HIGH BORDER COSTS REMAIN FOR TRADE BETWEEN NEIGHBOURING EUROPEAN COUNTRIES – EVIDENCE FROM THE WIND TURBINE SALES

Firms that trade across borders within the European Union(EU) still experience high costs, despite the longstanding EU goal of making national markets equally accessible to all firms. That is the main finding of research by Kerem Cosarand colleagues, to be presented at the Royal Economic Society’s 2012 annual conference.

Their study looks at the market for wind turbines in Europe and compares the cost of trade across the border between Germany and Denmark. It finds that crossing the border to make a sale is equivalent in cost to travelling 432 kilometres, which is around 75% of the transport costs incurred by a sales company.

This can help explain why the top five Danish producers of wind turbines dominate their domestic market (they supply around 90% of the market), but their market share sharply drops to 60% at the border. And 150 kilometres into Germany, the Danish market share drops by another 30%.

The study finds that if the costs of cross-border trade were removed, the differences in market share would halve and while German firms would lose out due to greater competition, German customers would benefit from a 10% fall in prices. Danish customers meanwhile would benefit from a 5% fall in prices.

The authors comment:

‘The European single market intends to minimise border costs and foster competition by making national markets equally accessible to all firms. Although the EU has come a long way in that direction, its national markets are still far from perfect integration.’

These findings are particularly relevant for the use of green technologies such as wind turbines in improving the EU’s energy efficiency. If the cost of these technologies is kept high by border costs, there is likely to be less uptake.

More…

How high are the additional costs that firms incur when they make cross-border sales within the European Union? Quite high, according to a paper by Kerem Cosar (University of Chicago), Paul Grieco (Penn State University) and Felix Tintelnot (Penn State University), presented at the Royal Economic Society’s 2012 annual conference.

The trio focuses on an industry that is of growing importance to Europeans: wind turbines. Using a detailed dataset with spatial information about wind turbine sales in Denmark and Germany, they estimate the ‘width’ of the Danish-German border.

They find the distance equivalent cost of supplying a German wind farm from a Danish plant to be 432 kilometres. Given that the average distance between wind farms and domestic plants is roughly 600 kilometres in Germany, cross-border sales face a significant hurdle.

The researchers start their inquiry by looking in the spatial market shares of Danish turbine makers. While the top five Danish producers dominate their domestic market (they supply around 90% of the market), their share drops sharply to 60% at the Danish-German border. 150 kilometres into Germany, the Danish market share drops by another 30%.

In a hypothetical scenario, the authors remove all border-related costs. If there were no barriers to cross-border sales, the total market share gap across markets shrank by 50% (the remaining market share difference is related to trade costs rising in distance).

Although German firms lose some profits, German consumers experience a big gain: total surplus in German wind turbine industry increases by about 10%. Similarly, additional German firms enter the Danish market, increasing the choice set for Danish wind farm owners. The Danes experience a 5% gain.

The European single market aims to minimise these ‘border costs’ and foster competition by making national markets equally accessible to all firms. Although the EU came a long way in that direction, its national markets are still far from achieving perfect integration, according to this study.

The large border costs have important policy implications. The efficiency of subsidies to wind power is closely related to the degree of competition in the upstream market for wind turbines themselves. If there are substantial frictions to international trade in turbines, a national subsidy to the downstream market may implicitly be a subsidy to domestic turbine manufacturers.

This is against the intensions of EU common market policy, which seeks to prevent distortions due to subsidies given by member states exclusively to domestic firms. In fact, Denmark, which has one of the most generous wind energy subsidies in Europe, is also home to the most successful European producers of wind turbines.

Given the authors’ findings of large border frictions in the upstream market, EU members may wish to harmonise renewable energy tariffs to ensure equal treatment of European firms in accordance with the principles of the European single market project.

ENDS

‘Borders, Geography, and Oligopoly: Evidence from the Wind Turbine Industry’ by Kerem Cosar, Paul Grieco and Felix Tintelnot

The views expressed are the authors’ alone.

Contacts:

Felix Tintelnot

+1 814 321 7730

Email:

Kerem Cosar

+1 814 321 2140

Email: