This article is an on-site version of Free Lunch newsletter. Premium subscribers can sign up here<\/a> to get the newsletter delivered every Thursday and Sunday. Standard subscribers can upgrade to Premium here<\/a>, or explore<\/a> all FT newsletters<\/p>\n<\/div>\n<\/div>\n<\/div>\n Welcome back. Businesses and investors are sensitive to developments in Donald Trump\u2019s tariff agenda. After all, as import duties directly affect profit margins and supply chains, their economic impact feels tangible and imminent.<\/p>\n But there is another component of the US president\u2019s policy plans that could be just as significant \u2014 if not more so \u2014 for the world\u2019s largest economy: his immigration crackdown. <\/p>\n A notable fall in foreign workers in America \u201crepresents a far more sustained negative supply shock for the economy than tariffs\u201d, says George Saravelos, head of FX research at Deutsche Bank. \u201cBut immigration garners less market attention, as the pass-through to economic activity takes longer and is harder to monitor.\u201d<\/p>\n So this week, I outline why Trump\u2019s immigration policy could indeed end up scarring the US economy more than his tariffs.<\/p>\n Right now, there are three strands to the president\u2019s immigration<\/a> agenda. \u201cThe first is shutting down illegal and legal crossings along the US-Mexico border,\u201d says Alex Nowrasteh, vice-president at the Cato Institute. \u201cThe 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.\u201d<\/p>\n 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.<\/p>\n Alongside last month\u2019s disruption to student visa interviews, universities and research bodies have been threatened with funding cuts from the White House. Indeed, in March, three-quarters<\/a> of postgraduate researchers and PhD students who answered a poll for Nature magazine said they were considering leaving the US. <\/p>\n A recent decline in tourist arrivals is also indicative of the general caution over travelling stateside.<\/p>\n <\/picture><\/a><\/figure>\n<\/div>\n Trump\u2019s 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<\/em> immigration to the country this year. <\/p>\n That hasn\u2019t happened in at least half a century of data. This will be driven by fewer arrivals, alongside deportations and voluntary exits, say the researchers.<\/p>\n 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\u2019s foreign-born population could drop by around 500,000 per year over the next three years. <\/p>\n That\u2019s before factoring in Trump\u2019s policies regarding universities and student visas. \u201cThe increased risk of seeing applications denied or visas revoked may dissuade students from choosing the US,\u201d says Marco Casiraghi, a director at the company. \u201cAs will less funding for research.\u201d<\/p>\n This is a significant problem for the US economy, because its recent growth has depended on foreign-born labour. <\/p>\n The US labour market has been \u201csupply constrained\u201d since the Covid-19 pandemic, partly as a result of \u201cexcess retirements\u201d, explains Dhaval Joshi, a chief strategist at BCA Research. \u201cStrong growth in labour supply \u2014 driven by immigration \u2014 in a supply-constrained economy explains why US GDP has grown faster than most expected over the past few years,\u201d he says.<\/p>\n Indeed, the impressive growth in US jobs following the pandemic has been driven by foreign workers.<\/p>\n Without immigration, America\u2019s population would be shrinking. \u201cAmerica is an ageing, sub-replacement-fertility society today, and its\u00a0native-born working-age population is no longer growing,\u201d says Nicholas Eberstadt, a political economist at the AEI. <\/p>\n The participation rate among the US-born labour force has been stagnant in recent years and remains below pre-pandemic levels. <\/p>\n This means lower immigration will drag the country\u2019s 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\u2019s policies reduce total hours worked.<\/p>\n 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.)<\/p>\n It would leave the US extra reliant on generating significant productivity gains, for instance from artificial intelligence, to prop up its growth.<\/p>\n Foreign workers have an added impact on America\u2019s economic growth potential, beyond their direct supply of labour.<\/p>\n 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<\/a>.<\/p>\n 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.<\/p>\n For these reasons, \u201cdeporting workers\u2009.\u2009.\u2009.\u2009reduces jobs for other US workers\u201d, notes the Peterson Institute for International Economics in a recent study<\/a>. Even in the think-tank\u2019s \u201clow\u201d 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.<\/p>\n Higher-skilled foreign workers have a more significant economic role in boosting US productivity via innovation and enterprise.<\/p>\n 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.<\/p>\n NBER research<\/a> 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.<\/p>\n There is, of course, plenty of uncertainty about how Trump\u2019s immigration policy will play out. Analysts expect the administration to fall short on its promises of \u201cmass deportation\u201d \u2014 which could mean targeting 1mn deportations per year \u2014 given the logistical challenges involved. Highly skilled workers and students may also be unable to find suitable opportunities abroad in the short term.<\/p>\n Still, baseline<\/em> 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.<\/p>\n For measure, assuming Trump\u2019s immigration agenda only amounted to the PIIE\u2019s low-end deportation scenario, real GDP would still fall further from baseline when compared to his various tariff plans.<\/p>\n 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. <\/p>\n 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. <\/p>\n 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. <\/p>\n Tariffs \u2014 and their effects \u2014 are also likely to be less permanent than a hit to labour supply. <\/p>\n 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. <\/p>\n This means once a chunk of the labour force has been reduced, it won\u2019t 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\u2019s second term. <\/p>\n In the long run, it is the loss of people from abroad \u2014 and not the cost of goods from outside \u2014 that will prove far more damaging to America\u2019s prosperity. <\/p>\n Send your rebuttals and thoughts to freelunch@ft.com<\/a> or on X @tejparikh90<\/a>.<\/p>\n Why do people follow rules even when they are given incentives not to do so? A new study<\/a> finds conformism to be a significant factor.<\/p>\n Free Lunch on Sunday is edited by Harvey Nriapia<\/em><\/p>\n Trade Secrets<\/strong> \u2014 A must-read on the changing face of international trade and globalisation. Sign up here<\/a><\/p>\n Unhedged<\/strong> \u2014 Robert Armstrong dissects the most important market trends and discusses how Wall Street\u2019s best minds respond to them. Sign up here<\/a><\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n\n<\/picture><\/a><\/figure>\n<\/div>\n
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Food for thought<\/h2>\n
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