DP7946 Terrorism Networks and Trade: Does the Neighbor Hurt?

Author(s): José de Sousa, Daniel Mirza, Thierry Verdier
Publication Date: August 2010
Keyword(s): security, Terrorism, trade
JEL(s): F12, F13
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7946

In this paper, we study the impact of transnational terrorism diffusion on security and trade. We set up a simple theoretical model predicting that the closer a country is to a source of terrorism, the higher the negative spillovers on its trade. The idea is that security measures, which impede trade, are directed both against the source country of terror and its neighbor countries where terrorism may diffuse. In contrast, we demonstrate that countries located far rom terror could benefit from an increase in security by trading more. Taken to the test, we empirically document these predictions. We find (1) a direct negative impact of transnational terrorism on trade; (2) an indirect negative impact emanating from terrorism of neighbor countries; and (3) that trade is increasing with remoteness to terror. These results are robust to various definitions of the neighboring relationships among countries.