The Economic Ramifications of Trump's Border Wall Proposal

Tuesday, April 5, 2016

Donald Trump's plan to force Mexico to pay for a border wall by blocking money transfers to the country would be a "mistake" and a total reversal of policy, experts say.

In his plan released today, Trump says he will "compel" Mexico to pay for a border wall by blocking remittances and canceling visas unless Mexico makes a one-time payment of $5 billion to $10 billion to the U.S.

"The cost of a border wall is nothing compared to the hundreds of billions we spend year after year providing services and benefits to illegal immigrants," Trump said in a press release, while claiming that Mexico has "taken advantage" of the United States for years with "criminal activity."

According to one estimate from the World Bank, Mexico received around $24 billion in remittances in 2014.

"The idea of using this flow of funds to try to implement foreign policy objectives such as border control would be a pretty sharp departure from current practice," said Aaron Klein, Brookings Institution fellow.

Mexico's President Peña Nieto, as well as the country's past leaders, have said the country won't pay for Trump's wall. But economists also say there are legal and economic reasons why Trump's plan won't work.

Millions of immigrants living in the U.S. send money home to family and friends and Klein points out that the typical migrant worker sends money home 14 times a year. While these are small sums, usually around $300, they represent an "extraordinary level" of savings given the worker's income, Klein said.

"Some of the money goes through the banking or financial system," or money wiring services like Western Union or MoneyGram, Klein said, "while some goes through informal means, including viajeros who are people that literally carry cash in suitcases on planes."

A spokeswoman for MoneyGram said in a statement to ABC News, "Remittances are an important part of economic development and financial inclusion around the world. At MoneyGram, many of our customers depend on our services to pay for basic needs like education, housing and healthcare. MoneyGram remains committed to ensuring our customers can continue to stay connected to family and friends around the globe through our quality financial services."

If Western Union or MoneyGram can't wire money to Mexico, then people could very well find other means to send cash, such as digital payments services. And it may not be so easy for Trump to change the existing laws that govern money transfers, Klein points out.

"The Patriot Act and subsequent federal law governing remittances in the Dodd-Frank bill were never intended to be used to threaten to cut off the flow of migrant worker remittances for foreign policy aims," said Klein, who helped draft the Dodd-Frank Wall Street Reform and Consumer Protection Act. "These laws were intended to track and crack down on the flow of money laundering or support for illegal or terrorist organizations while at the same time providing consumer protections to workers who are sending hard earned cash back home to their parents, grandparents, and children."

Klein explained that the goal of policy in remittances has been to encourage the flow of money to come into the official system and to discourage the flow of funds through the underground network.

"Proposals to cut off access to the financial system would run counter to this objective and would be a mistake," Klein said.

It's not clear if blocking money transfers to Mexico would compel America's southern neighbor to cooperate with a Trump administration. The World Bank noted that despite the growing number of deportations from the U.S. back to Mexico, El Salvador, Honduras and Guatemala, remittances received by these countries continued to rise in 2014.

Will Olney, economics professor at Williams College, said there is a "fundamental misconception" that immigration, trade, and globalization are zero sum games: That if one country "wins" the other must "lose."

"Globalization is not about making a deal or winning negotiations," Olney said. "In fact, a century's worth of economic research shows that globalization is mutually beneficial for both countries involved. Of course some people are adversely affected, as they would be with any large economic change. But these adjustment costs should be addressed through aid, education, and retraining programs, rather than being used as an excuse to block the very forces that have generated such rapid economic growth."

Blocking remittances could harm the U.S. economy, some economists argue. Michael Clemens, senior fellow with the Center for Global Development has pointed out that "the more U.S. dollars are sent to Mexico, the more the U.S. economy benefits."

"Mr. Trump's notions about remittances offer one of many examples of his outright ignorance about economics, and even worse, his lack of interest in basing policy on facts," Clemens told ABC News.

Olney said Trump's plan "undermines the principles of this country as well as our own economic interests."

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