The Hidden Economic Costs to Border Controls
WHY YOU SHOULD CARE
Because the return of border checks would further slow the beleaguered European economy, which is still struggling to find robust growth.
Simonomics: A regular look at the global economy from a former staff columnist at The Wall Street Journal.
After Friday’s atrocious attacks in Paris, messages of condemnation and condolence were soon joined by a drumbeat of calls for Europe to reintroduce internal border controls. Combined with the deaths of Charlie Hebdo magazine staff earlier this year, it’s easy to see why politicians would want to reintroduce some passport controls, at least to know who is inside which country. No one in their right mind wants a repeat of anything like those events if they can possibly be prevented. The problem is, financially, it would slow the beleaguered European economy, which is still struggling to find robust growth.
Two decades ago, such restrictions were abandoned for most countries inside the European Union. The goal was for Europe to mimic the United States by mostly scrapping the need for passports via the Schengen Agreement, which includes most of the EU and some non-EU countries but notably excludes Britain and Ireland. To a large degree, the more relaxed approach has worked. Trade between the member states was estimated at 2.8 trillion euros (roughly $3 trillion) in 2013, according to the EU’s Eurostat website. That figure has grown substantially over the years, driven in part by the removal of border controls. Back in 1990, one estimate for the boost to trade after checkpoints were removed ranged between 1 and 3 percent, according to a paper for the International Monetary Fund. The economic worry is that all those gains reverse, and then some, if the checkpoints are set up again.
The result would be higher costs of goods across the continent.
Indeed, the return of border checks would not only be a philosophical jolt to the dreams of uniting a continent ravaged by two world wars but would also wreak havoc on the movement of goods across the EU. “It’s the last thing Europe needs in terms of what it chooses to spend its money on,” says James Hookham, deputy CEO of the Freight Transport Association. Just compare the situation on the French border with that in the UK. If you go through the Channel Tunnel into England, the lanes fan out to “at least a dozen gateways through which passports can be checked,” Hookham says. At the French border, he adds, there’s “just a freeway. Not even accommodation for immigration staff.” The roads also don’t fan out like they do for tollbooths, so an immediate introduction of such controls would lead to huge delays — basically backed-up traffic for miles. It could add half a day to pass through, says Hookham. That in turn would disrupt supply chains for auto manufacturing and food retailers across the continent.
The enormous potential for delays also increases the expense in terms of time, and people and equipment, says Milton Ezrati, senior economist and market strategist at asset management company Lord Abbett. The result would be higher costs of goods across the continent. It also means companies may decide to choose different suppliers based on location. Food imported from Belgium to France, for example, might instead be sourced inside France, most likely at a higher price. Worse than regular border checks would be sporadic controls, which could add even more uncertainty to travel times. “In logistics, where people get nervous is where you have unpredictability,” says Hookham. If a shipment is delayed, the hauler would probably suffer contractual fines, while the customer simply may not accept the goods. Either outcome is bad for the European economies because intra-EU trade is enormous.
There is, however, some good news that may help avoid such an economic calamity — and that’s the “tremendous symbolic value in keeping the EU’s borders open,” Mujtaba Rahman, practice head for Europe at Eurasia Group, wrote in a recent report. “The Germans and French will want to play to that symbolism,” he added, “as it speaks to the very essence of the EU.”