Are Lives a Substitute to Livelihoods ? Terrorism , Security and US Bilateral

What is the impact of terrorism on trade through higher security at the borders? We set up a theory which shows that the impact goes not only from terrorism to trade. Higher trade with a partner might, in return, increase the probability of terrorism acts by making security measures more costly for total welfare. In order to identify the true impact of terrorism, our theory allows then for a strategy to condition out the latter mechanism. We show in particular, how past incidents perpetrated in third countries (anywhere in the world except the origin or targeted country), constitute good exogenous factors for current security measures at the borders. Our tests suggest that terrorist incidents have a small effect on US imports on average, but a much higher effect for those origin countries at the top of the distribution of incidents. Besides, the level of the impact is up to three times higher when the acts result in a relatively high number of victims, the products are sensitive to shipping time and the size of the partner is small. The paper further shows how terrorism affects the number of Business visas delivered by the US, thereby impacting significantly US imports in differentiated products. All these results suggest that security to prevent from terrorism does matter for trade. JEL classification: F12, F13