The Positive Effects of the Schengen Agreement on European Trade

Authors


  • Gift gratefully acknowledges financial support from the National Science Foundation Graduate Research Fellowship Program.

Abstract

Enacted in 1985, the Schengen Agreement is widely heralded as both a symbol and major institutional advancement of the European project. By eliminating passport requirements for workers, the compact ostensibly produces gains from travel, ease of market access and economies of scale. Yet despite these optimistic predictions, scholars know little about the actual effects of Schengen on trade. We fill this void by identifying why labour mobility should expand the cross-country exchange of goods and services and then test our theory with data from Europe spanning the period 1980 to 2011. We argue that labour mobility resulting from Schengen yields positive effects on trade by increasing demand for foreign goods, improving awareness of low-cost producers abroad and lowering the risks associated with buying and selling outside the country. Using the gravity model of trade, we show empirically that Schengen membership makes European states more robust trading partners.

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