Let’s hope Trump’s mass deportation and more tariffs are campaign promises he doesn’t keep, says economist Joel Naroff
How would a huge removal of undocumented workers impact the economy? And how would tariffs affect prices for U.S. consumers?
During his campaign, President-elect Donald Trump presented a variety of potential economic policy changes that would dramatically alter the way the economy operates — not only in the U.S. but in the world as well. The two biggest: mass deportation of undocumented immigrants and extensive use of punitive tariffs.
The question is: What will those proposals do to the economy?
Undocumented workers are concentrated in a few critical industries
Trump has proposed a goal of deporting upward of 1 million undocumented immigrants per year, many of which are part of the U.S. labor supply. With at least 11 million undocumented residents living in the country, massive deportations could persist for years to come.
How would a huge removal of undocumented workers impact the economy? Since these laborers are mostly employed in a limited number of industries, they constitute a significant proportion of the workforce in those sectors.
For example, undocumented employees make up about 25% of workers in agriculture, 13% in construction, 10% in administrative and support services (essentially entry-level jobs), and 8.4% in accommodation and food services. Nearly 20% of landscaping workers, maids or housekeepers, and construction laborers are undocumented immigrants.
Undocumented immigrants tend to take the least desirable jobs. In those occupations, the population of undocumented workers may be five to 10 times greater than U.S.-born workers.
A massive deportation of undocumented workers would lower production and raise prices
The proposed deportation program would remove a significant share of the labor force in a number of key industries, especially agriculture and construction. That would limit the ability to harvest crops, lowering food supply and raising prices. Fewer workers would reduce the level of construction, force hotels and restaurants to cut back hours or available services, and force up wages for critical entry-level positions.
All of these impacts would have negative multiplier effects as reduced production would cause further cutbacks, not only in the directly affected companies but in all of their suppliers. It would also lower population growth, restraining future economic activity.
The Brookings Institute has estimated that the deportation of roughly 750,000 undocumented workers would slow economic growth by about 0.4% in 2025, or about $130 billion. That doesn’t account for the cost of deportation, which could run about $13 billion per year, or the negative impacts rising costs would have on spending.
In summary: Without other immigration reform, closing the border and deporting large numbers of undocumented workers will reduce labor supply and production, raise prices, slow population growth, and reduce current and future economic growth.
Tariffs are indeed a tax on consumers
The second major proposal is to raise tariffs, in some cases punitively, especially on Chinese goods.
To recognize the economic implications of the tariff proposals, it is important to understand the actual process of paying a tariff. A tariff is a fee charged by a government to bring goods into that country from a foreign nation. The company that imports the products must pay the cost of the tariff before the goods are allowed to enter the country.
As an example, consider a firm that manufactures products in China in its own factories, then ships them to the U.S. to sell. That company is entirely responsible for paying the tariff. It faces the choice of either raising prices in the U.S. or reducing its profit margin. A suggested 30% tariff on Chinese goods would likely price that company out of the U.S. market, shrinking the company’s profit margin dramatically or even turning it to a loss.
A second example is a U.S. retailer who imports foreign-manufactured goods. This retailer typically uses a separate importer who is responsible for paying the tariff, then passes the tariff cost on to the retailer. This is the same situation for manufacturers who use foreign goods in their manufacturing process.
Someone in this process will have to pay the cost of the tariff. In the real world, the retailers and manufacturers all know about the tariff and its impact on costs, build that into their pricing decisions, and push the expense up the supply chain to consumers.
At the end of the day, it is the consumer who winds up paying the tariff, which is why economists consider tariffs a tax on goods.
The cost to consumers of tariffs would be significant
How much more will consumers pay if tariffs are implemented?
U.S. imports in 2023 totaled about $3.9 trillion. Imports from China were $427 billion. The suggested 30% tariff on Chinese goods would cost U.S. consumers upward of $128 billion. A 10% tariff on all goods could raise prices by $390 billion — to start.
But those price increases do not account for added costs to firms that use imported goods to produce other products. As you move up the production ladder, the initial price increases lead to further increases.
And then there is the issue of reciprocity.
No good tariff goes unchallenged, and our trading partners would almost certainly retaliate by imposing tariffs on goods made in the U.S. and exported to their countries. That would raise the prices of U.S.-made products in countries around the world, lowering our exports, and reducing production and employment in export industries.
The agricultural sector could be hit hard as farmers across the world would like nothing better than to price U.S. farm goods out of their markets.
Tariffs cannot replace income taxes
Trump has proposed replacing the income tax with tariffs. But is that feasible?
In 2023, the federal government raised about $2.2 trillion dollars from the income tax. At current levels of imports, it would take a 55% tariff on all imported goods to replace those revenues. But, of course, with prices of imported products soaring, demand would drop sharply and so would revenues, so the tariff level would have to be even higher.
Replacing the income tax with tariffs may have sounded like a good idea, but it doesn’t appear to have been well thought out.
In summary: A tariff is indeed a tax that is passed on to consumers. It raises prices and therefore inflation and interest rates, and lowers household spending power, slowing growth. It potentially prices foreign goods out of the market without any domestic manufacturing capacity available to replace those goods. Finally, tariffs cannot be used to replace the income tax.
Let’s hope the proposals to deport huge numbers of undocumented workers and raise tariffs significantly were campaign promises that will not be kept, or that they’re only implemented in a way that is not overly destructive to the economy.