Maritime Piracy and International Trade

Maritime piracy is a serious threat to international trade. Indeed, using Instrumental Variable Poisson Pseudo-Maximum Likelihood (IV-PPML) and PPML gravity models and using data on maritime distance and on piracy attacks over the period 2000–2016, it is estimated that an increase by 10 piracy attacks on the shortest maritime trade route between a country-pair results in a decrease in bilateral trade’s value by 2.8%. The impact, at 1.5%, is much smaller if the endogeneity of piracy attacks is not controlled for. Heterogeneity analysis reveals that successful attacks, attacks that involve violence, or attacks that target cargo are particularly detrimental to trade. This paper contributes to the literature by being the first to look at: non-Somali piracy attacks, different commodity groups, and various forms of attacks. This paper also proposes the use of maritime distance, instead of the commonly used great-circle distance. Finally, it offers a new instrumental variable for piracy attacks, namely, the sum of the square of the highest security apparatus index among countries in the vicinity of each vital chokepoint crossed by a ship travelling on the shortest maritime trade route between a country-pair, in a given year.