Trade Effects of Terrorism

The objective of this chapter is to consider the effect of terrorism on trade. We rely on the existing literature on trade and terrorism and primarily use perfectly competitive models of trade. First, we highlight how terrorism may affect trade by damaging resources and causing general equilibrium reallocations of factors of production. Second, we consider how these trade effects may be altered in the presence of optimal counterterrorism policy. Third, the chapter discusses how trade may affect intra-industry trade in varieties using a monopolistically competitive framework. Finally, we discuss some of the existing empirical literature that has focused on trade-terrorism and FDI-terrorism issues. A central message of our analysis is that while terrorism will likely raise costs and dampen economic activity, whether it will raise or reduce trade of a nation depends on how terrorism affects that nation’s resource reallocation, relative prices and real income level.