US businesses reluctant to take political action despite tariff costs, study finds

LAWRENCE — In his recent inaugural address, President Trump referred to William McKinley as a great president who “made our country very rich through tariffs.”

“Back in the late 1800s, before we were able to coordinate production across a whole bunch of countries, tariffs served the intended effect,” said Jack Zhang, an assistant professor of political science at the University of Kansas. “No complex product is made that way anymore.”

A tariff is simply a tax on imported goods. But for something so straightforward, many misconceptions abound, such as who pays for them.

“President Trump claims foreign countries are paying for tariffs. That is factually incorrect,” Zhang said.

“Tariffs are levied at U.S. ports of entry and collected by U.S. Customs and Border Protection folks from the business that’s importing the goods. So if you’re a retailer and you source things from overseas, you pay a tariff. If you’re a company that is buying parts and components made abroad, you pay a tariff. And those are factored into the cost of doing business,” he said. 

Global production makes it complicated for U.S. companies to determine how much tariffs cost them because they may not directly import goods but are indirectly exposed to tariffs if their suppliers do. Zhang and his co-authors created an experiment to see if directly providing information about tariff costs to companies could influence political support or opposition to tariffs, and the results appear in a new paper titled “Tariffs and corporate political activity: a survey experiment on US businesses.”

He presented business managers with tailored information about the input costs of new tariffs to their bottom line and invited them to take political action to express support or opposition to these tariffs. The findings suggest this information did not significantly increase managers’ propensity to contact members of Congress, donate to political campaigns, sign petitions or join social media groups.

The article appears in the Cambridge University Press journal Business and Politics.

“We went into this project thinking companies are going to be different than consumers and voters because they have clear economic interests and care about their bottom line. But it turns out that companies — especially the smaller ones — behave more similarly to individuals,” said Zhang, who co-wrote the paper with Lindsay Dolan of Wesleyan University, Robert Kubinec of the University of South Carolina and Daniel Nielson of the University of Texas at Austin.

Their results also show that the political culture of a company basically shapes whether it views tariffs as good or bad. Conservative companies see them as good. Liberal companies are opposed to them. These preexisting political beliefs were resistant to new information on tariff costs.

Part of the present confusion over tariffs is due to how the process of production fundamentally changed over recent decades. 

“Prior to the 1980s, if a product was produced abroad, it most likely was made by a foreign company,” Zhang said. “If you charge a tariff at the border, that’s going to protect your domestic producers of that good, and it’s going to hurt foreign producers of that good, which is going to be a foreign company based in a foreign country. What has happened in the last 40 years with this current era of global value chains is that companies no longer do production in only one country.”            

He points to Apple’s iPhone. It may be designed in California, but it’s made in China through the efforts of Taiwanese companies such as Foxconn. That company imports components from Japan, Korea, Germany and the United States.

“Chinese factory workers put it together, stick it in a box and then ship it. When shipped into the U.S., that’s counted as a Chinese export. But in fact, it is a globally produced and sourced product that mostly profits Apple,” he said.

Consequently, new tariffs put into place to target China make the iPhone more expensive for American consumers and cuts into the profits of its U.S. maker.

Zhang emphasizes that trade laws and tariff codes are also quite complicated.

“Different cuts of beef have different tariff codes attached to them. Strings of different weaves of fabrics have different tariff codes. Large companies invest resources in having that information. Smaller companies may not have the in-house sophistication to figure all this out,” he said.

Zhang’s team created a field experiment to test this theory. They designed a web application that provided such companies with a free analysis to ascertain whether this information could lead to actions to combat tariffs. Ultimately, it did not.

A faculty member at KU since 2019, Zhang is also the founder and director of the KU Trade War Lab. His research explores the political economy of trade and conflict in East Asia. His past articles include “Political risk and firm exit: evidence from the US–China Trade War,” “In the Middle: American Multinationals in China and Trade War Politics” and “Measuring Chinese economic sanctions 1949–2020: Introducing the China TIES dataset.”

“With tariffs, most economists will tell you that both sides lose,” Zhang said. “It’s a race-to-the-bottom dynamic, and the only way to win is to stop escalating.”