Trade and immigration tensions between the United States and Mexico are rising to a point where it makes sense to begin assessing the economic impact of rising tariffs, decreasing labor mobility and rising deportations.
A look at remittances serves as a timely reminder of the essential economic relationship between the U.S. and Mexico.
One place to start is by taking a look at the level of remittances to Mexico from the U.S., which in any given year represent between 3% and 5% of Mexican gross domestic product.
Since 2013, remittances (the movement of funds from the country of work back to a home country) from the United States to Mexico have increased at an average rate of nearly 12% per year.
This speaks to the integration of the North American economy as well as generational shifts in the U.S. labor force and the potential for further labor shortages and increased inflation should those ties be broken.
One of the unspoken risks to the direction of current policy is that should the trade war send a Mexican economy dependent upon the U.S. into a tailspin unemployed individuals south of the border will start walking north.
Anyone with memories of the 1994 Mexican financial crisis can attest to what an economically induced increase in immigration to the U.S. looks like.
The management of such tensions this year will be key to avoiding a similar outcome to what occurred following the collapse of the Mexican economy in 1994.
A look at remittances serves as a timely reminder of the essential economic relationship between the U.S. and Mexico.
Global remittances
Recent descendants of immigrants know the many reasons for immigrating to the United States and for sending aid back to extended families.
In 2023, remittances back to home countries totaled about $656 billion, equivalent to the GDP of Belgium, according to a World Bank report.
In more than 60 countries, remittances accounted for 3% or more of the gross domestic product, with small and fragile states more heavily dependent on the inflow of cash.
The World Bank reported that the increased remittance flows to lower- and middle-income economies in 2023 were supported by strong labor markets in the advanced economies.
The World Bank expected these trends to continue last year, particularly for the United States, which stands as the largest source country for remittances and the primary destination country for migrants.
The increase in employment in the U.S. sectors where migrants work, such as food and beverage services, health services and construction, contributed to the growth in remittances to Latin America.
The World Bank expected remittances to grow by 2.3% last year and 2.8% this year, reaching $690 billion.
In our view, remittances are an investment in the development of U.S. trading partners, and Mexico in particular. As households in those trading partners move further away from subsistence levels of income, they become better educated and eventually consumers of American services and products.
On a geopolitical level, helping the modernization of developing economies promotes democratic values and lessens the probability of conflict.
U.S. remittances to Mexico by state
According to the U.S. census, via the World Bank report, the foreign-born population from Latin America was 23.2 million out of 46.2 million foreign-born living in the United States in 2022. Of these, Mexico and Central America alone accounted for 14.6 million.
As of 2023, the top origins for immigrants arriving within the last year were Mexico, India, and Cuba, according to the Migration Policy Institute.
Of the 65.1 million people in 2023 who self-identified as Hispanic or Latino, 67% (43.7 million) were native born and 33% (21.5 million) were immigrants,
Not surprising then, California and Texas are by far the largest contributors of remittances to Mexico. These two states, which have the highest overall populations and highest percentages of Hispanic residents, sent $20.4 billion and $9 billion, respectively to families in Mexico, according to 2024 data from the Bank of Mexico.
Remittances compared to the size of the state work force
Looking at remittances compared to the number of employees in each state confirms the demographics of the labor force working in the food and health services and construction industries.
You would expect the border states that have the highest percentage of Hispanic residents and California and Texas, the states with the two largest Hispanic populations, to have the highest ratio of remittances to the total number of employees. Nevada is right up there, reflecting the large number of hospitality employees. And the several Sun Belt and mid-Atlantic states, reflecting the higher demand for construction workers.
Read more of RSM’s insights on the economy and the middle market.
This opens the conversation of who will fill the roles for which immigrant workers are now responsible should those workers be sent home and immigration closed?
The U.S. labor market remains tighter than it has been historically. And as we saw during the pandemic, any further loss of workers would most likely result in higher labor costs in the health care, hospitality and construction industries.
The takeaway
We have made the case for some time that the U.S. labor market is historically tight. Current immigration policy will put a growing constraint on U.S. labor supply and forced deportations will create the conditions in which wage pressures will create risks to the inflationary outlook.
The economic interdependence between the U.S. and Mexico is significant and unwinding it will be painful on both sides of the border.
If this is not carefully managed it will most likely result in a greater crisis at the border and an unnecessary human tragedy in terms of migration of people searching for work that would have not occurred otherwise.
