George A. Pieler and Jens F. Laurson argue that we ought to “defeat terror with trade” in a Forbes commentary piece:
As Robert Klemmensen of the University of South Denmark demonstrated in a study, openness to trade is closely associated with national resistance to being a breeding-ground for, or indeed victim of, terrorism…
America must lead. President George W. Bush’s most controversial post-9/11 policies, especially the prolonged war in Iraq, have cost him much political capital at home and abroad. The Bush administration, short of diplomatic assets to marshal in favor of free trade, can reassume the mantle of economic leadership by pushing unilateral free trade, with its faster economic gains (especially in the developing nations)…
The United States, by challenging its trading partners to action, can burnish its credentials as “exemplar of freedom” in the world by explaining that economic freedom as exemplified by free trade is the first, possibly best “weapon” against terror. Understanding that will enable us truly to transcend the status quo in trade and drive terror back into the dark shadows whence it arose.
Possibly the best weapon against terror? Pieler & Laurson rest their argument on the basis of a single study. Gary Becker, Alberto Abadie, and Alan Krueger & Jitka Maleckova argue that there is little direct connection between poverty, income, and terrorism, once you control for other important variables (namely, political institutions). What does this new study suggest?
Here’s the relevant part pf the abstract of “The political economy of freedom, democracy and terrorism” by Peter Kurrild-Klitgaard, Mogens K. Justesen & Robert Klemmensen:
There seems to be no consistent association of government power with terrorism: economic freedom has little association with terrorism but some with lower levels of political violence, while political freedom associates negatively with political violence but exhibits a non-linear relationship with terrorism. Simultaneously, a number of alternative explanations are disconfirmed: terrorism is unrelated to inequality, economic growth, etc., while a society’s fractionalization has very mixed importance. However, more trade associates with less domestic political violence and occasionally with less probability of terrorism.
Greater freedom to trade (a measure from the Economic Freedom of the World report) is not “closely associated” with reduced terrorism. It is “ocassionally” correlated with a lower probability of terrorism. I spent under ten minutes glancing at the relevant regression results. In table one, the coefficient’s sign is negative in four out of six regressions, and never takes a p-value below 0.10. The case is the same in table two. The second table of regressions also includes trade openness ([M+X]/GDP), which only has the “correct” sign two-thirds of the time. The trade measure is sensitive to the choice of measure of democracy.
I’ve spent a very short time skimming the paper, but given the apparent fragility of the coefficient’s sign (as well as the relatively minor magnitude of the point estimates) and the consensus that growth and poverty have little to do with terrorism, I don’t think that we can “defeat terror with trade.”
[The copy I found online was “a very preliminary draft” presented at GMU in May 2005. Perhaps the published version (Public Choice, July 2006) contains different results. If that’s the case, I’d be curious what revisions were made.]
Trade Diversion 
You are right to conclude our discussion of the paper by Klemmensen et al. was based on a later version: in this case, the version presented by Robert Klemmensen at a November, 2005 symposium in Washington DC sponsored by the Friedrich Naumann Stiftung, where the authors expressed appreciation for editorial comments offered after the May, 2005 George Mason event.
The November version includes the following language: “the perhaps most important and novel finding is that there are consistent, negative associations between how trade-oriented a society is and the probability that it will experience transnational terrorism or generate transnational terrorism. In other words, people who trade a lot seem to be less likely to experience or engage in terrorist acts involving other countries.” This does not ‘prove’ openness to trade defeats terrorism, but it strongly suggests such openness is a strong marker of greater resistance to transnational terrorism, and (pending further studies) may indeed be a key element of political and social structures that (controlling for other factos) demonstrate more resistance to terror.
George A. Pieler