Border trade, in general, refers to the flow of goods and services across the international borders between jurisdictions. In this sense, it is a part of normal legal trade that flows through standard export/import frameworks of nations. However border trade specifically refers to the increase in trade in areas where crossing borders is relatively easy and where products are significantly cheaper in one place than another, often because of significant variations in taxation levels on goods such as alcohol and tobacco.
As well as border trade across land or sea borders, air travel with a low-cost carrier can be worthwhile for a short international trip to the same purpose, although baggage restrictions can limit worthwhile savings to those for small high-value goods.
Where border trade is done for tax evasion it forms part of the underground economy of both jurisdictions.
Typical examples of this are the borders between Ukraine and Russia, between Norway and Denmark/Sweden/Finland/Russia/Estonia and between Denmark/Switzerland and Germany. For instance, the excise tax on alcohol is lower in Estonia than in Finland and much lower than in Sweden, thus it is common to buy large volumes of alcohol when returning from Estonia: there are shops in the Tallinn harbour that cater specifically to tourists. In Finland, the best-selling Alko shop in proportion to local population is on the border to Norway, since even if the alcohol tax is high in Finland, it is lower than the one in Norway (and was lowered in order to decrease border trade with Estonia).
Border trading exists between Lithuania and Poland. To buy food is cheaper in Poland than in Lithuania.
Border trading exists between Northern Ireland and the Republic of Ireland; during the Global Financial Crisis, when the Euro rose against the British pound, so many from the Republic visited Newry—with lines of traffic four miles long—that the phenomenon became known as the “Newry effect”. One in four households in the Republic in counties as far as Galway, four hours away from the border, shopped for groceries in Northern Ireland. Petrol is cheaper in the Republic, and groceries, furniture and clothing are cheaper in Northern Ireland.
Between the United Kingdom and France/Belgium, the booze cruise is a trip made specifically, or at least largely, to purchase cheaper alcohol and tobacco, and also goods offering different rates of VAT: laundry detergent, perhaps surprisingly, is a common purchase. Similarly, there is an important number of French purchasers buying tobacco and alcohol in Spanish border towns such as Le Perthus. In Spain, these products are a third cheaper than in France. During summer, around 70,000 visitors cross the Spanish border daily to buy such products, occasioning severe traffic jams. Nearby Andorra, with a low VAT (4%), is also extremely popular with French customers residing in the area.
There is a significant amount of border trade in marijuana between the Netherlands, where cannabis is essentially legal, and surrounding countries such as Belgium, Germany, and France.
A more legal example of the Netherlands is the Limburg province, where citizens occasionally take trips to Germany and Belgium to buy commodities like: medicinal products, handcrafted furniture, fresh produce, alcoholic beverages or home appliances for lower prices due to the VAT. This is very easy as there are no border controls due to the Schengen Agreement. It is fully legal to buy products for your own need over the border in the EU, if VAT is paid when purchasing, except from some low-VAT areas.
Residents of Switzerland and Liechtenstein who are non-EU residents can purchase many items in nearby Germany from anything from two to seven times the price they would pay for the same products in their own countries. Austria is also somewhat cheaper than Switzerland. Residents of Switzerland usually qualify for a tax refund on purchases made in all of the surrounding EU countries making cross border shopping even more attractive, particularly in Germany where there is no minimum-purchase requirement for claiming the tax back.
Cross-border shopping between three countries in Canada, Mexico, and the United States is robust. The North American Free Trade Agreement (NAFTA) has reduced barriers and tariffs, facilitating cross-border trade. Each day 2008, $2 billion of cross-border trade was conducted between Canada and the United States alone. Consumers take part in cross-border trading to broaden their product selection, gain access to a larger market place, or take advantage of currency volatility. Online commerce has taken on a more prominent role in recent years and gives consumers a convenient platform for cross-border shopping. However, additional border costs such as duties, brokerage and shipping are not always disclosed up front or even known to the retailer, leading to a situation where the final cost of an item can greatly exceed expectations. Dedicated cross-border shopping solutions such as Wishabi, and Canada Post’s Borderfree exist to mitigate these problems with varied success. In the end, caution is necessary to determine the final cost of goods before purchase.
Between U.S. States
Although not crossing a national boundary, residents of one state may often travel across a state line in order to shop for a variety of goods. In some cases, a larger city or metro area in one state may draw a population in from another state. In other cases, residents may take advantage of more friendly legislation regarding restricted products, such as alcohol, tobacco, fireworks, firearms, gambling, etc. For example, a New York City resident may engage in illicit cigarette trade by purchasing products in a nearby state with lower taxes and re-selling them illegally in New York. Furthermore, states which have legalized recreational marijuana may experience a high-amount of out-of-state customers.
Many Singaporeans also travel to Johor Bahru in Malaysia or Batam in Indonesia, to take advantage of price differences and differing product availability. The Singaporean government has a law that requires a car leaving Singapore to have the fuel tank filled by at least 75 percent, to prevent it from being filled with fuel from outside Singapore.
Shenzhen, on the border of mainland China with the special administrative region of Hong Kong, also benefits from border trade.
- ^“Third of Estonia’s Alcohol Sales Attributed to Finnish Tourists”. 22 April 2014.
- ^Quinn, Eamon (2008-12-18). “A Northern Ireland Town Is a Shoppers’ Paradise”. The New York Times. pp. A14. Retrieved 5 May 2015.
- ^“Shop frontiers: the rise of cross-border buying around the world”. The Guardian.
- ^Rodriguez, Cecilia (2013-09-13). “Marijuana For Tourists, Discord for the Netherlands”. Forbes. Retrieved 28 December 2015.
- ^“Archived copy”. Archived from the original on 2010-03-17. Retrieved 2010-03-12.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.