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Abstract
Trade policy uncertainty has skyrocketed in recent years with rising trade tensions between the US and China. In this paper, I empirically investigate how trade policy uncertainty (TPU) influences firms' lobbying and investment decisions, and how these decisions can potentially complement each other. Using a difference-in-differences design leveraging firms' differential exposure to trade with China and the timing of China's entry to the WTO in the early 2000s, I find that firms more exposed to trade with China have significantly higher trade-related lobbying expenditures in the years prior to China's WTO entry. I construct a newspaper-based index of US-China trade policy uncertainty to isolate uncertainty effects and again find positive lobbying responses. When these two forces are considered simultaneously, the increased level shift in lobbying during the pre-period outweighs the response to trade policy uncertainty. Various breakdowns of this result show evidence of response heterogeneity supporting the role of competition in lobbying. I also find significant negative investment responses to changes in the uncertainty index. Lastly, I present evidence showing that although lobbying can theoretically complement investment by counteracting the negative real option effects of uncertainty, other forces mute this response. Lobbying serves to build political capital that can be used to both increase the probability of positive policy outcomes for firms and protect the firms in the case of a negative outcome but also can take away resources from investment and allow other non-lobbying firms to free-ride.