Terrorism and Impact on International Trade

Terrorism is the intentional violence as a means to generate fear or terror to achieve a religious, political aim. The motive for terrorism may differ, but the actionshave some pattern with terrorist events in a variety of forms;

Kidnappings, threats, airplane hijacking, suicide attacks and bombings.

The termsterrorism and terrorist invented during the French Revolution but got popularity after the 1984 Beirut barracks bombings and again after the attacks on New York City and Washington, D.C. in September 2001 and on Bali in October 2002.

According to Global terrorism database, more than 62000 incidents have been recorded resulting in 150,000 deaths from 2000 to 2014.According to new terrorism index, the cost of terrorism has reached to $52.9 billion in 2014.(Myers, 2015)

It is estimated that terrorism has cost Iraq $159 billion since 2015.

Impact on international trade

The impact of terrorism is always negative for the economy.Economic consequences of terrorist activity have brought negative impact on the volume of international trade. Terrorism can impose acost on a country by a number of ways.Terrorist events have economic consequences of averting foreign direct investment, directing public funds to security, limiting trade or destroying infrastructure.Foreign direct investment is thesource of saving for the developing countries,if countries lose this,then theymay experience adecline in the economic growth.
Terrorism And Impact On International Trade Harvard Case Solution & Analysis

In some cases, terrorist activities can have animpact on specific industries as September 2001 attacks did on tourism and airline industry. Terrorism alsoincreases the cost of doing business in regard to higher insurance premiums, larger salaries to at-risk employees and expensive security precautions.

Nitsch estimated the effects of terrorism on trade flow. In hismodel, trade flows between partners depending on the terrorist attacks in the country. Income variable is thedistance between the two countries. Hefound that first terrorist attack reduced the trade by 10% which had a greatinfluence. In addition to this,sometimes, terrorism is correlated with domestic terrorism.(Volker Nitsch, 2004)

Other central channels through which terrorism may affect the international trade.

Terrorism raises the cost of doing business by increasing both security costs and insurance premiums.
Terrorism raises the uncertainty that increases the cost of traded goods relative to the similar products manufactured in the terrorism free country.
Terrorism can disturb from more productive sectors to less productive security activities
Terrorism can divert the production and that will reduce the purchasing power drops from loss in income
Terrorism reduces the flow of goods through ports due to inspections

Terrorism affects the international trade in different ways. Firstly, terrorism increases the cost of government spending due to increased expense in defense budgeting. Secondly, terrorism increases the cost of doing business.

Increase in the government spending

Increase in the government spending due to the terrorist activities is linked with the higher inflation rate and lower growth. It is estimated that in the US, homeland security spending increased from $57.0 billion in 2001 to $98.0 billion in 2005. This $41 billion increase in homeland security is the 0.35% of US GDP. It seems reasonable, after 9/11, government spending increased by ahuge number.Disturbance in the economic activities compromises the consistency of the fiscal account by lowering the proficiency of tax administration, distorting the composition of public spending and eroding the tax base...............

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