Trump’s trade war with China benefits lobbyists, but is bleeding small US businesses dry

Mike Elrod voted for Donald Trump in 2016, hoping for a break from tight government oversight that his business had endured for years, which he often found unreasonable.

“There was a time when every day I dreaded opening the mail,” said Elrod, who founded a small firm in South Carolina called Eccotemp, which makes energy-efficient, tankless water heaters. “The Department of Energy would put in an arbitrary rule and then come back the next day and say, ‘You’re not in compliance.’ We had no input into what was changing and when the change was taking place.”

Elrod also thought that big businesses had long been able to buy their way out of problems, either by spending lots of money on compliance or on lobbyists to look for loopholes and apply political pressure. Trump, of course, had promised to address that – to “drain the swamp.”

Elrod is in his mid-60s, tall with a white beard and deliberative drawl. He trusted the president even as Trump started a trade war with China, where Elrod manufactures his heaters. The administration said US companies that could prove they had no other source for their imports and whose business would be gravely injured could be spared the punishing tariffs that Trump was imposing. They would simply have to file for an exemption.

“I had every reason to believe they were talking about us,” Elrod said. Eccotemp had spent 15 years developing different models of tankless heaters with manufacturers in China. Simply finding new factories in other countries seemed impossible.

So in the summer of 2018, Elrod settled in at his desk, strewn with brass valves, a pressure tester and a smiling jade Buddha from a Chinese supplier, and began typing. He and his dozen US employees – designers, engineers, salespeople and customer service representatives – operate out of a squat cinder block building in a woodsy suburb of Charleston that used to be a film studio and now doubles as a distribution warehouse.

In letters to the Office of the US Trade Representative, Elrod asked that gas-powered water heaters be exempted from the administration’s 25% tariffs, writing that the cost would be “devastating” for the company’s balance sheet. “We had all the boxes checked,” Elrod said. “Or so I thought.”

The process didn’t go as he expected. It’s the stuff that libertarians like Elrod dread: Low-level staffers with limited industry knowledge issuing seemingly arbitrary decisions that can save or smash a company’s bottom line.

Every few weeks, a list comes out with a new batch of lucky winners, and losers. “Non-electrical wall candelabras, of wood, each with 3 wrought iron candle holders” received a pass, for example, but none with one or two candles.

There is no mechanism for appeals.

Win for lobbyists

Overall, Trump’s tariffs have not had the effect that the self-described “Tariff Man” promised. Companies have moved manufacturing out of China – and it has mostly gone to Vietnam, Taiwan and Mexico. Tariffs are chiefly behind a months-long decline in domestic manufacturing, Federal Reserve researchers have found. The total loss of jobs across the economy may be as high as 300,000.

But constantly up-in-the-air trade agreements and the byzantine, opaque exclusion process has been a blessing for one set of players: Washington’s influence industry, including the firms of former Trump officials and allies like inauguration committee chief Brian Ballard, former White House chief of staff Reince Priebus and Trump fundraiser Marc Lampkin.

Ballard was once Trump’s lobbyist in Florida. He’s since been dubbed “the most powerful lobbyist in Trump’s Washington.” A cancer therapy firm, Varian Medical Systems, paid Ballard and a colleague $540,000 to lobby the White House, the trade office and Vice President Mike Pence on trade issues, filings show. The outreach included a meeting with Trump’s director of trade and manufacturing policy, Peter Navarro.

Since then, four of Varian’s five exclusion requests have been approved – which, the company said in an SEC filing, boosted revenues by $23 million. Navarro said he doesn’t intervene in the exclusion process.

Priebus’ firm, Michael Best Strategies, was hired by a Wisconsin company, Primex, to handle exemptions for its timekeeping and temperature measurement devices. “You’re not gonna do it on your own,” Primex CEO Paul Shekoski said in an interview. “It’s suicide actually.”

Shekoski said he wanted help understanding the process and making sure all the requests were filed correctly. With Michael Best’s guidance, he personally wrote letters to and met with his representatives in Washington.

The collective effort may have made it all the way to the Oval Office. Shekoski said in an email last fall that he heard from his lobbyist at Michael Best, Denise Bode, that Senator Ron Johnson, cited Primex as an example of a Wisconsin company suffering from tariffs when the senator took the issue to the president. “He not only called USTR, he was able to bring our specific case up to Trump directly,” Shekoski said. Bode did not respond to a request for comment, and a Johnson spokesman did not respond to questions about the Trump contact, saying only that Johnson had advocated for many Wisconsin companies.

Days before this story was published, Shekoski denied knowing whether Johnson brought up the issue with Trump. He said he was just trying to give his elected representatives concrete stories about small businesses struggling with tariffs that they could use to advocate for tariff relief.

Lobbying records show that Primex paid Priebus’ firm, Michael Best Strategies, $85,000 in 2018 and 2019 for its services. “I’m not selling access,” Priebus once told Politico. “I am merely providing strategic advice and helping them handle their problems.” Neither Priebus nor the White House responded to requests for comment.

Primex got mixed results, with about half of its 205 exclusion requests granted and half denied.

Disclosure rules don’t require companies to say how much money they’ve spent lobbying on exclusions specifically. But records compiled by the Center for Responsive Politics show that the number of clients lobbying on tariffs and other trade issues are higher than any year on record. In 2018, the number jumped by 28% to 1,372, and 2019 will significantly exceed that once final figures are in.

First jolt

There is also no comprehensive picture yet of how companies that have hired lobbyists have fared compared with those that haven’t. But there is evidence that agencies have bent the rules. In October, a government watchdog found that Commerce Department officials had secretly changed the rules for one exclusion category after “off-the-record” discussions with a favored company, creating a “perception of undue influence.”

Companies with enough resources and savvy can not only push their own cases, they can work to undermine those of competitors. Elrod began to understand that in early August. He had been on the trade office’s website, waiting to see if he would get his exclusion and watching for requests from competitors, when he noticed that an industry giant had formally objected to his application.

Rheem Manufacturing Company is a Japanese-owned conglomerate and one of the world’s largest producers of water heaters, including in the United States. It challenged Elrod and a handful of other companies that had claimed they couldn’t find alternative sources for their products outside of China, arguing that Elrod could find suppliers in Japan, Germany and South Korea – or buy from Rheem itself.

Elrod quickly fired back with another letter, laying out how difficult and expensive it would be in practice to move production to another country. Amid a rush out of China, factories in Vietnam are holding out for enormous orders and shunning the relatively small quantities that Eccotemp imports. Plus, after developing his heaters over more than a decade with a handful of suppliers, finding one that could meet his exacting standards would require months of tests and new certifications.

That did not sway the government’s trade office, the USTR, which in late September, posted a one-page form letter saying that Elrod had failed to demonstrate his products weren’t available outside of China. Thinking that his original ask for exclusions might have been too broad, Elrod then filed individual requests for several of his models, hoping the government might exempt at least a few of them.

But Rheem had reinforcements. New comments in opposition arrived on the letterhead of King & Spalding, a law firm with sleek offices across the street from the White House and a complement of former government officials. Stephen Vaughn who had left the firm in 2017 to serve on the administration’s “beachhead team” at USTR, served as the agency’s general counsel – where he oversaw the exclusion process – and then rejoined the firm in 2019.

Fees paid for legal services aren’t public, but records show that Rheem spent $610,000 on lobbying on all federal issues in 2018. Neither Rheem nor Vaughn responded to requests for comment.

“I don’t have anyone on Pennsylvania Avenue,” Elrod said. “That letter probably cost them more than we’ve spent on legal expenses in the last five years.”

No relief in sight

His concern growing, Elrod met a staffer in the district office of Senator Lindsey Graham, and asked for a letter of support. He inquired with USTR about testifying at one of the agency’s multiday hearings on its sweeping tariff action.

Nothing worked. He didn’t make the witness list for USTR’s hearings, but the head of Rheem’s air conditioning division did. South Carolina’s Department of Commerce wrote letters on behalf of large employers like the fiberglass manufacturer China Jushi, but for the first few rounds of tariffs, no letters for small companies appear in the public record. A spokeswoman said the state had written letters for “companies of various sizes and with varying numbers of employees.”

Graham, who had filed seven letters supporting companies with a presence in South Carolina – several of them multinational or foreign-owned – also didn’t help. “Lindsey Graham really did kick it to the curb,” Elrod said. A spokesman for Graham did not respond to a request for further explanation.

Finally, in November, the trade office rejected all of Elrod’s requests for relief in the same terse fashion it had the first. “After careful consideration, your request was denied because the request failed to show that this particular product is available only from China,” the letter read.

As a result, Eccotemp would get back none of the hundreds of thousands of dollars in duties that it had already paid out, and the bleeding would continue. Its profit margins vaporised and its employee head count sank by about 30%, as the company opted not to replace departing staff.

For a while after receiving the denials, Elrod carefully watched the steady stream of response letters posted on the federal regulations portal, in case another company received an exclusion that would also cover his products. But no relevant approvals appeared.

Elrod has appreciated how, under Trump, other regulators have been more business-friendly. The government pesters him much less these days about energy and environmental rules. “Then you’ve got the USTR and the whole tariff thing that’s just a crusher,” he said.

“People our size, that don’t have K Street lawyers,” said Elrod, referring to the center of Washington’s lobbying industry. “We’re the ones that bear the brunt, we’re the ones that have the least tools in the box to work with.”

Complex system, no checks

It’s not often that K Street gets handed the type of business development opportunity that Trump’s volatile trade policy offers. With new tariffs being announced and lifted on a few days notice and trade agreements constantly being renegotiated, companies have scrambled to protect themselves.

Tariff exclusions are highly sought after because they offer a huge competitive advantage – especially if a rival still has to pay. The review of exclusions is happening on a compressed time schedule, with little warning before tariffs and a complex set of rules that few people understand go into effect. And there are no second chances.

“When you’re running a process that has no appellate review, there’s a lot of room for questionable behavior because there’s no one really checking the process,” said one former USTR official who spoke on the condition of anonymity. “It’s common knowledge in town that the best way to get a leg up on an exclusion request is to get a Republican House or Senate member to call the White House.”

Members of Congress frequently work the bureaucracy on their constituents’ behalf, but there’s a particularly large pile of money on the line with trade. So far, Trump’s new tariffs amount to an $88 billion annual tax increase for US companies, according to the Tax Foundation.

Just understanding the complexities of the process can require a specialised trade lawyer. Often, multiple importers will request exclusions for similar products. A reviewer at USTR’s Washington office might grant one company’s request and reject another’s, but anyone may take advantage of the resulting exclusion and request a refund of all the duties it paid on that product, which means keeping a close eye on the Federal Register. The Commerce Department runs the exclusion process for steel and aluminum tariffs, and under its rules, exclusions are company-specific.

Companies that can’t afford their own lobbyists often go through their trade associations, which can help open doors on the Hill on behalf of an industry’s interests. Still, even the trade groups are often baffled at why decisions come down the way they do. The National Marine Manufacturers Association has seen confoundingly mixed results – a fish finder is excluded while a depth finder isn’t, for example.

“We can’t make heads or tails out of why that happens,” said John-Michael Donahue, the association’s communications director. “I don’t think there’s a lack of help from Congress being loud about this issue, it’s more getting through to the administration and figuring out what the next step is in their mind.”

Some companies don’t need members of Congress or trade associations to make their case. Apple, for example, got 10 out of the 15 exclusions it asked for on items like computer chargers and mice, with 11 yet to be decided. The company spends more than $6 million on lobbying overall each year. Its CEO, Tim Cook, has met with Trump several times and the president cited Apple’s exclusion approvals during a public event at its Texas production facility.

“It’s difficult for me to see how this is a fair and transparent process,” said Nicole Bivens Collinson, head of the international trade and government relations practice for Sandler, Travis & Rosenberg. “When you’ve got Tim Cook who’s able to go in and meet with the president and get an exclusion, and someone who’s a very small company trying to submit through the regular process, and this is going to have a huge impact on their business.”

The federal government last set up an exclusion process in 2001, when George W Bush imposed tariffs of up to 30% on $15 billion worth of steel imports in an attempt to bolster flagging mills. About half of the goods originally covered by the measure were exempted, which was one reason why the tariffs ultimately didn’t arrest the steel industry’s decline.

In numbers

Trump’s tariffs are much less discriminate. Hefty new duties now cover about $364 billion worth of imports, or 12% of the overseas products Americans buy in a year. The tariffs don’t just fall on finished goods, like toasters or water heaters. They also cover many of product components, from motherboards to heat exchangers.

Because they’re so sweeping, the Commerce Department and USTR have been flooded with clemency pleas. As of mid-December, steel and aluminum users had requested exclusions on about 152,000 specific products. With two-thirds of the requests decided, about 79% had been approved. Importers of goods from China had requested about 44,000 exclusions, of which 43% had been decided and 35% approved, with a final round of exclusions under way.

For the first two rounds of China tariffs, which are worth about $50 billion in imports, the Peterson Institute for International Economics estimated that USTR had excluded products worth about $12.8 billion, in what it called “a substantial off-budget concession to lucky firms.”

Many of those affected simply submitted no requests, figuring they had slim chances of success. A handful of businesses submitted thousands, especially industrial suppliers that globally source tools and parts and distribute them to US manufacturers, since a separate application was needed for every possible product variation. A single company – AEP Holdings, a private equity-owned supplier of aftermarket car parts – filed more than 10,000 exclusion requests. So far, about 2,600 have been denied and only a handful approved.

Adjudicating each request is an enormous undertaking, and the federal government was ill-prepared.

The Commerce Department at first had projected that it would see only about 4,500 applications – a threshold that was passed almost instantly. According to a regulatory filing, USTR estimated that each exclusion request would take applicants two hours to prepare, at a cost of $200 each, and two and a half hours for USTR to process. For the China tariffs, adjudicating cases is expected to take 175,000 staff hours over the course of a year, at a cost of $9.7 million

US steel industry

To keep up, agencies have had to borrow staff from other departments and brought on dozens of contractors, giving them a crash course in tariff codes. “The internet is useful to research the product,” reads one set of instructions for reviewers obtained by ProPublica. There is no hard completion deadline, and companies can only track their applications’ progress via an online portal.

Very often, at least with the steel and aluminum process run by the Commerce Department, it was hard to believe that parties were being considered equally.

Christine McDaniel, an economist and a senior fellow at the Mercatus Center at George Mason University, has found that requests are rarely granted if objections are filed. A handful of steel producers have objected to thousands of applications, claiming that the importers should get no relief because US manufacturers could make the necessary items. But McDaniel poked a hole in their argument: Added together, the producers’ claims far exceed what they’re realistically able to produce.

“It’s nearly costless for these guys to file objections, but the objection can prevent a company from getting its steel,” McDaniel said. Capitol Hill has noticed.

In early 2018, after receiving complaints from steel importers, Representative Jackie Walorski, sent letters to the Commerce Department detailing problems with evaluations. The process had been a “masterclass in government inefficiency and plagued by maddening inconsistency,” she wrote in April. After receiving no formal responses, on October 17 she wrote in exasperation, “It is difficult not to believe that there is a finger on the scale favoring objectors.”

In one letter, Walorski cited the case of National Tool & Manufacturing Company, a 45-person firm based in East Dundee, Illinois, that found itself in a fight with a multinational metals titan.

National Tool requested an exemption on a specialty grade of steel it buys in Italy and distributes to companies that make injection molds. EDRO Specialty Steels, which is owned by the Austrian conglomerate Voestalpine AG, objected on the grounds that it could produce the steel National Tool needed in the US National Tool’s request was denied, so it had to keep eating the 25% tariff.

Then, EDRO itself requested exclusions for the raw material it imports from Slovenia to produce its proposed substitute – showing that the product it said it could supply wasn’t entirely American-made after all. EDRO said this summary was “incomplete,” but declined to comment further.

National Tool President Eric Sandberg suspects his exclusion request never had a chance.

“It truly is one of these big versus small battles,” Sandberg said. “Because one of those big three companies wrote a letter, done. Without investigation, it was just done. It really feels like the government is working against you.”

In late October, the Commerce Department wrote back to Representative Walorski, tersely rejecting her complaint. But Walorski’s concern was merited. On October 28, the agency’s inspector general issued an alert finding that steel producers had back channel communications with Commerce Department staff that swayed their decisions. For example, the inspector general found that criteria for evaluating exclusions had been changed at an objector’s request, before decisions were posted publicly.

That apparent bias has percolated out to some Washington insiders, who see the steel and aluminum exclusion process as so slanted toward US producers that it’s not worth the trouble. “I wouldn’t take anybody’s money against the US steel industry,” said one prominent D.C. lobbyist who spoke on the condition of anonymity. “We say no a lot.”

Challenges ahead

Throughout his career, Mike Elrod has tried to follow the incentives that American trade policy has created for US businesses. In the 1990s, he owned a factory that made industrial rainwear. After China’s entry into the World Trade Organization in 2001, which locked in low tariff rates, Elrod’s biggest client decided to relocate production there. “It killed the company,” Elrod said. “There was nowhere else to go.”

After that, Elrod decided to start importing from China himself, setting up a business that manufactured precision metal components before finding a type of water heater that he thought would sell well in the US. Founded in 2006, Eccotemp grew steadily, adding people, new models and distribution centers overseas, to the point where Elrod started thinking about setting up assembly operations in the US. Even if labour is more expensive, not having to wait four months for new orders to ship across the world would allow him to more closely control inventory levels and turn around design changes faster.

Instead of accelerating that plan, however, Trump’s tariffs on Chinese imports took it off the drawing board. If the only place to get components is China, the duties would make bringing them into the US for final assembly cost-prohibitive.

As the trade war began, Elrod had been looking forward to retirement. As soon as the tariffs were announced, Elrod and his successor as CEO, Joe Bolognue, had to formulate a new business strategy based on a 25% hike in the cost of goods: More higher-margin products, more non-US sales, leaner operations.

They don’t want to walk away from the brand they’ve built, or put their employees out of work. “We don’t have the luxury to say, ‘We’re going out of business,’” Bolognue said. “We just don’t make as much money as we used to.”

The tariffs have also created other problems, like Chinese manufacturers selling directly into the US on Amazon or Alibaba rather than going through companies like Eccotemp. They still have to pay tariffs, but they can undercut prices by avoiding one layer of markups.

Since the tariff decisions came down, Elrod has moved to Georgia and isn’t as involved in day-to-day operations. But he’s still heavily invested in the company, financially and emotionally. That’s why it was particularly devastating when the tariffs killed a potential deal to sell Eccotemp to a private equity firm, which would have allowed it to keep growing while ensuring his retirement.

“That’s usually what people see as the pot of gold at the end of the rainbow,” Elrod said. “My net worth, you’re sitting in it. I don’t have a 401(k). Everything that I’ve ever done has flown back into this business. I don’t have enough runway to do it again.”

Elrod says that despite it all, he still plans to vote for Trump in November, citing the administration’s friendlier stance to his company on regulations. As for draining the swamp, Elrod doesn’t blame the president.

“Maybe if Trump moved the capital to Dallas and put everyone with a DC address on the Do Not Fly List, maybe,” Elrod said. “You get all the justice you can afford.”

This article first appeared on ProPublica.