The paper is structured in the following way. In section 2, we present the ITERATE dataset and describe some stylized features that will be of interest to investigate the links between transnational terrorism and bilateral trade flows. Section 3 sets then a simple theoretical model of endogenous transnational terrorism and security, embedded into a standard trade model. Section 4 explains the induced empirical strategy to test the impact of terrorism and counter-terrorism measures. Section 5 takes the model to the test and presents the econometric results. Section 6 provides further evidence on the impact of terrorism translating through higher security at US borders. In particular, it investigates one specific (observable) channel of security measures at the border: the allocation of business Visas by US authorities. Finally, section 7 concludes.

# **2 Transnational Terrorism and the ITERATE Database**

ITERATE defines terrorism acts as ”the use, or threat of use, of anxiety-inducing, extra-normal violence for political purposes by any individual or group, whether acting for or in opposition to established governmental authority, when such action is intended to influence the attitudes and behavior of a target group wider than the immediate victims and when, through the nationality or foreign ties of its perpetrators, its location, the nature of its institutional or human victims, or the mechanics of its resolution, its ramifications transcend national boundaries”.

We amend that definition by two additional conditions to qualify an incident as ”transnational terrorism”. Focusing first on the term _terrorism_ , we follow Omar Malik (2000) from the Royal Institute of International Affairs who claims that only those incidents that are perpetrated against or within _liberal_ states should be qualified as terrorist attacks. A country is said to be liberal when it safeguards human rights in its laws and practices. Qualifying terrorism acts as incidents against non-liberal countries is usually more controversial. To some observers, these actions might be viewed as terrorism but to others, they might rather be qualified as acts of resistance against a totalitarian country. To avoid getting into the controversy, we decided to withdraw the corresponding observations from the dataset. We had access to the Freedom House dataset that rates civil liberties and political rights on a scale varying between 1 and 7 for each country from the 1970s onwards, in order to distinguish between ’liberal’ and ’non liberal’ countries. As in Helliwell (1994) and Rodrik (1999), we combine the two ratings into an index varying between 0 and 1. The higher it is in a given year and the more ’liberal’ the observed country shall be considered. For the purpose of this paper, we retained only those observations where incidents took place within or against a country associated with an index equal or higher than 0.5.

Second, Mickolus _et al_ treat some incidents perpetrated by separatist groups like ETA in the basque country, IRA in Northern Ireland or FLNC in Corsica as _transnationals_ , leaving the choice for the users of the dataset to decide whether or not to include them in the data. We define instead a terrorism incident as ”transnational” when it is directed by a group that emanates from an internationally recognized nation against or within an internationally recognized other nation and thus withdraw 6