Why you should care
Because closing borders can have surprising consequences.
Gregory Daco is head of U.S. Macroeconomics at Oxford Economics.
To ban or not to ban, that is the question … for the courts. But beyond the political, legal and social ramifications of President Trump’s attempts to ban refugees as well as citizens from Muslim-majority countries from entering the country, the executive orders and the chaos they’ve caused signal a key juncture for relations between the White House and the business community.
While most U.S. companies stayed shtum for fear of being targeted by presidential tweets, many American conglomerates have expressed concern about restricting immigration. Business leaders from Google, Apple, Facebook, Microsoft and other major Silicon Valley companies opposed the first ban outright. Many other top executives, from Amazon and Procter & Gamble to Goldman Sachs and Airbnb, also joined the protest.
The broader concern? That it’s the first step toward much more stringent immigration rules that would limit foreign entry into the United States, thus cutting off the economy from important sources of revenue.
The markets reacted negatively the first time around, with stocks falling around the world and safe-haven assets like gold and U.S. Treasury securities rising. And while the Dow has reached an all-time high, surpassing 21,000 points, that was since Inauguration Day that Trump’s actions led to a retreat in the financial markets. What this leaves us with is a highly volatile and uncertain business environment. Business leaders may be willing to exchange patience for potentially lucrative corporate tax reform, but they may not do so if Trump’s anti-immigration agenda is pushed forward in the meantime.
Why Immigration Matters
It’s not difficult to understand why the markets and business leaders across the U.S. reacted negatively. Even though the immigration ban affects less than 0.1 percent of arrivals in America, its symbolic nature resonates further. The broader concern? That it’s the first step toward much more stringent immigration rules that would limit foreign entry into the United States, thus cutting off the economy from important sources of revenue — be it education, labor or tourism. And the clash with business leaders is unlikely to fade anytime soon because Trump’s team appears to have drafted another executive order that aims to overhaul the work-visa programs (like H1B visas) that allow high-skilled workers to gain employment in the U.S. when local hires lack the needed skills. Oxford Economics estimates that the administration’s tough stance on immigration (legal and illegal) could impose a drag on the economy north of half a percentage point.
To put things in perspective, the Department of Commerce estimates that international students contributed between $30 and $35 billion to the U.S. economy in 2015. For most of these students, the majority of their funding resources came from outside the country (personal, family and foreign government assistance). Putting these factors together suggests an elevated net benefit to the U.S. economy, and any policy that curbs entry of foreign students, or makes it more difficult for them to stay and work after obtaining a degree, represents a significant net loss.
Regarding labor, Pia Orrenius, vice president and senior economist at the Dallas Federal Reserve Bank and a member of the advisory council for the Bush Institute’s Economic Growth Initiative, puts it eloquently when she says, “Immigration fuels the economy and greases the wheels of the labor market.” The entry of immigrants into the labor force generally occurs where there are shortages, thus increasing the economy’s productivity and broadly boosting national income and output. This “immigration surplus” benefits everyone, including the native population.
Does this mean that U.S. labor only stands to gain from immigration? Not necessarily. For low-skilled native workers, for example, the influx of immigrants (legal and illegal) generally represents a substitute that puts downward pressure on wages. And for many nationwide, this has led to serious discontent. But, at the other end of the spectrum, research shows that foreign-born, high-skilled workers generally complement native high-skilled workers, boosting overall wages and output.
Finally, when it comes to tourism, the immigration ban could also have significant adverse economic consequences. A recent report by Hopper.com indicated that flight searches from 122 countries had fallen 9 percent, from 61.5 million per week before Inauguration Day to 56 million after, and fell another 9 percent to 50.9 million after the travel ban. While the data may only reflect a temporary shift in travel preferences, we shouldn’t underestimate the importance of presidential actions in promoting or deterring tourism. With international tourism generating around $200 billion in outlays each year, it’s easy to see the potential significance of these decisions.