Make America Free Trade Again Part 6: Tariffs Exemptions Are Crony Capitalism at Its Worst

By now, it should be abundantly clear that firms will charge higher prices in response to the tariff policies implemented by President Trump and his administration. This is a fundamental aspect of basic supply and demand. If you increase taxes on goods, you increase the cost of the good, which causes a decrease (shift to the left) in the supply curve. This increases costs and reduces the number of goods being sold.

However, recent exemptions have made this story a bit more complicated. Many large corporations have received immunity from paying the import tax (weird, because Trump told us that foreign countries pay these…). What this means now is that large companies are immune to these new tariffs, and the companies that are stuck paying these import taxes are small businesses that do not have political connections in the White House.

This should come as no surprise to those familiar with public choice. When it comes to regulations or any government policy, there are (broadly speaking) two theories: public interest and public choice. Public interest theory assumes that regulations are put in place to mitigate some externality. In this case, the public interest argument is that U.S. jobs are being sent overseas, harming consumer welfare. (There are many reasons why this is wrong, but nevertheless, let’s move on).

Public choice theory posits that regulations are part of the political process and is used to restrict competition. The idea is that firms that are already successful/have political capital to spend resources do so in order to put barriers in place that stop other firms from being able to compete. This begs the question as to why firms might want regulations in the first place. It’s not cut and dry (as I’ll get to in a bit), but firms that already exist and are large enough can better handle the regulations—the smaller or newer firms cannot handle the costs of cooperating with these regulations. It pushes out smaller, newer, or not-yet-existing firms from competing with the large firms. This is crony capitalism at its finest.

In a fairly recent paper from Sam Peltzman in Public Choice, he takes this a few steps further, which I think is important in explaining this phenomenon. Peltzman furthers Stigler’s famous “The Theory of Economic Regulation” paper by stating that firms do try to resist many regulations. However, if firms cannot stop the regulation from happening (like tariffs in this case), they can steer regulations in the direction of harming new incumbents. This explains why lobbying expenditures on trade issues were 277% higher in Q1 of 2025 relative to Q1 of 2024. In the 2018 tariff hike on China under President Trump’s first term, a recent study found that campaign contributions to the Trump administration increased the odds of getting an exemption.

An abundance of work has found that regulations benefit (or at least cause less harm to) larger companies relative to small businesses. Pete Calcagno and Russell Sobel found that regulations lead to a decrease in the share of firms that are small businesses. Contrary to many in the public interest/pro-regulation camp, Dustin Chambers and Colin O’Reilly show that higher federal regulations tend to increase income inequality, again suggesting that this seemingly anti-business mechanism can actually favor those who are politically connected. More regulated industries have lower new firm-birth rates, according to a study by James Bailey and Diana Thomas.

These tariffs and their subsequent exemptions are no different. They are (relatively) benefiting larger firms at the expense of small businesses and consumers. This is yet another example of when you give the government too much control over our lives and the economy, they will benefit those with political connections, leaving the rest of us out.