found that just 14.6% of companies, or roughly one in seven, applying for exemptions between 2018 and 2020 succeeded. However, the chance of success increased by almost four percentage points for companies that backed Republican candidates.
That's a significant shift in fortunes, translating to a roughly one in five chance of winning, compared with roughly one in seven for companies overall.
The researchers found that the system allowed the "administration of the day to reward its political friends and punish its enemies."
‘Indicative of quid pro quo arrangements'
The odds of winning an exemption went down for firms whose executives backed the opposing party, the study found: The probability of approval fell by 3.4 percentage points for firms that backed Democratic candidates.
Again, this represents a significant shift in fortunes, changing the odds to just a one in ten chance of success for firms whose executives backed Democrats.
The findings "are strongly indicative of quid pro quo arrangements," the study found. "Our evidence shows that the selling of political favors within the US federal government can take place in the open."
The paper did not allege wrongdoing by companies or US officials.
Jesus Salas, a co-author of the study and a finance professor at Lehigh University, went a step further.
"There is clear evidence of corruption," Salas told CNN in a phone interview.
Salas found it "mind-blowing" to learn that the USTR combed through 50,000 tariff exclusion applications often in the span of just two weeks.
He and his colleagues found "inconsistencies," including at least one instance where two firms applying for an exclusion received different results. One was accepted, and another was rejected, even though the debate was over the same exact product.
"That doesn't make sense," Salas said. "It's just huge chaos for the firms."
Salas is confident there will be winners from the chaos, beyond just the lucky firms that win tariff exclusions.
"The lobbyists and the lawyers are going to benefit the most," he said. "We also think this is going to increase the political contributions to candidates. If you see the benefit, why not do it?"
‘Institutional weaknesses'
To prevent corruption and maintain a level playing field, Salas argued that the exclusion process needs significantly more transparency and oversight from Congress.
The researchers did not study tariff exclusions under the Biden administration.
Sam Michel, a spokesperson for the USTR, told CNN that since Biden took office in 2021, it has run a "transparent and open" exclusion process and that requests are considered "on their merits."
To address concerns about politics potentially influencing decisions, Michel said the exclusion process is currently run by career officials, not political staffers.
Furthermore, Michel said the Biden administration does not allow meetings between USTR staff and companies seeking to lobby for pending exclusion requests.
However, SUNY Buffalo finance professor Veljko Fotak, one of the authors of the study on tariffs, said the "depressing" reality is the process that was constructed under Trump's first administration hasn't been significantly overhauled under Biden.
"We see no indication that the institutional weaknesses and potential for political distortions we documented in our study have been addressed," Fotak told CNN.
‘A clear-and-present danger'
And there is plenty at stake.
Winning or losing an exclusion request can be the difference between surviving and not.
The researchers found that companies that won tariff exclusions gained an extra $57 billion in combined market value.
David French, executive vice president of government relations at the National Retail Federation, said retailers have already in touch with lawyers, lobbyists and consultants to figure out ways to avoid the forthcoming Trump tariffs. French said the retail trade group plans to commission economic studies, lobby and do grass-roots advocacy against tariffs.
Madrecki, the Consumer Brands Association executive, said his industry has been in touch with lawmakers and Trump transition officials to express concern about the looming tariffs, especially the across-the-board tariffs that have been threatened on all $3 trillion of US imports.
"It's a clear and present danger," Madrecki said. "We're not saying all tariffs are bad. But it should be done in a more strategic way rather than a sledgehammer thrown across the room."
Djavaheri, the president of the LA-based appliance firm, said he plans to apply for tariff exclusions again.
"I have to, otherwise I'm dead," he said.
Djavaheri rejected the argument from Trump that China will pay the tariffs, a description that is undermined by research that shows Americans have borne almost the entire cost of the last round of tariffs on China.
"Bro, that's bullsh*it. I'll show you my bills. I'm getting the bills," he said.
