Preventative measures and persistent terror acts weaken a countrys trade position, writes Sandra Speares- Thursday July 27 2006

GOVERNMENT action to reduce the risk of terrorism through stepping up security measures may make international trade more difficult, the World Trade Organisation has warned.

According to the WTO's 2006 annual report, while the trade effects of individual acts of terrorism were likely to be small and transitory, where terrorism persisted the economic effects are likely to be more permanent, perhaps even affecting the pattern of trade.

The report concluded that terrorism was likely to be more pronounced for trade in services as international service transactions like travel and tourism require close contact between buyer and seller.

Although random actsof terror might not have long-lasting economic consequences, it warned however that a countrys position in international trade may be permanently weakened if terrorist activities persist and security measures post a burden on business travel, transport and investment
The report cites the effect of the long lasting conflict in the Spanish Basque region as having resulted in a 10% reduction of per capita GDP.

A large part of this permanent drop in output is due to the displacement of industries to safer regions.

However, a European survey by Duke University with CFO Magazine in 2005 showed only 10% of companies rating terrorism among their top three concerns.

Real growth developments after recent terror attacks may give some crude supportto the hypothesis such attacks had temporary and less severe impacts than other political disruptions and supply-side events like the oil crisis of the early 1970s, the report suggests.

It says that the impact of the recent attacks on goods trade mostly related to changes in transaction costs, principally through higher insurance premiums, and tighter security at borders, ports and airports.

Recent terrorist events have led to a lasting step-up of security measures, resulting in longer delivery times,the report says, while transaction costs have increased due to additional security measures. It suggests that inbound freight rates per teu have increased since 2001 while outbound rates have continued to decline.

The report also assesses the impact of natural disasters on international trade flows, saying that the impact on international trade by a disaster would tend to be localised or temporary.

For example, the report says that the tsunami has not had a discernible impact on global or regional trade given that many of the coastal communities devastated by the tsunami were not significantly integrated into the global economy.

It estimates the impact of Hurricane Katrina on international insurance claims at $9.7bn.