Edited by Harry W. Richardson, Peter Gordon and James E. Moore II
Chapter 10: The Effect of Transnational Terrorism on Bilateral Trade
Quan Li Since the 9/11 terrorist attacks, the economic consequences of terrorism have attracted wide public and scholarly attention. The global ‘war on terror’ has led to tightened security almost around the world, increasing the costs of conducting international business. Many are concerned that international trade, an important component of the global economy, will suffer due to terrorism and counter-terrorism. A 2003 report, prepared by the Australian Department of Foreign Affairs and Trade and delivered at an Asia-Pacific Economic Cooperation (APEC) trade and security forum in Bangkok in 2003, estimated that the United States economy is losing up to US$75 billion a year because of terrorism. The popular view is that terrorism leads to lost business. Several econometric studies (Nitsch and Schumacher, 2004; Fratianni and Kang, 2006; Blomberg and Hess, 2006) demonstrate that terrorism reduces the volume of trade. According to these studies, a doubling in the number of terrorist incidents in two countries of a dyad is associated with a decrease in bilateral trade by about 4 percent. The presence of terrorism together with internal and external conflict is equivalent to as much as a 30 percent tariff on trade in a given country year. And the negative effect of terrorism for trade is stronger for contiguous countries. In this chapter, I re-examine the effect of terrorism on trade. Previous studies have ignored the direction of terrorist attacks, failed to control for dyad-specific unobserved characteristics, and treated pairs of countries at different development stages equally. This research corrects...
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