Clark Packard and Alfredo Carrillo Obregon
On February 20, the Supreme Court correctly struck down President Trump’s tariffs invoked pursuant to the International Emergency Economic Powers Act (IEEPA). The administration’s response was swift and naturally chaotic: it replaced the IEEPA tariffs with 10 percent duties imposed under Section 122 of the Trade Act of 1974, citing large trade deficits as justification. Like their predecessors, these new tariffs almost certainly violate the law.
What Section 122 Actually Says
Section 122 was enacted in the early 1970s, around the time the United States was transitioning away from the Bretton Woods system of fixed exchange rates. The statute authorizes the president to impose temporary import tariffs of up to 15 percent—or other trade restrictions such as quotas—for up to 150 days (absent an affirmative congressional vote to extend them) in response to “situations of fundamental international payments problems.” The statute defines such circumstances as “large and serious United States balance-of-payments deficits and/or circumstances” in which the dollar faces “imminent and significant depreciation.”
The administration now claims that invoking Section 122 is necessary to address the United States’ large trade deficit. But the trade deficit is not the balance of payments, and conflating the two represents a serious distortion of the statute’s plain terms. In fact, another provision in Section 122 authorizes the president to enact temporary trade-liberalizing measures to address “fundamental international payments” problems by dealing with “large and persistent United States balance-of-trade surpluses.” (Emphasis added.) It is therefore hard to imagine that Congress intended for the distinct concepts of the balance of payments, on one hand, and the balance of trade, on the other, to be used interchangeably. A Senate Finance Committee report on the Trade Act of 1974 provides further evidence that Congress understood the balance of payments to be distinct from the balance of trade.
The Economics Are Clear
The balance of payments summarizes all the economic transactions between a country and the rest of the world. It has three components: the current account, the financial account (including reserve assets), and the capital account. The balance of trade is one component of the current account, which encompasses trade in goods and services, as well as investment income flows. When the US runs a current account deficit (as it does today), capital inflows (i.e., the capital and financial accounts) essentially offset it dollar-for-dollar. The opposite is also true, as the balance of payments must, in theory, equal zero (i.e., a current account surplus must be offset by capital outflows).
Under the Bretton Woods fixed-exchange system, countries agreed to fix their currency values at a specific exchange rate relative to the US dollar, which was convertible to gold at a fixed rate of $35 an ounce. Under this system, a country facing an excess of payments relative to receipts had to either devalue its currency or use its foreign reserves to finance the imbalance. The United States ran current account surpluses during much of the Bretton Woods era, yet registered larger net financial outflows by the 1960s due to a combination of military spending, foreign aid, and foreign investment. As foreigners holding these US dollars sought to convert them to gold, the US used its official gold reserves to finance this imbalance and maintain the value of the dollar. Economist Phil Magness thus notes that a balance of payments “deficit” referred to a negative transaction balance in official reserves. Ultimately, the US “printed” too many dollars for other countries to remain confident in the system, and it broke down, giving way to a floating exchange rate system that still exists today.
Under the current international monetary regime of floating exchange rates, a country that does not regularly intervene in foreign exchange markets to peg its currency and does not suffer from insufficient capital inflows (such as the US) does not need to use its foreign reserves to finance an imbalance between international payments and receipts. Its currency can freely depreciate and thereby prop up its exports and domestic assets. (Milton Friedman actually proposed a floating exchange rate as a solution to balance-of-payments problems in the 1960s: “a system of floating exchange rates eliminates the balance-of-payments problem […] the [currency] price may fluctuate, but there cannot be a deficit or a surplus threatening an exchange crisis.”)
Fast forward to today, and as the Peterson Institute’s Kimberly Clausing and Maurice Obstfeld note, the United States’ floating exchange rate and large supply of attractive financial assets mean it can finance its large current account deficits. Gita Gopinath, a former senior official at the International Monetary Fund and current Harvard economics professor, concluded similarly on social media: “As long as there is plenty of demand for US debt and equities, which is the case, the US does not have a ‘payments’ problem. It can finance its trade deficits easily.” Indeed, though the US has the largest trade deficit in the world, it also enjoys the largest financial account surplus. Virtually no serious economist, therefore, believes the United States has a “large and serious balance-of-payments deficit.”
The Administration’s Own Lawyers Admitted It
Perhaps more damaging, the Trump administration’s own Department of Justice (DOJ) acknowledged that Section 122 does not apply to the current situation. During the IEEPA litigation at the Court of Appeals for the Federal Circuit, the DOJ’s reply brief noted that Section 122 has “no application [to the current situation], where the concerns the President identified in declaring an emergency arise from trade deficits, which are conceptually distinct from balance-of-payments deficits.” Though the DOJ dropped this line of argument at the Supreme Court, the administration cannot credibly argue otherwise now. And for the reasons outlined in the preceding sections, it would prove difficult to demonstrate that Section 122 authorizes tariffs to deal with trade deficits.
Courts Should Grant Injunctive Relief
The Trump administration likely invoked Section 122 precisely because it understands that a legal challenge is unlikely to be fully litigated in the 150 days permitted by the statute. The administration has made clear that Section 122 will serve as a bridge authority as it readies Sections 301 and 232 tariffs to roughly recreate the tariff architecture it illegally established under IEEPA.
Courts hearing challenges to Section 122 should carefully scrutinize the administration’s legal arguments. Under eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006), a plaintiff seeking a permanent injunction, such as the one handed down by the Court of International Trade (CIT) in its initial decision on the IEEPA tariffs case, must show: “(1) that it has suffered an irreparable injury; (2) that remedies available at law […] are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and the defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.” Plaintiffs might find encouragement in the fact that the CIT found the four factors to be present in the IEEPA tariffs case, though it explained this only after it had already handed down its ruling.
That said, the scope of such an injunction might be limited in light of the Supreme Court’s decision in Trump v. CASA, Inc., 145 S. Ct. 2540 (2025), which led the Court of Appeals for the Federal Circuit to vacate and remand the universal injunction that the CIT granted in the IEEPA tariffs case. Overshadowing the prospect for injunctive relief, moreover, is the fact that protracted litigation is unlikely to be resolved before the 150-day mark when the Section 122 tariffs expire (assuming Congress does not vote to extend them).
The Bottom Line
Once again, the Trump administration has demonstrated no fidelity to the rule of law in pursuit of economically destructive protectionism. If the president wants the authority to impose these sweeping tariffs, the proper course is to go to Congress and ask for it. Given that 2026 is an election year and how deeply unpopular the tariffs have become, that seems unlikely. Instead, the administration will likely continue its pattern of legal improvisation—hoping to keep the Section 122 tariffs in place long enough to run out the 150-day clock while it works to roughly reconstruct the IEEPA tariff regime through Sections 301 and 232.
