HONOLULU — The war on terrorism will be with us for a long time; honest observers admit the fight will never end. New technologies have permanently altered the balance of power between states and individuals. It is just too easy to commit terrorist acts. The rising number of incidents and the increasing scale of the violence have hardened consciences and lowered the threshold for horror.
In other words, we have to get used to the new security measures that are becoming part of daily life. For many of us, they are inconveniences; reminders of the insecurity that has crept into modern life and which add more time — airport lines, mailing restrictions, parking restrictions — to otherwise routine chores.
Such costs aren’t too great for individuals but they add up nevertheless. And the accumulated costs — many of which are invisible to most of us — could have a profound impact. Antiterrorism measures can become “grit in the gears of globalization.” As a result, governments have to balance the negative impact of counterterrorism policies with more aggressive development policies.
Concerns about the economic impact of the war on terrorism surfaced almost immediately in the aftermath of the Sept. 11 attacks. U.S. Federal Reserve Board Chairman Alan Greenspan warned that “fear of terrorist acts has the potential to . . . reverse at least part of the palpable gains achieved by postwar globalization.” Worries about national disengagement, corporate retrenchment and the costs added to international transactions gave rise to fears of a global slowdown that would have a disproportionate impact on the world’s poorest citizens.
The passage of time has confirmed that the fears are justified. Heightened instability has settled on international capital markets. There are many sources of this nervousness, but concerns about another terrorist attack inject a considerable level of volatility into the markets. Volatility raises the cost of capital to companies, depressing investment and expansion. Management becomes more conservative and business opportunities diminish.
The cost of the war against terrorism is another macro-level concern. The United States is said to have already spent about $60 billion fighting al-Qaeda, and other governments have significant expenditures on the table. Canada’s five-year program to fight terrorism will cost about 0.7 percent of GDP; Britain’s armed forces have made a similar request. Germany will spend about 0.1 percent of its GDP on an antiterrorism package. These efforts will increase the competition for funds and will raise interest rates, again raising the cost of capital for companies. The new U.S. budget deficit is one early casualty of this new reality.
On the micro-level, costs have also increased. New security measures have altered international transactions. In the immediate aftermath of the attacks, there were vast lines of trucks waiting to enter the U.S. from Canada, part of the $1.4 billion in trade that crosses that border every day. The worst of those lines have been reduced, and it reportedly only takes a little longer than before to clear customs.
But experts note that other transportation costs have increased. Air freight rates increased about 10 percent after the attacks. Maritime shipping rates went up and then returned to previous levels, but given drops in aggregate demand and falling fuel costs, they should have dropped farther still.
Costs should increase more. The U.S. has instituted the U.S. Customs Container Security Initiative, which aims to transfer to foreign ports the checking of containers for terrorist weapons. About 5.7 million containers — holding one-half of all imports — enter the U.S. annually. The project aims to install individuals and technology in the world’s 20 leading ports, which handle one-third of U.S. imports; five are already on board. The initiative makes sense, but it could skew foreign trade by channeling goods through approved ports. The cost of the equipment could limit the willingness of governments to sign up, effectively relegating those that refuse to second-class status. Shippers also worry about the time involved in clearing the new security procedures.
A new study by the Organization for Economic Cooperation and Development on the costs of terrorism* cites industrial sources that estimate the proposed security measures may increase the ad valorem cost of trading internationally by 1 to 3 percentage points. This may not look like much, but put it in perspective: In the Uruguay Round of trade negotiations, the developed countries agreed to cut tariffs on the import of industrial goods by 2.5 percentage points. The OECD notes that “given that the elasticity of trade flows with respect to transaction costs may be in the -2 to -3 range, this could lead to a significant drop in international trade, negatively affecting openness, productivity and medium-term output growth.” The authors estimate that a “relatively small increase in the costs of trading internationally in the order of 1 percent would lead to a drop in trade flows of between 2 and 3 percent.”
Another concern is rising inventory costs. A critical component of corporate efficiency in recent years has been supply chain management; Japan laid the foundation for this field in the 1970s and ’80s. Worries about supply-chain disruptions could encourage companies to increase their inventories. The OECD authors note that increasing inventory levels in the U.S. to those of 1990 would require approximately $300 billion in working capital and impose a carrying cost of about $75 billion, or 0.7 percent of GDP.
Finally, the Sept. 11 terrorist attacks have permanently altered the insurance market, which is an essential lubricant of capitalism. The losses from those attacks are estimated at between $30 billion and $58 billion, making them the largest insurance event in history. The blow to the industry has been severe; it is estimated that perhaps one-quarter of reinsurance capacity has been lost. In response, the insurance companies have raised rates. It is estimated that commercial property and liability insurance rates jumped by about 30 percent on average; Morgan Stanley financial services firm estimates that commercial insurance premiums in the U.S. will rise by perhaps 50 percent between 2002 and 2004.” Target structures” face even sharper increases. Reportedly some, such as San Francisco’s Golden Gate Bridge, can’t get any insurance.
While most of these costs will be sharply felt in the developed economies, the effects will also impact developing nations. The “flight to quality” in world markets will deprive emerging and developing economies of much needed funds. New security measures will add disproportionately high costs to internationally traded goods, narrowing the already slim comparative advantage many developing countries have. The effects will be difficult to quantify with any precision, but they are present nevertheless.
Governments have to take affirmative steps to counteract these negative influences on the international economy. They acted quickly enough immediately after Sept. 11, injecting sufficient liquidity into markets to ensure there was no shock. Now they must work to stabilize the global economy over the long term. The most important step is providing new momentum to the Doha Round of trade negotiations. Recent decisions by the U.S. government on steel imports and food subsidies betray a dangerous shortsightedness. Developed nations must overcome their reluctance to cut barriers to imports. A failure to cooperate with the world’s poorer countries to spur growth will only feed the pool of hungry, angry and dispossessed citizens who have nothing to lose from desperate acts.
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.