Why remittances are good for America

Story highlights

  • Justin Sandefur: Donald Trump's proposal on money transfers to Mexico is misguided
  • Remittances aren't just good for American consumers, they're also good for American firms and job creation, he says

Justin Sandefur is an economist and senior fellow with the Center for Global Development in Washington, D.C. The views expressed are his own.

(CNN)Republican presidential candidate Donald Trump made headlines last year when he proposed building a wall along the U.S. border with Mexico. The proposal was met with widespread skepticism, especially his insistence that Mexico would also pay for the construction of such a wall. Undeterred, Trump this week explained how he would make this happen, outlining in a policy memo posted to his website a plan to cut off money transfers by immigrants in the United States to their families in Mexico.

Justin Sandefur
There are lots of reasons this is a bad idea. For a start, it's wildly impractical to implement without undermining other commerce. It is also mean-spirited toward families in Mexico who depend on remittances. And it would probably also start a trade war.
    But even if you set all that aside, stopping remittances to Mexico is also simply bad for the American economy. It may seem counterintuitive, but when immigrants in America send money to their families overseas, America gains.
    The economics of remittances surprise a lot people, even those who aren't sympathetic to Trump's anti-immigrant rhetoric. People intuitively assume keeping that money in the United States is a good thing for the American economy, but many macroeconomists disagree.
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    Why?
    One reason is that remittances mean cheaper stuff for Americans. The millions of Mexican immigrants working in the United States provide goods and services for American consumers, and in exchange they earn dollars. About 11.7 million Mexican immigrants live in the United States, and last year Mexico received about $24 billion back in remittances. When immigrants send their earnings overseas, America loses dollars, but no actual goods or services. Figuratively, we trade pieces of paper with green ink for real stuff. If families in Mexico use those dollars to buy things made in Mexico or elsewhere, then America has essentially gotten immigrants' services without paying anything tangible in return. If, on the other hand, families in Mexico use their remittances to buy things made in the United States, then American exports increase. Either way, the American economy wins.
    Remittances aren't just good for American consumers, they're also good for American firms and job creation, by making American industry more competitive with Mexico.
    Research has shown that when immigrants send money home, the receiving country experiences real exchange rate appreciation that may hurt its international competitiveness, similar to the negative side effects of oil booms. Put simply, when Mexican immigrants in the United States send dollars home to relatives in Mexico, the families will probably exchange those dollars for Mexican pesos. This increases the demand for pesos, driving up their value. As the peso appreciates, goods produced in Mexico get more expensive internationally, and by comparison, goods produced in America get cheaper. In short, if you're worried about America competing with Mexico for manufacturing jobs, remittances help rather than hurt.
    To be clear, the size of this exchange rate effect is probably small, given the relatively modest size of remittances in the American economy, but it's still important to highlight the issue in part to counter the idea that sending money to Mexico must be bad for American firms.
    And of course, if you have any concern for the welfare of poor people in developing countries, many of those families depend on money from abroad for basics like food and school supplies. Research from Mexico and the Philippines has shown that remittances not only help households cover costs, they spur investment in microenterprises and help reduce child labor.
    So far, the 2016 presidential campaign has been full of economic arguments that assume we live in a zero-sum world, where any trade agreement or immigration policy that benefits another country hurts America. Yet the real world is a world of mutual gains from trade and integration -- and even from the simple act of sending money overseas.