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.
