WPS4094 Are Lives a Substitute for Livelihoods? Terrorism, Security, and U.S. Bilateral Imports* Daniel Mirza (CREM, University of Rennes 1, France) Thierry Verdier (PSE, France and CEPR, London)†

# **Abstract**

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 turn, increase the probability of terrorism acts and make 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. In addition, 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 Unites States, thereby impacting significantly U.S. imports in differentiated products. These results suggest that security to prevent terrorism does matter for trade.

Keywords: Terrorism, trade, security JEL codes: F12, F13 World Bank Policy Research Working Paper 4094, December 2006 _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the view of the World Bank, its Executive Directors, or the countries they represent. Policy Research Working Papers are available online at http://econ.worldbank.org._

*We are especially grateful to James Anderson, Matthieu Crozet, Juan Carlos Hallak, David Hummels, Thierry Mayer, John Romalis, Maurice Schiff, Ben Shepherd, Barbara Spencer, and Vanessa Strauss-Kahn for very fruitful discussions on earlier drafts of the paper as well as conference participants at the NBER Summer Institute, ETSG, PSE, CEPII and universities of Paris 1, Rennes 1 and Paris 9 seminars. The authors wish also to thank Anne-Sophie Novel and Fabien Verger for excellent research assistance and Francoise le Gallo for compiling OECD-Flubil trade data.

†This work is part of a broader project on trade facilitation and development supported through a trust fund of the U.K. Department of International Development. It has further benefited from the funding of the World Bank and a grant from the French Ministry of Education and Research (contract ZVA46). Thierry Verdier and Daniel Mirza acknowledge respectively financial and logistical support from the University of Southampton (UK) and the University of Paris 9 and CEPII (France) where part of this work was completed.