Do arms imports fuel terrorism? We leverage plausibly exogenous variation in global arms trade patterns as an instrument to provide causal evidence of a significant positive effect of arms imports on terrorist activity for 179 countries between 1992 and 2018. We also show that arms imports do not conclusively strengthen state capacity but increase corruption and political exclusion, which may explain why arms imports ultimately encourage terrorism. Finally, the adverse effect of arms imports on terrorism is strongest among countries characterized by low levels of fiscal capacity as well as high levels of political inequality and authoritarianism.