To begin with, in the aftermath of September 11, the OECD was particularly concerned by the extent to which the world economy would be hit by the observed increase in security surcharges emanating from airlines, maritime transport companies or insurers due to the increase in terrorism threat (OECD (2002a) and (2002b)). They do not though provide any particular estimate of the impact of terrorism on trade.

Walkenhorst and Dihel (2002) is one of the first attempts to tackle the issue. They use CGE modelling to assess more analytically the impact on trade and welfare. The authors model the costs from a terrorist attack in the same way as an increase in tariffs with the only exception that the former is not accompanied by additional revenue for the importing government. Where the transaction costs borne by terrorism are uniform across regions, the results show not surprisingly that highly opened regions and industries with high import price-elasticities would bear a non negligible adjustment in trade and welfare losses.

The first study to use a gravity model to assess the impact of terrorism on bilateral trade is Nitsh and Schumacher (2004). In the standard gravity model of (1), they introduce an additional variable, Terror, which measures the extent of transnational terrorism occurring in the two countries in the period 1968-1979. More precisely, using the ITERATE database described earlier, the authors construct three alternative variables of terrorist activity: the yearly number of terrorist events in the two countries, the total number of terrorist events during the period, or finally a dummy variable that takes the value of one for at least one terrorist action. They find that terrorist activity negatively affects bilateral trade flows. In particular, they find that a doubling of the number of yearly terrorism attacks in those countries affect their trade by around 4%, holding all other things constant. When one considers the total number of terrorist events in the period, the effect is larger, capturing the trade effects that are not visible in the same year of attacks. When terrorism is finally described by the dummy variable taking values 0, 1,or 2 , depending on whether no terrorist event or at least one terrorist event happened in one or both countries, Nitsh and Schumacher estimate that bilateral trade would be reduced by almost 10% if one country is affected by terrorism and 20% if both countries are affected by it.

Using the latter dummy variable of terrorism, Fratianni and Kang (2006) extend the analysis of Nitsh and Schumacher (2004) along two dimensions. First, they consider a different time period (1980-1999) and found actually the terrorism variable to be insignificant, suggesting that the result of Nitsch and Schumacher could be sample specific. Second, they investigate how the terrorist impact on bilateral flows depends on distance. For this, they interact the dummy terrorist variable with distance and with a common border dummy. Formally they estimate : where _Tijt_ stands for the dummy terrorism events, _Bij_ is common border and _dij_ is geographic distance. They find that terrorism-related trading costs decline as distance between trade partners 14