In an effort to curb rising illegal immigration from Central America, U.S. President Donald Trump is considering limiting transfers of money from migrants working in the United States to Honduras, Guatemala and El Salvador. But even relatively mild measures — such as denying or delaying more transfers through increased scrutiny by the U.S. Treasury Department — threaten the already tenuous economic and political situations in these Central American countries. Reducing remittances would also likely accelerate Central American efforts to seek additional foreign aid and trade links with China, though the United States wields significant economic influence to hamper this trend. In the end, the Trump administration's efforts could actually drive more migrants to the border by exacerbating the factors they often seek to escape, such as high crime, poverty and food shortages.
The U.S.-Mexico border has seen an influx of asylum seekers from Central America in recent years. The number of migrants apprehended or turned away at the border increased from about 17,000 in March 2017 to 100,000 this March. And while this figure is still well below where illegal immigration on the southern U.S. border was nearly two decades ago, it nonetheless presents a challenge to U.S. President Donald Trump by undermining the staunch immigration enforcement message that helped fuel his electoral victory in 2016.
The Big Picture
Quelling illegal immigration was the core of Donald Trump's political platform in 2016, and it remains a key issue for his administration and supporters. But the growing number of Central Americans who are now reaching the U.S.-Mexico border risks undercutting this political message ahead of the 2020 presidential election. In response, the Trump administration is mulling unprecedented measures to quickly deter illegal border crossings, such as blocking migrant workers from sending money back home.
In an attempt to shore up support ahead of the 2020 presidential election, the Trump administration is now seeking to turn its campaign promises into policy — even if it means pursuing drastic measures. Currently, the most consequential proposal on the table is a move to stem the flow of remittances to Guatemala, Honduras and El Salvador, or money migrant workers send back to their families. But announcing a crackdown on this money is no idle threat. Remittances to these countries (the vast majority is from citizens in the United States) are a leading source of revenue in Central America — making up about 20 percent of Honduras' and El Salvador's GDP and about 12 percent of the Guatemalan economy.
If the White House makes good on its threat, reducing remittances risks spawning considerable political and economic ripple effects in Central America, which could eventually make their way back to Washington in the form of even more migrants on its doorstep.
A Perfect Storm for Populism
The proposal to slow remittances is particularly risky for the economies in Guatemala, El Salvador and Honduras because of the high number of citizens in these countries who earn their living through informal jobs. In Guatemala and Honduras, more than 70 percent of the population is estimated to work in what's known as the informal labor force, while in El Salvador, the figure exceeds 60 percent. These jobs offer few, if any, benefits and are often tenuous and low-paying. Those who work in the informal sector can also go for weeks or months without pay. As a result, these citizens often make ends meet through the remittances they receive from family members working abroad.
Targeting remittances would thus severely strain many households' income. And the resulting economic slowdown, worsened by global economic headwinds over the next several years, could threaten the region's already fragile political stability and give rise to brewing populist movements.
Central American governments would face hundreds of thousands, if not millions, of constituents with delayed or nonexistent income from remittances. And with limited pools of domestic capital and small budgets, they would have little to offer in the way of alleviating citizens' financial woes. As a result, voters could start turning their anger against incumbent governments, leading to violent unrest and increased support for leftist populists who promise to address their social and financial grievances.
In Honduras, the government of President Juan Orlando Hernandez is already facing a growing threat from the country's main leftist coalition after the president narrowly defeated its candidate in 2017. There is, of course, little that the Honduran government can do to avoid attracting the Trump administration's ire concerning illegal migration. But that wouldn't stop its leftist opponents from using the issue of remittances to garner support and possibly eke out a win in the next presidential election in 2021.
Tied Hands on Trade
Beyond the direct economic and political implications for the region, cutting off remittances would also likely force Central American governments to consider options for expanding trade links and sources of foreign assistance outside of the United States. In doing so, these countries could start accelerating their efforts to court Chinese assistance and export opportunities, which will prove risky due to the region's exposure to the U.S. economy.
As part of the Central American-Dominican Republic Free Trade Agreement (CAFTA-DR), Honduras, Guatemala and El Salvador are particularly vulnerable to U.S. retaliation in the form of trade benefits. El Salvador, for example, was quickly met with Washington's wrath after toying with the idea of recognizing China over Taiwan to diversify its exports in 2018. The United States considered revoking some of El Salvador's trade benefits under CAFTA-DR in retaliation. While the decision to revoke CAFTA-DR benefits would ultimately fall into the hands of an arbitration panel, it is nonetheless a powerful tool the United States can wield to dissuade Central American countries from strengthening their ties with its chief rival in the East.
Even if the United States moves to penalize Central American countries for illegal immigration, these countries will find it very difficult to pursue a path away from the United States. Their historical reliance on their northern neighbor for trade and foreign assistance will cause governments to walk a fine line between satisfying Washington and planning for the future. But there will be little they can do to prevent the domestic fallout from challenging the United States.
Laying Out Trump's Options
With that said, the extent of these economic and political implications in Central America largely depends on the effectiveness of the measures enacted by the Trump administration. As president, Trump technically has the power to target remittances by cutting off all financial transfers to these countries. However, such a move would be highly unpalatable because of the collateral economic damage. It also would be challenged in the U.S. courts and face potential reversal in Congress.
Complicating Central Americans' ability to send money home risks slowing Central American economies, which would have economic and political consequences for the United States.
Instead, the administration is more likely to target remittances by alleging that some of the money migrants are sending back home is being used to facilitate money laundering or fund criminal activities, such as drug trafficking. In doing so, Trump could, for example, have the Treasury Department order financial entities to start heavily scrutinizing remittances sent to Central American countries. Under such a policy, the Treasury Department could start blocking even small amounts of money wired abroad, if the entities transferring the funds can't easily verify the sender's identity or legal status.
In the long term, Central American migrant workers in the United States stymied by more stringent controls on money transfers may start to look for alternative methods, such as cryptocurrency, to continue sending remittances. However, complicating Central Americans' ability to send money home — even if it's temporary — risks slowing Central American economies, which would have economic and political consequences for the United States.
Beware the Backfire
The importance of Central American economies to the United States is relatively minor, accounting for less than $16 billion of U.S. exports. However, certain U.S. companies that operate in Central America, such as those in the retail sector, could be hit especially hard by consumers' shrinking pocketbooks.
But perhaps of most concern to the United States, and to the Trump administration in particular, is the potentially adverse effect targeting remittances could have on Central American migration. The economic fallout risks exacerbating the existing factors — such as violent crime and food insecurity — that already push Hondurans, Guatemalans and Salvadorans to seek asylum in the United States. And drought conditions in rural areas — which are particularly dependent on remittances from abroad — will propel even more of the poorest Central Americans to head north. Though the administration is considering targeting remittances to deter migration, the secondary effects of such a decision could thus end up driving to the U.S. border more desperate Central Americans, who have few other destinations to improve their economic prospects.
Whether the White House will try to make it more complicated for Central Americans to repatriate their earnings remains an open question. A proposal to limit remittances from Mexico was nestled in Trump's 2016 platform on immigration, but the idea only now seems to be under serious consideration. The temptation to make the proposal a reality ahead of the 2020 election will be great. As a result, the United States could come away with even more Central American migrants at its border, and fewer friendly relationships at its disposal in the region to preemptively curb migration flows.
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