Dr Geoff Raby

The Costs of Terrorism

and the Benefits of Cooperating to Combat Terrorism

Paper presented by Dr Geoff Raby, Deputy Secretary, Department of Foreign Affairs and Trade to APEC Senior Officials Meeting, Chiang Rai, 21 February 2003 and submitted by Australia to the Secure Trade in the APEC Region (STAR) Conference, 24 Feb 2003. Economic Analytical Unit.

Main Points

Unchecked Terrorism Undermines Trade

The threat of terrorism reduces trade flows.

A shutdown of major ports or airports due to terrorist attacks could result in high costs, particularly for those economies more reliant on trade.

The continuing threat of terrorism raises the cost of undertaking trade through a range of mechanisms:

Piracy and Terrorism

The costs piracy imposed on international shipping and trade are analogous to those of terrorism. Between 1814 to 1860, mainly due to the European powers eliminating piracy, international shipping costs fell by over 80 per cent and the industry's total factor productivity rose by about 500 per cent. Improvement in management also contributed. By allowing ships to dispnse with cannon and reduce their manpower, shippers could introduce faster, cargo-specific ships dramatically reducing costs and boosting productivity. This fall in shipping costs significantly expanded international trade flows in the nineteenth and twentieth centuries.

Source:  North, 1968.

The Threat of Terrorism Reduces Investment and Economic Growth

Terrorism and the spectre of future terrorist acts creates uncertainty which increases perceived risk.  This increases costs through several channels and dampens economic activity.

The Overall Economic Costs of Terrorism Are High

The threat of terrorism may hurt developing economies more

While the costs of unchecked terrorism are significant for all economies, terrorism could impose a disproportionately high cost on developing APEC economies' trade and income growth because:

Counter-terrorism measures: an investment against future attacks

Implementation of new counter-terrorism measures will require one-time investments in new infrastructure and may, in some cases, lead to short-to-medium term increases in the costs of doing business internationally.

These costs should, however, be viewed as an investment that will, by reducing the threat of terrorism, pay future dividends through reduced risk premiums and increased trade efficiency.

Security measures can facilitate trade

APEC's trade facilitation and improved security objectives are mutually reinforcing.  Regardless of the benefits of reducing exposure to terrorism, technological advances to increase security are likely to increase the efficiency of cargo handling and people movement, lowering trade costs and making trade flows more efficient.  For example:

With international trade expanding rapidly, global logistics systems already are becoming a necessity. Thus, expenditure on these new systems represents an investment which will deliver considerable efficiency returns in the future, regardless of their added benefits in countering terrorism.

APEC economies need to be creative in working together to find innovative ways, using new technologies, to both strengthen security and facilitate trade.

Cooperating to achieve trade security

The public good nature of anti-terrorist activities means all economies can benefit from a more secure international environment and have an interest in achieving it. Reducing terrorism creates increased international security benefits from which no economy can be excluded; also individual economies can benefit from this increase in security without diminishing other economies' ability to enjoy these benefits.  On the other hand, any individual country's failure to take action will impact negatively on global, regional and domestic welfare. Economies which fail to cooperate in multilateral counter terrorist measures run the risk of marginalising themselves from many international transactions.

By taking coordinated joint action to counter terrorism, APEC economies will increase the effectiveness and reduce the costs of their efforts to ensure the security of their citizens, trade and investment. Without regional and multilateral cooperation, individual economies are likely to face higher public and private spending on security and trade requirements and regulations and measures to combat terrorism in individual economies may need to be more stringent.

Due to complex cross border linkages between financial institutions and new banking technologies, for instance, actions to counter money laundering and combat terrorism financing require all economies to work together. Those economies that do not take counter measures could face a loss of investor confidence and boycotts by other banks. Financial institutions involved in terrorist financing also will face criminal charges and reputation damage.

Summing Up

Effective action to combat terrorism will generate significant benefits for the global economy, preventing losses from reduced trade flows and investment undermining economic growth. Since international goods and financial markets transmit terrorism's costs well beyond the country where acts occur and terrorist groups operate across borders, any economy's actions to curb terrorist activities should produce global and regional benefits. Similarly, failure to counter terrorism will produce costs for all economies and populations. Given their active participation in international trade and high investment requirements to promote growth, developing APEC economies have at least as much to gain from countering terrorism as industrial economies.