US President Donald Trump appears determined to fill American coffers at the expense of other countries and the world’s most vulnerable people. In addition to cuts to foreign aid and the strong tariff increasesyour Government’s “great and beautiful law” introduces something new 1% tax. to remittances sent from the United States paid with physical instruments (for example, cash, checks and money orders). This “tax on the poor“, as Mexican President Claudia Sheinbaum defines it, will generate serious economic and social costs in developing countries.
Over the past three decades, the amount of money sent by migrant workers to family and friends in low- and middle-income countries (LMICs) has increased. multiplied by more than 17until you reach the 685 billion dollars in 2024 (more than the sum of official development assistance and foreign direct investment). Already the remittances constitute no less than 3% of GDP in more than 77 countries and far exceeds the World Bank Group’s annual loans to developing countries ($128 billion) and the total loans owed to the International Monetary Fund (about 145 billion dollars).
This enormous growth implies a fundamental change: remittances have become the most direct and dynamic link between migration and development, as they serve as a source of foreign exchange and macroeconomic stabilization force in low- and middle-income countries. Trump’s new 1% tax puts this global progress at risk and further increases the opportunity cost of brain drain.
Trump’s new tax justification resembles the one used for the trade war. Just as U.S. import growth has outpaced export growth and widened the trade deficit, outgoing remittances have also grown more than incoming remittances. For example, in 2012 they went out from the United States in the form of remittances approximately 200,000 million dollars, while only 7,000 million entered, which represents a 34% increase in net outflow compared to 2017. The United States is already the main issuer of remittanceswith none other than 134 beneficiary countries in 2021 (the last year with reliable bilateral data).
Already the remittances constitute no less than 3% of GDP in more than 77 countries and far exceeds the World Bank Group’s annual loans to developing countries
Trump’s new tax will have broad consequences. In the United States, it is expected to discourage immigration, discourage unauthorized employment, and reduce the net outflow of resources. Preliminary calculations indicate that the tax (which will be applied to anyone who sends remittances, regardless of their immigration or citizenship status) will generate just under 10 billion dollars of turnover over the next decade. And those who share the zero-sum thinking of Trump (“money sent abroad is money that is not spent on local goods and services”) even claims that this will stimulate consumption and growth in the United States.
Health and education
But the global implications are more worrying. It is shown that the transaction cost is a predictor significant volume of formal remittances; Therefore, Trump’s tax will reduce that outflow. A decrease in remittances, combined with cuts in international aid, can cause local currency depreciation, inflationary pressures and worsening macroeconomic instability in low- and middle-income countries. Particularly serious risks for over-indebted countries, which will be more exposed to disruptions in trade or capital flows.
In the most vulnerable low- and middle-income countries, remittances are also important at the microeconomic level allow families to maintain more uniform consumption, face economic crises and invest in health and education, all crucial elements for reducing poverty and improving well-being.
Data from developing Asian economies show that a one percentage point increase in international remittances as a percentage of GDP can reduce the poverty gap coefficient by 22.6%. Similarly, a study of 122 developing countries between 1990 and 2015 found a reduction in malnutrition and infant mortality rates following a 10% increase in the level of remittances per capita.
A decrease in remittances, combined with cuts in international aid, can cause local currency depreciation, inflationary pressures and worsening macroeconomic instability in low- and middle-income countries.
Trump’s remittance tax could not only reverse this progress, it also goes against it I commit undertaken by the international community (within the scope of the United Nations Sustainable Development Goals) to reduce the costs of transferring emigrants’ remittances (which at the end of 2023 reached a value 6.4% on average) to less than 3% in 2030. The increase in tariffs will lead migrants to use informal channels (e.g. cryptocurrencies and the hawala) and could expand the black market for these types of services, with the significant associated risks.
The only good thing that can be said about Trump’s new tax is that it makes visible the risks posed to low- and middle-income countries that depend on remittances to support economic development and finance essential goods such as food, education, medical care and housing. While a sustained flow of remittances reduces the opportunity cost of brain drain, it does not address its underlying causes.
The solution is for low- and middle-income countries to develop economic strategies that foster large-scale growth, job creation, closing technology gaps and improving productivity. To move up the global value chain and generate lasting prosperity, these countries will still need their emigrants, but their technical knowledge and scientific expertise, not just their money. By contributing to “brain circulation” and technology transfer, emigrants can promote development at the same time in countries of origin and host countries.
This dual benefit depends on improving the investment climate for private business and deepening regional integration, so that low- and middle-income countries can benefit from economies of scale in the service of strong economic growth and long-term sustainability. To create a more favorable business environment, authorities must strengthen regulatory institutions and standards, improve accountability and governance, and address obstacles such as financial repression and infrastructure deficiencies. This will also encourage the use of remittances for long-term investments (not just consumption). Additionally, low- and middle-income countries could diversify their sources of financing by creating emigrant bonds with a lower interest rate.
The Trump administration’s remittance tax is just the latest in a series of punitive US measures against developing countries; Others will be added. Low- and middle-income countries must recognize the need to break the cycle of dependency and create a virtuous cycle of technology-based growth that builds economic resilience, fosters shared prosperity and alleviates migratory pressures.
