US immigration crackdown will leave deeper scars than tariffs

Welcome back. Businesses and investors are sensitive to developments in Donald Trump’s tariff agenda. After all, as import duties directly affect profit margins and supply chains, their economic impact feels tangible and imminent.

But there is another component of the US president’s policy plans that could be just as significant — if not more so — for the world’s largest economy: his immigration crackdown.

A notable fall in foreign workers in America “represents a far more sustained negative supply shock for the economy than tariffs”, says George Saravelos, head of FX research at Deutsche Bank. “But immigration garners less market attention, as the pass-through to economic activity takes longer and is harder to monitor.”

So this week, I outline why Trump’s immigration policy could indeed end up scarring the US economy more than his tariffs.

Right now, there are three strands to the president’s immigration agenda. “The first is shutting down illegal and legal crossings along the US-Mexico border,” says Alex Nowrasteh, vice-president at the Cato Institute. “The second is increasing deportations from the interior by empowering Immigration and Customs Enforcement. And finally, reducing legal immigration by ending refugee programmes, reducing student visas, instituting country bans and raising the barriers to acquiring visas.”

All three pillars are now taking effect. Migrant encounters at the south-west land border have fallen to lows not seen since the 1960s. According to ICE, there were an average of 2,000 arrests per day in the first week of June, compared with just over 300 per day in the 2024 fiscal year under the Biden administration.

Alongside last month’s disruption to student visa interviews, universities and research bodies have been threatened with funding cuts from the White House. Indeed, in March, three-quarters of postgraduate researchers and PhD students who answered a poll for Nature magazine said they were considering leaving the US.

A recent decline in tourist arrivals is also indicative of the general caution over travelling stateside.

Trump’s plans have led economists to lower their projections for US immigration. A forthcoming study by the Brookings Institution and American Enterprise Institute is expected to project net negative immigration to the country this year.

That hasn’t happened in at least half a century of data. This will be driven by fewer arrivals, alongside deportations and voluntary exits, say the researchers.

Evercore ISI expects net immigration to stay negative beyond this year, too. While there is notable uncertainty around its assumptions, the investment banking firm reckons America’s foreign-born population could drop by around 500,000 per year over the next three years.

That’s before factoring in Trump’s policies regarding universities and student visas. “The increased risk of seeing applications denied or visas revoked may dissuade students from choosing the US,” says Marco Casiraghi, a director at the company. “As will less funding for research.”

This is a significant problem for the US economy, because its recent growth has depended on foreign-born labour.

The US labour market has been “supply constrained” since the Covid-19 pandemic, partly as a result of “excess retirements”, explains Dhaval Joshi, a chief strategist at BCA Research. “Strong growth in labour supply — driven by immigration — in a supply-constrained economy explains why US GDP has grown faster than most expected over the past few years,” he says.

Indeed, the impressive growth in US jobs following the pandemic has been driven by foreign workers.

Without immigration, America’s population would be shrinking. “America is an ageing, sub-replacement-fertility society today, and its native-born working-age population is no longer growing,” says Nicholas Eberstadt, a political economist at the AEI.

The participation rate among the US-born labour force has been stagnant in recent years and remains below pre-pandemic levels.

This means lower immigration will drag the country’s annual potential growth rate notably below its recent 2 per cent level. For measure, Morgan Stanley expects it to drop towards 1.5 per cent in 2026, as Trump’s policies reduce total hours worked.

Simply put, the loss of foreign workers is akin to removing an economic input. (In contrast, by raising the cost of production, tariffs mostly impact how inputs are utilised.)

It would leave the US extra reliant on generating significant productivity gains, for instance from artificial intelligence, to prop up its growth.

Foreign workers have an added impact on America’s economic growth potential, beyond their direct supply of labour.

There were an estimated 8.3 million unauthorised workers in the US in 2022, accounting for around 5 per cent of the US workforce, according to the Pew Research Center.

These workers tend to prop up core industries where there are existing shortages, including construction, agriculture and manufacturing. In some hands-on occupations, such as brick masonry and roofing, which employ a high proportion of undocumented labourers, labour-saving technologies are still limited. After taxes, this group also has over $250bn in annual spending power, according to the American Immigration Council.

For these reasons, “deporting workers . . . reduces jobs for other US workers”, notes the Peterson Institute for International Economics in a recent study. Even in the think-tank’s “low” scenario, involving the deportation of 1.3 million unauthorised workers, it finds US GDP to be 1.2 per cent below baseline in 2028. The loss of labour supply also pushes up inflation.

Higher-skilled foreign workers have a more significant economic role in boosting US productivity via innovation and enterprise.

Despite accounting for around 5 per cent of the US workforce, high-skilled immigrants comprise a larger share of the labour pool in industries that require advanced education and specialised experience, says Goldman Sachs in a recent research note. These include information services, semiconductor design, scientific research and pharmaceuticals.

NBER research estimates that US immigrants founded a fifth of venture capital-backed start-ups between 1990 and 2019. One-quarter of the aggregate economic value created by patents in companies between 1990 and 2016 came from foreign-born workers too.

There is, of course, plenty of uncertainty about how Trump’s immigration policy will play out. Analysts expect the administration to fall short on its promises of “mass deportation” — which could mean targeting 1mn deportations per year — given the logistical challenges involved. Highly skilled workers and students may also be unable to find suitable opportunities abroad in the short term.

Still, baseline projections from Evercore ISI, Brookings and AEI for net immigration to turn negative, at least in the near term, will generate worse outcomes for the US economy in the long run than tariffs.

For measure, assuming Trump’s immigration agenda only amounted to the PIIE’s low-end deportation scenario, real GDP would still fall further from baseline when compared to his various tariff plans.

This result may feel counterintuitive. That is partly because markets and businesses are so focused on the immediacy and bottom-line consequences of tariffs. But tariff and immigration shocks propagate through the economy via different channels.

Tariffs are a tax on importers. In the near term, they push up prices and weaken demand by raising uncertainty. Over time they sap supply by coddling, and shifting resources to, less efficient companies.

But reducing foreign workers is more akin to directly removing resources, as well as a source of demand and innovation, from the economy. It just takes slightly longer to filter through.

Tariffs — and their effects — are also likely to be less permanent than a hit to labour supply.

Future administrations can lower, or remove, any import duties. They can also reduce immigration barriers (although politically that may be harder). But generally trade flows and supply chains are more responsive to changes in policy, costs and economic conditions than migratory flows, at least in the short run.

This means once a chunk of the labour force has been reduced, it won’t be easy to scale it back up quickly. Skilled workers, students and unauthorised immigrants could remain risk averse to committing to life in the US for some time after Trump’s second term.

In the long run, it is the loss of people from abroad — and not the cost of goods from outside — that will prove far more damaging to America’s prosperity.

Send your rebuttals and thoughts to [email protected] or on X @tejparikh90.

Food for thought

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Free Lunch on Sunday is edited by Harvey Nriapia