The Tariff Argument Fails Again

By Stan Veuger & Simon Johnson

Tuesday, April 21, 2026

 

After the Supreme Court struck down President Donald Trump’s global tariff regime, for which he cited the 1977 International Emergency Economic Powers Act, the administration imposed a new set of worldwide 10 percent tariffs based on Section 122 of the 1974 Trade Act. These tariffs will supposedly stay in place for the statutory maximum of 150 days, while the administration presumably prepares a long-term protectionist regime.

 

Setting aside the economic harm these new tariffs inflict, they represent yet another attempt to circumvent the congressional power to “lay and collect Taxes, Duties, Imposts and Excises” (Article I, Section 8, Clause I of the U.S. Constitution). The administration admitted as much in court earlier this month while defending the tariffs in a suit seeking to overturn them, surprising the panel of judges by directly linking the imposition of the Section 122 tariffs to the demise of its IEEPA tariffs.

 

But Section 122, like IEEPA, does not provide the president with broad tariff powers. Instead, it is predicated 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.

 

He can do so for any of three enumerated purposes. The first one of these purposes, the one invoked by President Trump, is “to deal with large and serious United States balance-of-payments deficits.” A balance-of-payment deficit here refers to a drain on monetary reserves, including gold. If that sounds quixotic, it is because the language only makes sense in 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 have to be met for Section 122 to authorize the 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, that fundamental international payments problems exist, is not seriously argued by the government, which instead claims it is merely a prefatory phrase. That legal strategy makes sense, as we face no such problems. There is ample global demand for U.S. debt, and we do not struggle to pay for imports of goods and services either. If anything, it is surprising how much debt we are able to issue at low cost, while the president frequently complains about the size of the trade deficit. We may have a fundamental spending problem, but certainly not an “international payments problem.”

 

What Congress meant by the second condition, that the actions serve to deal with 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 system, U.S. balance-of-payments deficits would result in (and reflect) a drain on U.S. gold and currency reserves. When this outflow was large enough, it could undermine the U.S. ability to meet its obligation to convert dollars into gold at a rate of $35 an ounce.

 

President Nixon’s decision to suspend convertibility in 1971 triggered the demise of this system, which came to a definitive end with the 1976 Jamaica Accords. Since then, we have lived in a system of floating exchange rates under 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 overvalued, the exchange rate simply adjusts instead of us having to prop it up.

 

To provide a sense of how irrelevant the concept rapidly became under the new international monetary regime, it perhaps suffices to note that the Commerce Department’s Bureau of Economic Analysis ceased publication of overall payments balances shortly after the Jamaica Accords were signed. Janice Westerfield explained this well in the November/December 1976 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.”

 

Weirdly, the government itself is now intentionally misinterpreting balance-of-payment statistics. It argues that instead of the specific balances that were of concern under Bretton Woods—and which it no longer publishes—it can pick and choose whatever balance it likes from within the Balance of Payments (capitalized here to indicate that we are talking about the statistical statement, which summarizes all transactions between U.S. residents and non-residents). The administration has brought up the balance of trade, the current account balance (a broader measure that adds a set of income flows to the balance of trade), and various other numbers. But just as accountants do not use the term “net profit” to refer to any positive number reported somewhere in a profit-and-loss statement, the term “balance-of-payment deficit” does not refer to any single negative number reported in the Balance of Payments.

 

The government argues 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 started moving away from Bretton Woods. But, in fact, that system was not officially replaced until 1976, and the legislative record confirms that Congress did not expect Section 122 to be relevant if the fixed exchange rate system were abandoned. As the Senate Finance Committee report on the Trade Act explained: “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 should make that case to Congress and to the American people. The courts should not let the administration rely on a clear misinterpretation of an outdated statute, just as they did not let the administration rely on an overly expansive reading of an emergency statute.