Following the Supreme Court’s decision to invalidate President Trump’s global tariff framework, which he had justified on the basis of the 1977 International Emergency Economic Powers Act, the administration imposed a fresh round of worldwide 10 percent duties anchored in Section 122 of the 1974 Trade Act. These duties are expected to endure for the statutory maximum of 150 days, during which the administration presumably gears up for a long‑term protectionist scheme.
Setting aside the economic damage these new tariffs would cause, they constitute yet another move to circumvent Congress’s power to “lay and collect Taxes, Duties, Imposts and Excises” (Article I, Section 8, Clause I of the U.S. Constitution). The administration conceded as much in court earlier this month while defending the tariffs in a suit aimed at overturning them, catching the panel of judges by surprise by directly tying the imposition of the Section 122 tariffs to the demise of its IEEPA tariffs.
But Section 122, like IEEPA, does not grant the president broad tariff authority. Instead, its authority rests on specific conditions. Section 122 authorizes the president to proclaim temporary duties or quotas “whenever fundamental international payments problems require special import measures to restrict imports,” the so‑called “necessary threshold condition,” as Judge Taranto of the Court of Appeals for the Federal Circuit has described it.
The president can act for any of three enumerated purposes. The first, the one cited by President Trump, is “to deal with large and serious United States balance‑of‑payments deficits.” A balance‑of‑payments deficit here refers to a drain on monetary reserves, including gold. If that sounds farfetched, it is because the language only makes sense within the context of the Bretton Woods system, as we will see below.
The other two enumerated purposes, not at issue here, are “to prevent an imminent and significant depreciation of the dollar in foreign exchange markets” and “to cooperate with other countries in correcting an international balance‑of‑payments disequilibrium.”
Two conditions must be satisfied for Section 122 to authorize new worldwide tariffs: that we are facing fundamental international payment problems, and that we are dealing with large and serious balance‑of‑payment deficits.
The first condition, the existence of fundamental international payments problems, is not seriously argued by the government, which instead treats it as a prefatory phrase. That legal strategy makes sense, since we face no such problems. Global demand for U.S. debt remains robust, and we do not struggle to pay for imports of goods and services either. If anything, it is remarkable how much debt we can issue at low cost, even as the president routinely complains about the size of the trade deficit. We may have a fundamental spending problem, but certainly not an “international payments problem.”
What Congress intended with the second condition, that the actions address large and serious United States balance‑of‑payments deficits, can only be understood in the context of the early 1970s. These were the final years of the Bretton Woods system of fixed exchange rates anchored by the dollar‑gold standard. Under that regime, U.S. balance‑of‑payments deficits would imply and reflect a drain on U.S. gold and currency reserves. When this outflow became large enough, it could undermine the United States’ ability to meet its obligation to convert dollars into gold at $35 per ounce.
President Nixon’s decision to suspend convertibility in 1971 triggered the demise of that system, which fully ended with the 1976 Jamaica Accords. Since then, we have operated under a regime of floating exchange rates in which “large and serious balance‑of‑payment deficits” as envisioned in Section 122 can literally no longer exist. Foreign governments can no longer come to the United States to exchange dollars for gold, and if the dollar becomes misaligned, the exchange rate simply adjusts rather than requiring a government bailout.
To illustrate how irrelevant the concept became under the new international monetary order, it is worth noting that the Commerce Department’s Bureau of Economic Analysis ceased publishing overall payments balances soon after the Jamaica Accords were signed. Janice Westerfield explained this well in the November/December 1976 issue of the Federal Reserve Bank of Philadelphia’s Business Review: “As the international monetary system moved to floating exchange rates, these overall measures came to be misinterpreted by the public.”
Strangely, the government now appears to be intentionally misreading balance‑of‑payment statistics. It argues that, instead of the specific balances of concern under Bretton Woods—whose figures it no longer publishes—one can select whatever balance sheet figure suits its purpose from the Balance of Payments (the capitalized term here indicating the statistical statement that summarizes all transactions between U.S. residents and nonresidents). The administration has invoked the balance of trade, the current account balance (a broader measure that adds income flows to the balance of trade), and several other figures. Yet just as accountants do not use “net profit” to refer to any positive number on a profit‑and‑loss statement, the term “balance‑of‑payments deficit” does not point to any single negative figure found in the Balance of Payments.
The government contends that Congress must have had some of these other concepts in mind when it made Section 122 authority conditional on balance‑of‑payments deficits, because by 1974 we had already begun moving away from Bretton Woods. But in truth, that system was not officially replaced until 1976, and the legislative record confirms that Congress did not intend Section 122 to be relevant if the fixed exchange‑rate regime had been abandoned. As the Senate Finance Committee report on the Trade Act stated: “under present circumstances such authority [to impose surcharges … for balance of payments reasons] is not likely to be utilized.”
If the administration truly believes sweeping tariffs are an appropriate response to the trade deficit, it ought to present that case to Congress and to the American people. The courts should not permit the administration to lean on a clear misreading of an outdated statute, just as they did not allow an overly expansive reading of an emergency statute.
