“Higher Tariffs Benefit Certain CEOs, But Almost Nobody Else”
By Daniel Griswold, courtesy of the Mercatus Center
A big reason why tariffs are so tempting to politicians is that the costs they impose on the economy are diffused. These costs are spread across millions of households and thousands of businesses, forcing them to pay higher prices for the protected good, while the benefits are concentrated among the small but well-organized sectors that gain from restrictions on foreign competition.
According to a new Mercatus Center study, the chief executive officers of the companies that directly benefit from tariffs imposed by the US government are among the biggest winners from trade restrictions.
In the study, “Executive Incentives, Import Restrictions, and Competition: Empirical Analysis of Antidumping and Countervailing Duty Orders,” Professor Brian Blank at the College of Business at Mississippi State University documents the sharp increase in CEO compensation when their companies receive special tariff protection.
Blank examined more than 1,000 firms between 1994 and 2015 that received “protection” through special tariffs aimed to counter foreign dumping or subsidies, or that had such tariffs revoked. He then compared those companies to firms in similar industries that were not affected by changing tariff levels. He found that the CEOs of the companies gaining the tariff protection saw their compensation increase sharply, and the increases could not be explained by the normal measures of company performance.
As the study summarizes:
“When imports are restricted, firms linked to restrictive orders give their CEOs compensation in cash and equity incentives that is 17 percent higher than when the restrictions are not in place. Furthermore, CEOs’ compensation is $1 million higher than expected, suggesting the additional compensation is not explained by superior firm performance or other characteristics.”
The Mercatus study helps explain the political economy of trade protection. Companies will aggressively seek the benefits of restrictive tariffs on their competition not because it necessarily benefits the company, its shareholders, or its workers in the long run, but because it benefits its top management through increased compensation.
The study highlights the fact that trade protection is not only an economic loss for the nation as a whole, but it also often fails to ultimately benefit the protected industry itself. The reason is that higher tariffs raise domestic prices, which benefits domestic producers in the short run, but discourages longer-term demand by forcing consumers to look for alternatives. Protected industries may gain in the short run, but eventually they price themselves out of the market.
The primary example of that today is the US steel industry. The industry successfully lobbied the Trump administration for 25 percent tariffs beginning in 2018 under Section 232. But according to widespread reports, those tariffs have failed to deliver real benefits to the industry, while imposing real costs on the rest of the economy.
According to a November 4 story from the Associated Press, “Trump’s 25% tariffs, it turns out, have done little for the people they were supposed to help. After enjoying a brief tariff-induced sugar high last year, American steelmakers are reeling. Steel prices and company earnings have sunk. Investors have dumped their stocks.”
Running a major company is a demanding job, and corporate executives should be compensated fully and fairly for their work. But obtaining special tariff protection from the federal government at the expense of the rest of society should not be a path for executive bonuses.
Daniel Griswold is a Senior Research Fellow at the Mercatus Center at George Mason University and Co-Director of its Trade and Immigration Project.