Term Paper: Global Terrorism's Impact on International Business

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Terrorism Impact

When a terrorism attack hits a country, such as September 11, 2001, naturally the citizens of that nation are most affected. They are the ones who are immediately impacted by the injuries and deaths of peers, friends and loved ones, the shut down of production and services, and the psychological and physical long-term effects. However, such an attack also impacts the rest of the world economically, either through the way that the national organizations have difficulty fulfilling their international obligations or the way that other countries perceive that they, too, are being threatened by these same terrorists. In the future, it surely can be expected that such terrorist attacks will continue. It is up to the organizations to prepare their processes and people for such an occurrence. Because of the connections among regional and international economic activities, terrorism in one economy can significantly impact other economies. Thus, it is necessary that all economies place importance on ways to cooperate to decrease the threat of terrorism. Those economies that fail to challenge terrorism and ensure the safety of trade and people can expect to face considerable costs in terms of lost investment and trade opportunities. Collective anti-terrorism activities are the most effective action to take, since the positive domino effect promotes advantages for all economies from a more secure trading and investment environment, as well as reduces negative impacts from inaction.

The economic results of terrorism can be mainly broken down into short-term direct effects; medium-term confidence consequences and longer term productivity impacts. The direct economic costs of terrorism, which includes the destruction of life and property, responses to the emergency, restoration of the systems and the infrastructure impacted, and the availability of temporary living support, are greatest in the immediate aftermath of the attacks and therefore matter more in the short run. Direct economic costs are likely to be in proportion to the strength of the attacks and the size and the characteristics of the economy affected. The indirect costs of terrorism can be major and possibly impact economic matters in the medium term by shaking consumer and investor confidence. A destruction of confidence that is associated with an attack can lower the desire to spend as opposed to save, a negative trend that can move through the economy and the remaining world through regular business cycles and trade channels. Similarly, declining investor confidence could lead to an overall decrease in asset prices and an impact on quality that raises the costs for riskier borrowers. Overall, the degree of the effects over nations, sectors, and time depends on numerous issues, such as the type of attacks, the multiplier effects, the form of policies adopted in response to the terrorism, and the strength of the markets (Bruck and Wickstrom, 2004).

The biggest disruption to the trading infrastructure of 9/11 was caused by damage to the communications infrastructure of the Bank of New York (IMF, 2001). Both Bank of New York and J.P. Morgan Chase, the two main clearing banks for government securities, were located a few blocks from the World Trade Center and had to relocate to other sites (Lacker, 2004). Having to conduct manual processing of securities and payment transactions resulted in major delays in financial clearing and settlement, causing uncertainty about the completion for liquidity trades and demand (IMF, 2001). Similarly, the government securities market was significantly impacted by the loss of the largest broker, Cantor Fitzgerald, and other smaller brokers who had offices in the World Trade Center (Lacker, 2004).

The New York Stock Exchange and the NASDAQ Stock Market never opened for trading on September 11, because of the time of the attack. The U.S. securities markets went back to trading on September 17, with agreements between the private sector and the Securities and Exchange Commission that considered factors such as the safety of the personnel and the viability of the infrastructure and communication systems (Pitt, 2001). Overall, the U.S. stock markets were down throughout the first day of trading, which continued in the following days. Between September 17th and 21st, Standard and Poor's 500 index fell by 11.6% and the NASDAQ by 16.1 (IMF 2001). The September 11th attacks that were seen across the globe by the major equity markets, experienced acute and fast falls and showed how market participants were shocked by the events. The European stock markets, which started operating before the U.S. markets were opened, had even more declines after September 17th due to spillover effects. In total, the Dow Jones Euro STOXX index fell 17.3% between September 11th and the 21st.

One of the most immediate costs of a terrorist attack is the lack of ability of continuing production or services, and thus the loss of revenue and the necessary reduction of the workforce. Terrorism increases the risk and cost of doing business, whether that business is diplomacy, manufacturing, or sales. For example Associated Press reported in October 2002 nearly 200,000 employees were let go after 9/11, including nearly 40,000 in the aerospace industry, alone. An airline industry spokesperson estimated that the world's airlines may have lost up to $15 billion due to passenger and freight cut backs. The comptroller of New York City believed that the attacks would result in $1.7 billion in lost sales and $1.75 billion in lost rent by the end of FY 2003. The international insurance industry was hit by about $50 billion. In 2005, New York City still had 181,000 fewer jobs than it did at the economy's peak in 2000. The downturn began in January 2001, and the attacks themselves cost New York an estimated 28,000 to 55,000 jobs over the next two years, according to a report by the New York Federal Exchange (Taylor, 2002).

The terrorism also impacts the flow of trade between countries. According to Raby (2003), the increased risk and pervasiveness of global terrorism exists as a significant threat to regional development. Terrorism has already placed significant rising costs on world economies. The first cost of terrorism, such as loss of life and property and short-term economic downturn, are further exacerbated by the price of coping with the ongoing threat of another attack. It is estimated that if the U.S. has to incur 10% more in inventories and pay 20% more for commercial insurance premiums due to increased terrorism threats, it would respectively cost 0.1% and 0.3% of GDP or U.S.$7.5 billion and U.S.$30 billion per year (Crise, 2001).

Terrorism fear raises anxiety, negatively impacts confidence levels and increases risk perceptions and premiums that result in lower investment rates and economic growth. Terrorist activities can, and have, severely dismantle international trade and impact costs. Becker and Murphy's (2001) analysis estimates the U.S. investment decline from ongoing terrorism threats is about 0.2 per cent of GDP. This decline, and resulting income, affects other economies, due to lower U.S. demand for imports. Since developing APEC economies are greatly dependent on trade and capital inflows, they may face higher costs relative to GDP from terrorism.

Any terrorist attack, especially one where a number of people are killed, disturbs people psychologically. They will act and react differently in the future than they did in the past. This can have a major impact on business and industry, because buying habits can change. For example, a study by Dermisi (2007) shows how fear and the resulting economic recession after September 11, 2001 impacted the Chicago downtown office market cycles of vacancy rate and rents (per square foot). After 9 / 11, the Chicago Joint Terrorism Task Force assigned threat levels to each high-rise building that were based on the probability of a terrorist attack occurring at that location. It was found that the higher the risk that buildings face due to their location, tenant base, or other security-related challenges, the more prolonged their total vacancy rates.

The most severe impact of 9/11 was on trophy building (such as Sears Tower) rents, caused by escapting tenants who chose not to renew their terminating leases and moved to other less high profile buildings. A trophy or landmark property is one that is well-known by the public and highly sought by institutional investors, such as pension funds and insurance companies. They usually have unique architectural designs, with the highest quality of materials and finish, expensive trim. Normally, such properties are more desirable than Class a buildings. In addition to these regular renters, the available space in trophy buildings, particularly those in the higher floors, was more difficult to lease and triggered the reduction of rental levels. A search of the database of occupied buildngs indicated that among Chicago's three trophy buildings (Sears Tower, Aon Center, and Hancock Tower), most of the unrented space, even at the end of 2005, was located above the 20th floor (at 84%) and the 30th floor (at 65%) (Dermisi 2007).

Shipping is another service to both consumers and organizations where it is possible to define a credible counterfactual -- that is, what would the state of affairs been in the absence of 9/11?… [END OF PREVIEW]

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