Trade and Terrorism: A Disaggregated Approach

Abstract

This paper constructs a model of trade consequences of terrorism, where firms in trading nations face different costs arising from domestic and transnational terrorism. Using dyadic dataset in a gravity model, we test terrorism's effects on overall trade, exports, and imports, while allowing for disaggregation by primary commodities and manufacturing goods. While terrorism has little or no influence on trade of primary products, terrorism reduces trade of manufactured goods. This novel finding pinpoints the avenue by which terrorism harms trade and suggests why previous studies that looked at all trade found modest impacts. Moreover, the detrimental effect of transnational terrorism on total manufactured trade, exports, and imports as well as on various classes of manufactured trade is substantially larger than that of domestic terrorism. Generally, this adverse impact is more pronounced for imports than for exports.

What We Have Learned about Terrorism since 9/11

“…The literature usually utilizes the gravity model, which is the standard in the empirical trade literature. The adverse effect of terrorism on trade is shown for the period of the dominance by the leftist terrorist groups (e.g., Nitsch and Schumacher 2004) as well as for the era of dominance by the religious fundamentalist terrorists (e.g., Bandyopadhyay, Sandler, and Younas 2018). Egger and Gassebner (2015) are an exception; they discern a negligible non-robust effect of terrorism on trade in the short run.…”

The Day after the Bomb: Well-being Effects of Terrorist Attacks in Europe

“…Terrorism has relevant economic consequences, as it negatively affects growth (Abadie and Gardeazabal, 2003;Blomberg et al, 2004;Gaibulloev and Sandler, 2008;Meierrieks and Gries, 2013), capital markets (Chen and Siems, 2004) and trade (Bandyopadhyay et al, 2018). Attempts to estimate the economic costs of terrorism generally consider direct costs (loss of lives, severity of injuries, value of damaged structures, etc.)…”

Effects of Neighboring Nation Terrorism on Imports

“…De Sousa et al (2018) show that the presence of terror networks may cause neighboring countries to affect a nation's trade. Bandyopadhyay et al (2018) show that terror has different effects on trade of manufacturing and primary products. Building on the insights of the extant literature, we present a simple model that analyzes how own and neighbor terrorism may affect trade and production costs and thereby affect imports of a nation.…”

“…We adapt a version of the standard monopolistic competition model of Helpman et al (2008) used in Bandyopadhyay et al (2018). There are J nations trading in differentiated products.…”

“…Finally, in recent years, an overwhelmingly large fraction of terrorism incidents has been domestic in nature. 3 Such incidents also raise the costs of trade (see Bandyopadhyay et al 2018) and affect trade through both income and substitution channels.…”