increases (ie. _β_ 7 _>_ 0) while sharing a common border tends to aggravate impact of terrorism on bilateral trade (ie. _β_ 8 _<_ 0). All coefficients _β_ 6 _<_ 0 and _β_ 7 and _β_ 8 are statistically significant. Terrorist activities’ effect on bilateral trade flows depend on distance and having a common border between trading countries. Although the reasons behind these results are not clear, they imply that terrorism is redistributing trade flows from close to distant partners, thus producing trade diversion effects.

In the same vein, Blomberg and Hess (2004) estimate the cost of violence on bilateral trade flows. Again they use the ITERATE database to measure transnational terrorist activity. But they consider the full period 1968-1999. They again use a dummy variable for terrorism which takes value one if a terrorist event is recorded for either country in a given pair. However, they also consider other sources of violence like external conflicts, revolutions, inter ethnic fighting. They find that all types of violence have a negative impact on trade, but with different levels of magnitude. For instance, a country which has a terrorist accident is associated with a 7.6% decline in bilateral trade. While significant, this is less than half the magnitude of the negative impact on trade from external conflicts and inter-ethnic More interestingly, the authors compare the trade reducing effect of these dimensions to other impediments of trade like tariffs rates. As known from the literature (see for instance Feenstra, 2002), this depends on the value of the elasticity of substitution between domestic and foreign products. Taking ”reasonable” values of this elasticity to be between 5 and 10 (Anderson and Van Wincoop, 2003), Blomberg and Hess find that transnational terrorism has a tariff equivalent trade cost between 1 % and 3% while total violence has a tariff equivalent varying from 8% to 19%.

A final important element is the fact that the authors try to control for the endogeneity effect of trade flows on violence and in particular on terrorism, as is transparent from (7) in our basic framework _{_ (4), (5), (6) and (7) _}_ . They use as an instrument for violence, the UN voting records and dummies for peace treaties to obtain much higher coefficients. The magnitude of the coefficients, 10 to 100 times higher, with respect to the variable of violence that is chosen however make the authors cautious not to emphasize more these results. Besides, the use of UN voting records and peace treaties as instruments might be questionable as they could also be related to bilateral trade, independently from being correlated with terrorism.

Several points should be mentioned at this stage.

# **A/ Terrorism, Trade and Common Factors**

The first one has to do with control variables in an equation like 1). As already mentionned, an important stylized fact from transnational terrorism (Sandler and Enders (2002)) is that over the period 1968-2002, and in particular before the 1990s, terrorist groups tended to hit targets that were relatively close to home and/or had big influence on internal policies of origin countries:<sup>6</sup> As proximity and colony (or neo-colony) ties are also known to be factors of trade, this could give a rapid idea on why one could find some spurious correlation between terrorism activities and bilateral trade if those

> 6That is in particular the case of some Latin American countries (Colombia, Puerto Rico, Peru, Cuba, Argentina) vis-`a-vis the US but also for instance, that of Algeria and Spain vis-`a-vis France.

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