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The Trade Effects Of Border Controls Evidence From The European Schengen Agreement

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In response to the massive influx of refugees, Germany introduced border controls at the Austrian border in September 2015; in November, Sweden began carrying out identity checks on the bridge of the Eresund; And Austria has re-established controls on its border with Slovenia and Italy. The terrorist attacks in Paris in November 2015 led to checks at the French borders. Taking into account all border controls notified to the European Union since the summer of 2015, in accordance with Articles 23 and following of the Schengen border code, and applying our estimates, we find that total trade in goods and services from EU-28 countries decreases by an average of 1.3% compared to the 2011 status quo; this corresponds to an annual decrease of 70.19 billion euros in the volume of trade. With a trade elasticity of 5 in the welfare formula of Arkolakis et al. (2012), this effect reduces the real GDP of EU28 members by 12.51 billion euros, or 0.10% of GDP. However, there is a high degree of heterogeneity, as countries are different in terms of the importance of trade with partners in south-eastern Europe (see Chart 5). To answer these questions, we access our current research (Felbermayr et al.2016). Specifically, we apply an econometric gravitation model to historical data (1995-2011) to measure the trade impact of the Schengen agreements. We then turn to a simple counterfactual analysis based on the latest data, in which we introduce border controls at certain internal EU borders. The Schengen Agreement, which came into force on 26 March 1995, created free movement within the European internal market, thus achieving an unprecedented goal of continental integration. The Schengen agreements were seen as a perfect complement to the free flows of capital and goods that had already been made possible by previous agreements. The Schengen area currently covers an area of around 4.2 million square kilometres and more than 400 million citizens who can move freely within the 26 Member States without a tourist visa or work visa. If Germany`s intercontinental trade is expected to be proportionately affected by the reintroduction of border controls on Italian and Balkan roads, the overall effect of German trade would be -1.14% (-29.8 billion euros) and the real gross domestic product of 1.9 billion euros to 4.6 billion euros lower.

Chart 3. Total EU trade-28 in billions of euros along the number of borders exceeded by Schengen, 2011 ad 1.

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