Which statement describes the economic effect of border fences?

• A. They increase regional trade by improving compliance.
• B. They have no effect on smuggling.
• C. They always improve cross-border investment.
• D. They reduce cross-border trade and can increase transaction costs, creating incentives for smuggling.

Answer: (D)

Border controls alter the cost and friction of moving goods and people across borders. A border fence raises the time, risk, and paperwork involved in legitimate trade, increasing transaction costs for firms and potentially delaying shipments. When these costs rise, cross-border trade tends to fall because firms face higher per-unit costs and less predictable delivery times. At the same time, the higher costs and enforcement risk can make illegal routes or smuggling more attractive as firms or individuals try to avoid the extra expenses, creating incentives for illicit activity. This combination—lower formal trade due to higher costs and greater incentives for smuggling due to enforcement and risk—best describes the economic effect of border fences. The other statements either overstate benefits (like boosting trade or investment) or claim no effect on smuggling, which contradicts how price and risk shifts typically operate in cross-border contexts.