The Trade Effects of Border Controls

Tasks

The Schengen Agreement that came into force on 26 March 1995 created freedom of movement within the European domestic area and thus achieved an unprecedented goal of continental integration. The Schengen Agreement was seen as a perfect complement to the free flows of capital and goods, which had already been made possible by previous agreements. The Schengen Area currently covers an area of around 4.2 million square kilometers and over 400 million citizens, who can move around freely within the 26 members states without tourist visas or working visas.

The threat of global terrorism, spotlighted once again by the attacks in Paris on 13 November 2015, as well as a sharp in refugee figures in Europe since summer 2015, have recently given rise to a fundamental debate in the Schengen area over the extent to which keeping internal borders open is politically and economically tenable. In the meantime the challenges raised by the influx of refugees in particular have led to the temporary reintroduction of border controls in the Schengen states of Germany, Austria, Sweden, France, Norway and Denmark, as well as in Malta, Hungary and Slovenia for a short time. The fact that these countries decided to impose border controls has recently called the Schengen Agreement into question.

This study addresses the following three issues:

1. How heavily is the travel time between cities affected by border controls?
2. Does the elimination of border controls by the Schengen Agreement influence crossborder trade in goods and services within Europe; and if so, to what extent?
3. What prosperity effects can be expected to arise for Germany from a change in international trade volumes following a reintroduction of border controls in the Schengen Area?

Methods

We assess the trade effects of the Schengen Agreement using a gravitational model based on aggregate and sectoral bilateral trade data from all countries in geographical Europe. For every pair of countries we count the number of crossings of the Schengen borders that must be made when transporting goods by land along the shortest transport routes. This consideration of the spatial dimension of trade relations is missing from other assessments of the Schengen effect. We also take into account other integration effects of the European Union (customs union and internal market), the common currency, the European Economic Association (EEA) and further regional trade agreements, as well as the macroeconomic determinants of bilateral trade. To analyse the impact of prosperity, we simulate four different scenarios based on assessed trade effects, which differ in terms of the borders at which concrete controls are introduced.

Data and other Sources

Official trade statistics, BACI from UN COMTRADE, World-Input-Output Database, the World Bank's World Development Indicators, the World Trade Organisation's RTA
Geographical data on travel distances and times

Results

ad 1.
Using data on travel times from the Bing Map Service, we show that crossing country borders withing the Schengen area is on average around 20 minutes quicker than crossing borders between two countries in cases where at least one country doesn't belong to the Schengen area. Data from North America also suggests that crossing the border from Canada (Mexico) to USA involves an average waiting time of 18 minutes (38 minutes).

ad 2.
We find that a reintroduction of border controls in the Schengen area would reduce bilateral goods exports by around 2.7% per border crossing. This corresponds to a ad valorem tariff equivalent of 0.54% and also applies to imports of goods. Bilateral services exports would be reduced by around 4.2%, corresponding to a ad valorem tariff equivalent of 0.82%.

The sectoral analysis reveals heterogeneous effects in goods trade. A resumption of border goals can be expected to have particularly substantial effects on perishable goods and industrial intermediate goods. According to our analysis, certain service sectors are also heavily affected by the Schengen Agreement.

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The results of the welfare analysis are as follows:

i. Scenario 1: The reintroduction of border controls at all Schengen borders; Germany's intercontinental trade with the rest of the world crosses one Schengen border on average. If the change in goods and services trade are combined, the change in the German total trade volume effect (i.e. of goods exports and imports, as well as services exports and imports combined): amounts to -3.77% (-98.6 billion euros). Real German GDP falls to between 6.01 billion euros and 14.83 billion euros per year compared to the status quo.

ii. Scenario 2: The reintroduction of border controls at all Schengen borders; German intercontinental trade with the rest of the world is not affected. If the change in goods and services trade are combined, the German total trade volume effect amounts to 
-2.63% (-68.7 billion euros). Real German GDP falls by between 4.37 billion euros and 10.79 billion euros per year compared to the status quo.

iii. Scenario 3: The reintroduction of border controls at all Schengen borders that lie on the refugee routes via the Balkans or Italy and encompass Germany and Austria. If the changes in goods and services trade are combined, the German total trade volume effect without taking into account German intercontinental trade amounts to -0.84% (-21.9 billion euros). Real GDP falls by between 1.36 billion euros and 3.36 billion euros per year compared to the status quo.

If we assume that Germany's intercontinental trade were to be proportionately affected by the reintroduction of border controls on the Italy and Balkan routes, the German total trade volume effect would be -1.14% (-29.8 billion euros) and annual real gross domestic product would be between 1.9 billion euros and 4.6 billion euros lower.

iv. Scenario 4: The reintroduction of border controls between Germany and Austria only. If the change in goods and services trade are combined, the German total trade volume effect,without taking German intercontinental trade into account, amounts to -0.48% (-12.5 billion euros). Annual real German GDP falls by around between 770 million euros and 1.9 billion euros compared to the status quo.

An approximation of the impact on German intercontinental trade through the reintroduction of border controls gives a total trade volume effect of -0.65% (-17 billion euros). Annual real domestic product is between 1.05 billion euros and 2.6 billion euros lower.

There are similar analyses for Bavaria, Austria, and the European Union as a whole. For further details, please see the final project report.

Publications