In recent discussions about tariffs and their implications for the U.S. economy, researchers have uncovered significant insights. They’ve revealed that investors are increasingly wary of how tariffs affect companies and industries located in predominantly Republican areas of the country. Furthermore, there’s a trend among less competitive firms directing resources toward lobbying efforts rather than investing in their core business, as the former often proves more rewarding. This tendency is amplified in environments with trade barriers like tariffs, leading to increased rent-seeking behavior.
By Janice Huijun Yan, PhD candidate University Of Alberta and Randall Morck, Jarislowsky Distinguished Chair in Finance and Distinguished University Professor of Business University Of Alberta. Originally published at VoxEU
The stock market in the U.S. experienced a decline following President Trump’s announcement of his “Liberation Day” tariffs, which were later suspended. This analysis indicates that companies located in counties with a strong Republican presence—and the industries dominated by these firms—suffered greater stock losses than their counterparts in more Democratic areas. The findings suggest a combination of diminished investor confidence and increased anxiety regarding the future of businesses in redder regions.
In early 2025, under an emergency declaration (Fayyad 2025), President Donald Trump implemented extensive tariffs in two distinct phases. The initial phase commenced on February 20 and was “paused” on March 13, targeting Canada, China, the EU, and Mexico. The second phase, referred to as the “Liberation Day” tariffs, began on April 3 and was “paused” on April 8, affecting a broader range of foreign economies. With both episodes, retaliation from other nations ensued, leading to substantial counter-retaliations from the U.S., which collectively resulted in a market plunge of over 10% (Reis 2025).
President Trump characterized his Liberation Day tariffs as a declaration of economic independence that would revitalize jobs and factories across the nation, asserting, “you see it happening already” (Narea 2025).
Traditional manufacturing, once the backbone of the U.S. economy from California to Massachusetts in the 1960s, has been gradually automating and relocating labor-intensive components overseas for decades. Emerging high-tech firms have rejuvenated areas near research universities that boast educated workforces. Voters in these blue regions primarily lean Democratic, whereas those in neglected red regions tend to favor Trump and the Republican Party, a dynamic that reflects the modern political landscape.
Contrary to President Trump’s expectations that the broad market declines during the rollout of the tariffs would be outweighed by gains in manufacturing and traditional sectors, we observe a different trend. By evaluating each firm’s ‘redness’ based on the Trump vote ratio in their headquarters’ county from the 2024 presidential election (Yan and Morck 2025), we’ve found that stocks of firms in redder counties decreased more sharply, particularly during the Liberation Day tariff announcements. Additionally, stock indices for industries with a higher concentration of firms in these areas also faced significant declines.
Investor anxiety reached unprecedented levels during both tariff announcements, indicating that the substantial drops in stock valuations may reflect lowered expectations coupled with fears regarding the future performance of companies in red regions. This pattern does not support the notion that tariffs might be perceived positively or even neutrally by firms in these areas.
A slight positive note for proponents of tariffs is that stocks of firms in less-educated counties experienced slightly less decline during the initial wave from February 20 to March 13. However, this observation is tempered by the fact that, even in these counties, the stock values fell significantly, especially among firms in redder regions with comparable educational backgrounds. This initial wave featured aggressive tariffs against China, whose exports had exacerbated a negative impact felt by less-educated areas in the U.S. (Autor et al. 2022, Bloom et al. 2024).
The absence of clear evidence is not proof of a lack of impact and can be challenging to publish. Had we observed stocks of firms in redder and less-educated areas rising amid tariff announcements while most stocks declined, it would suggest that investors viewed tariffs as a viable policy to reinvigorate neglected regional economies. Conversely, if all stocks had uniformly dropped in response to market panic, it would imply broad investor fears. Instead, the disproportionately steep declines among firms in red regions indicate other underlying factors are influencing investor behavior.
Markets are not infallible, and future developments may shift perspectives. However, the trends detected affirm previous studies linking trade barriers to distortions in pricing and investment. Basic trade theory illustrates that tariffs generally harm domestic consumers more than they benefit local producers. Nonetheless, perceived advantages for producers in politically significant regions might influence political calculations despite the higher costs borne by consumers, especially if the anticipated resurgence of jobs and factories holds true. Domestic manufacturing, given its significantly higher labor costs compared to countries like China and Mexico, could ultimately result in prices exceeding tariffs on foreign supply chains, making tariffs essentially another form of taxation that raises prices, diminishes demand, and contracts the industry. Our findings are consistent with investor fears that tariffs will disproportionately impact redder industries.
Advanced trade theory connects trade barriers to increased political rent-seeking, wherein firms tend to lobby for tariffs favoring their interests (Baldwin 1985). Indeed, lobbying for favorable tariffs can sometimes yield better returns than investment in productivity-enhancing technology. A historic example includes U.S. steelmakers of the 1970s, who were technologically behind. Aggressive lobbying led to trade barriers that inflated steel prices, reduced R&D investment across the sector (as lobbying proved more lucrative), and consequently shrank employment in the industry (Lenway et al. 1996).
With established political influence acting as a sunk cost, firms opted for lobbying as their primary area of investment, resulting in neglected R&D and intensified lobbying efforts. In this context, trade barriers can be likened to corporate fentanyl—initially concealing deeper issues but ultimately leading to detrimental dependency (Morck et al. 2001). Our research findings suggest that investors perceive companies in redder areas as particularly susceptible to this kind of destructive reliance.
Advocates of late-20th century trade liberalization recognized that the most considerable cost associated with trade barriers lay in the investment drain linked to political lobbying (Magee et al. 1989, Rodrik 1995). Lengthy and complex tariff schedules ultimately benefit those lobbyists negotiating the best deals, creating an atmosphere where no firm can afford to cease lobbying without risking disadvantage from competitors. President Trump’s vision of economic independence is not unique; mid-20th-century Latin American countries took a similar approach with import substitution, heavily subsidizing domestic firms to fill the void left by imports blocked by high tariffs (Irwin 2021). This method fostered a close-knit relationship between businesses and government, leading to prolonged stagnation and corruption (Dutt 2009).
In the 1990s, there was a hopeful perspective that binding governments to free trade could halt the damaging “black hole” of tariff-induced investment drains and promote growth through increased productivity-enhancing technologies (Coelli et al. 2022). Initially, this approach yielded positive results. While minor tariff reductions can exacerbate existing strains, the removal of trade barriers tends to stimulate innovation and reduce corruption (Baksi et al. 2009), leading industries, often reluctantly, towards rehabilitation and improved corporate responsibility.
Unfortunately, this positive trajectory faltered due to two significant public policy errors. Unlike in the Asian Tiger economies of the 1990s, wage levels in China remained disproportionately low relative to productivity, prompting charges of unfair export subsidies rather than worker oppression. Additionally, high-income countries, notably the U.S., struggled to adapt by retraining workers displaced by the downsizing of high-cost, low-tech domestic firms, which has contributed to a troubling rise in “deaths of despair” related to fentanyl (Pierce and Schott 2020). Rising wages in China are addressing the first issue (Li et al. 2012). There is hope that enhanced education, retraining initiatives, redistribution efforts, and drug rehabilitation programs could ameliorate the second.
The U.S. has found itself entrenched in a cycle akin to a corporate fentanyl crisis, and the rest of the world may benefit from remaining cautious. Implementing retaliatory tariffs against the U.S. could serve as a necessary wake-up call, while other high-income nations might consider actively dismantling existing trade barriers among themselves. There’s also an opportunity to advocate for the rights of workers globally by linking free trade to wages that keep pace with productivity.
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