First, trade and terrorism incidents are endogenous to each other. On the one hand, the relationship is negative: terrorism via an increase in security reduces trade. But on the other hand, it can be positive: higher trade volumes are more likely to limit security measures which in turn increases terrorism activities. We propose therefore a way to condition out the latter effect which would otherwise bias downward (in absolute value) the estimated negative impact of terrorism incidents on bilateral trade. What we do is to consider a particular type of incidents that we believe are the most exogenous to security and bilateral trade. These are past incidents perpetrated by groups originating from a country against the interests of another, but which take place in a _third_ country. As an example, take for instance the case of Al-Qaeda in 1998, whose origin at that time was still attributed to Saudi Arabia<sup>1</sup> . In that year, Al-Qaeda managed to explode a car bomb next to the U.S. embassy in Dar El-Salam (Tanzania), which hurt nearly 80 people. We make the point here, that with such types of incidents, based in third countries (here, Tanzania), we are capable to identify the exogenous impact of terrorism originating from one country (here, Saudi Arabia) on its bilateral exports towards the targeted country (here, the US).

Second, if transnational terrorism induces security reactions directed towards countries from which the incidents emanate, then trade should be affected differently across countries and products. Indeed, one may expect different bilateral trade effects with origin countries of terrorism (from where transnational terrorism comes) than with other countries. As well, some products and sectors may be more sensitive to bilateral security measures (like social network goods or differentiated products a la Rauch) than others for which transaction costs are less discriminatory across countries (standard goods and primary products). An additional route to identify the counter security effect however, is to link terrorism acts to trade through a security measure that we can observe in the data.

We investigate empirically all these issues on US bilateral imports. We have chosen this country because it has been the main ”target” of transnational terrorism (i.e. one-third of the incidents over the considered period target the U.S) and the one with the largest variation of ”origin” partners (more than 95 countries have hit the U.S between 1968 and 2003). We combine, thereby, three datasets on trade, terrorism incidents and business number of visas issued by the U.S.

First for the trade data, we use bilateral imports of the United States at the product level (SITC4/5 digits) from the NBER World Trade Data complied by Feenstra and Lipsey (2005). As it provides only values which exceed 100,000$ per year, we have completed it with the OECD-FLUBIL bilateral trade dataset. Disaggregated data are needed here, in particular, in order to be able to capture the differentiated impact of counter-terrorism measures on trade across products, as mentioned above. Besides, as it will be shown next, as both bilateral trade and terrorism activities seem to be correlated with the relative specialization of countries, one needs to condition out this effect in the regressions, which could not have been done by using highly aggregated data.

> 1It might be argued that it is not the case anymore in the very recent years (say after 2000), where Al-Qaeda is becoming more fragmented, acting as a Multinational with affiliates over the world.

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