Most research examining how the benefits from trade vary across domestic consumers focuses on imports. This column analyses the welfare implications of consumers in Switzerland purchasing foreign goods by physically crossing into neighbouring countries. The authors find that cross-border shopping substantially lowers the cost of living for Swiss households, particularly for those living near the border who are most able to take advantage of price differences across borders.
Countries with a high share of the population living near a border and facing significantly lower price levels abroad often engage in policy debates about the effects of cross-border shopping on consumers and retail businesses. One question central to these debates is how cross-border shopping affects consumers’ cost of living and welfare.
Most research quantifying gains from trade and how these benefits differ across domestic consumers focuses exclusively on imports (consumers and firms purchasing foreign goods in their own country). For example, Porto (2006), Fajgelbaum and Khandelwal (2016), Cravino and Levchenko (2017), Borusyak and Jaravel (2021), and Auer et al. (2024) study how differences in import shares across the income distribution induce unequal changes in the cost of living in response to changes in international prices. Much less attention has been paid to cross-border shopping (consumers purchasing foreign goods by physically crossing into neighbouring countries) and how these benefits differ across domestic consumers; exceptions include Chandra et al. (2014), Baggs et al. (2018), Campbell and Lapham (2004), Steen et al. (2019), or Friberg et al (2022).
In a recent paper (Burstein et al. 2024), we analyse the welfare implications of cross-border shopping, focusing on Swiss households’ behaviour. Switzerland provides an interesting case study because it shares borders with countries in which prices of identical goods are often significantly lower. We focus on two periods where international prices changed dramatically from the perspective of Swiss consumers: (1) the 2015 appreciation of the Swiss franc, which led to a decline in prices abroad of around 10%; and (2) the COVID-19 related border closure, which led to an essentially infinite increase in the cost of cross-border shopping for a short period of time. We provide new empirical evidence on cross-border shopping patterns using detailed Homescan data and develop a model consistent with these patterns to quantify the welfare effects of cross-border shopping on the cost of living of Swiss households and how these effects differ across households living close to the border and those farther away.
The empirical context: Cross-border shopping and price differences
Switzerland’s geographical proximity to lower-priced countries like Germany, France, and Austria has made cross-border shopping an attractive option for Swiss households, particularly for those living near the border. We document several key findings:
Cross-border shopping patterns
Figure 1 shows that cross-border shopping shares – measured in expenditures, transactions, and trips – are higher near the border, where up to 17% of shopping activity occurs abroad, and decline to close to zero with high driving distance to the border. In contrast, import shares (foreign goods purchases made within Switzerland) do not vary systematically with distance from the border. This suggests that physical proximity is a critical factor in determining cross-border shopping behaviour.
Figure 1
Notes: Cross-border shares in 2014 by two-digit zip code (measured by expenditures, transactions, and trips) plotted against distance (measured by the log of travel time to the closest supermarket abroad). Solid lines display the fit of a quadratic regression (weighted by number of households, which also determines the size of the circles).
Price gaps
Prices of identical products are generally 30% to 35% lower in neighbouring countries than in Switzerland (Figure 2). Following the significant appreciation of the Swiss franc in 2015, the price gap widened, making cross-border shopping even more attractive.
Figure 2
Notes: Estimates of the goods-level relative price of products purchased in Switzerland relative to the same products purchased abroad. A negative number indicates that prices are lower abroad than in Switzerland. It uses a sample of purchases by Swiss consumers in Switzerland and by German, French, and Austrian consumers in their respective countries, in addition to the Swiss consumers’ purchases abroad. Robust standard errors are clustered at the product level and observations are weighted by expenditures per product in the year 2014 (in the Swiss Nielsen data).
COVID-19 border closures
During the COVID-19 pandemic, Switzerland imposed temporary border closures in March to May 2020, which led to a near-complete halt in cross-border shopping (Figure 3). This provided a natural experiment for understanding the welfare losses associated with losing access to cross-border shopping.
Figure 3
Notes: 2-digit zip code cross-border (in the top three panels) and domestic (in the bottom three panels) expenditures (in 1000 CHF), transactions, and trips averaged across months in the three months before, three months during, and two months after the Swiss border is closed to limit transmission of COVID-19.
Model and welfare implications
To quantify the welfare implications of changes in international prices through cross-border shopping, we build a discrete choice model of shopping location. We use our detailed Swiss data to guide our choice of cross-border shopping shares across regions and the sensitivity of cross-border shopping to changes in relative prices between Switzerland and its neighbours.
We feed in the price changes we observe in our data and construct household-level price deflators by Swiss region. We find that regions close to the border experienced the greatest reductions in the cost of living following the 2015 Swiss franc appreciation. In these areas, as shown in the left panel of Figure 4, the welfare-relevant cost of living fell by 2.8% compared to only 1.7% in more distant regions. The right panel of Figure 4 shows that the price deflator rises substantially (up to approximately 13%) close to the border during the border closure in 2020, whereas regions that do not engage in much cross-border shopping are largely unaffected. These differences underscore how cross-border shopping shapes spatial heterogeneity in the impact of foreign price shocks across households.
Figure 4
Notes: Left panel quantifies changes in the welfare-relevant deflator in each zip code associated the 2015 CHF appreciation. Starting from 2014 cross-border trip shares, we feed in observed price changes. Right panel quantifies changes in the welfare-relevant deflator in each zip code associated with the 2020 border closure. Starting from 2019 cross-border trip shares, we set the pecuniary non-retail costs associated with shopping abroad to infinity for all households. In both panels the x-axis is travel time to cross-border shopping.
Policy implications and broader relevance
Our findings have implications for policymakers, particularly in small open economies like Switzerland that face substantial price differences with neighbouring countries. Cross-border shopping allows consumers to benefit from lower prices abroad. This has several implications:
Cost-of-living measures
Traditional measures of inflation and the cost of living may underestimate the true welfare benefits of cross-border shopping. In regions near the border, the ability to shop abroad mitigates the effects of domestic price increases, leading to a lower effective cost of living than domestic price indices might suggest.
Retail employment
Our paper also examines the impact of cross-border shopping on local retail employment. In regions close to the border, the increased availability of cross-border shopping options led to a reduction in domestic retail employment in response to the 2015 appreciation of the Swiss franc. This suggests that while cross-border shopping benefits consumers by lowering their cost of living, it may also have adverse effects on local businesses and employment in the retail sector in periods of domestic appreciations.
Broader trade policy
While the paper focuses on Switzerland, the results are relevant for any country where consumers have access to cheaper goods in neighbouring regions. For instance, we can draw comparisons with intra-national borders, where similar spatial heterogeneities in prices and taxes can drive shopping behaviour. Baker et al. (2021) shows that consumers often adjust their shopping locations to take advantage of lower tax rates in neighbouring states, a pattern that mirrors cross-border shopping in the international context.
Conclusion
Cross-border shopping offers a unique mechanism through which households can reduce their cost of living by taking advantage of price differences across borders. In the case of Switzerland, cross-border shopping has become an important part of household shopping activity, at least in regions close to the border. We provide empirical evidence on how exchange rate movements and border closures affect cross-border shopping activity, and develop a model to quantify the welfare effects of this activity for the cost of living. The key finding is that cross-border shopping substantially lowers the cost of living for Swiss households, particularly for those living near the border. These findings have broader implications for how we measure the cost of living and how policymakers should consider the spatial heterogeneity of consumer access to foreign markets (or markets segmented in other forms, for example through differences in local sales taxes) in the formulation of trade and domestic economic policies.
Source : VOXeu
