An Injury to One Is an Injury to All: Terrorism's Spillover Effects on Bilateral Trade
by Cong S. Pham, Chris Doucouliagos
(June 2017)

In this paper we investigate whether the effects of terrorism in one country spillover to affect trade in neighboring nations. Using a sample of more than 160 countries from 1976 to 2014, we report robust evidence that terrorist attacks in a nation's contiguous neighbors significantly reduce bilateral trade. Each additional terrorist attack in a neighboring country reduces bilateral trade by nearly 0.013% on average, which translates into a reduction of about $6.4 million USD in total trade. Trade effects from terrorist incidents are higher in sub-Sahara. Adverse trade effects hold for different flow and stock measures of terrorism, and even for terrorist incidents with zero casualties. Spillovers from terrorism are relatively long-lived, depressing bilateral trade up to five years after a terrorist event. Our findings are consistent with terrorism adversely impacting bilateral trade through several channels: psychological distress, higher trade costs arising from increased trade insecurity and regulatory burden, and adverse effects on income and trade reform.
Text: See Discussion Paper No. 10859