Tariffs and "International Payments Problems"
It has long been accepted that tariffs are an acceptable tool for managing balance of payments issues. The real question is whether they would be useful for the U.S. in 2026.
Last week, the Supreme Court ruled that the arbitrary imposition of tariffs using the International Emergency Economic Powers Act (IEEPA) was illegal. But their reasoning was somewhat strange. Rather than address whether there are any ongoing emergencies that would justify the capricious use of tariffs, as the administration claimed, the justices instead argued about the meaning of the word “regulate”.
Now the administration has come back with a different legal justification—Section 122 of the Trade Act of 1974—for a new set of tariffs. Quite a few lawyers and economists have argued that this is also illegal.
Unlike IEEPA, there is no ambiguity about whether the words in the law allow the administration to impose tariffs and/or quotas. But there is a debate, summarized nicely by Adam Tooze, about whether the circumstances that could enable the use of worldwide tariffs under section 122 are even possible in 2026. The law is only supposed to be used when:
Fundamental international payments problems require special import measures to restrict imports— (1) to deal with large and serious United States balance-of-payments deficits, (2) to prevent an imminent and significant depreciation of the dollar in foreign exchange markets, or (3) to cooperate with other countries in correcting an international balance-of-payments disequilibrium
What are “fundamental international payments problems”? What are “large and serious United States balance-of-payments deficits”? What is an “international balance-of-payments disequilibrium”?
I am not a lawyer, but I know enough about both the history of this period and how the balance of payments work to take a stab at answering these questions. My conclusion is that Section 122 tariffs are allowed, even though they would also be unhelpful. (Part of the issue is that the drafters of Section 122 seem to have been confused about what it was supposed to do.)
The rest of this note will cover the following:
The bipartisan track record of abusing wartime authorities to manage the financial system, and how this led to both Section 122 and IEEPA
The important difference between what the Supreme Court ruled and what the Court of International Trade said back in May
The traditional links between balance of payments management and trade controls, and whether those make sense
The history of the U.S. “balance of payments deficit”, “exorbitant privilege”, and the end of the Bretton Woods pseudo-gold standard
What people thought about Section 122 and balance of payments management at the time
The current U.S. balance of payments situation and how tariffs might alter that situation
“Trading with the Enemy” as Macroprudential Regulation
Immediately after taking office in March 1933, Franklin Delano Roosevelt decreed that “all banking transactions shall be suspended”. FDR claimed that the legal authority for this extreme act “is provided in Section 5 (b) of the Act of October 6, 1917”, which was more commonly known as the Trading With the Enemy Act (TWEA). FDR knew that using a wartime law to manage a peacetime banking crisis was dubious, which is why he convinced Congress to pass a new banking law within days.
That was not the last time that this WWI measure was broadly interpreted. In 1968, Lyndon Johnson used the same section of the law, once again obliquely cited as “the act of October 6, 1917”, to justify restrictions on transfers of dollars abroad via foreign direct investment. LBJ also claimed that Truman’s declaration of an ongoing national emergency during the Korean War highlighted “the importance of strengthening the balance of payments position of the United States”. It was a strange way to do macroprudential regulation, but it was allowed under the law at the time.
Then in August 1971, Richard Nixon imposed a “surcharge” of 10% on all “dutiable imports”. At the time, he cited his authority under the Tariff Act of 1930, more commonly known as Smoot-Hawley, and the Trade Expansion Act of 1962. But when the government was sued by importers, administration lawyers also cited the TWEA, on the grounds that they had the authority to regulate cross-border transactions in an emergency. (They lost the case.)
LBJ and Nixon were both responding to the same problem, which was a real problem, even if their methods were questionable. Congress eventually changed the law to constrain presidential power while also giving them the tools to manage these challenges. Section 122 was meant to be an improvement over what Nixon did, which is why it includes a fixed time limit “unless such period is extended by Act of Congress”. It is also explicit that any tariff follow “the principle of nondiscriminatory treatment” and that “neither the authorization of import restricting actions nor the determination of exceptions with respect to product coverage shall be made for the purpose of protecting individual domestic industries from import competition”. Similarly, IEEPA was meant to be a constrained version of TWEA that could be used outside of wartime in exchange for tighter limits and more Congressional oversight.
IEEPA vs. Section 122: Why the CIT Ruling Matters
IEEPA clearly gives the executive branch sweeping power to engage in financial sanctions, export controls, asset seizures, and embargoes, among other things, in response to “any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States”.1 However, it does not explicitly grant unlimited presidential discretion to increase taxes on imports.
Being literalists, the majority of the Supreme Court ruled that IEEPA, which gives the president the power to “regulate, direct and compel, nullify, void, prevent or prohibit, any acquisition, holding, withholding, use, transfer, withdrawal, transportation, importation or exportation of, or dealing in, or exercising any right, power, or privilege with respect to, or transactions involving, any property in which any foreign country or a national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States” was not the same as the authority to impose tariffs.
While one might think that the power to regulate or prevent any transaction involving any foreign national and anyone subject to U.S. jurisdiction would include the power to make imports somewhat more expensive, the majority argued that this was not so, because tariffs are taxes, and tax policy is the domain of Congress. Congress can, and has, explicitly delegated its authority to impose tariffs under clearly defined circumstances, but apparently it did not do so in IEEPA because the word “tariff” is missing from the text. Without that explicit permission, the Supreme Court majority declared that the IEEPA tariffs were illegal.
Perversely, this suggests the administration might have won if they had chosen to ban imports from certain countries outright, or used quotas to limit how much could be imported, rather than relying on price-based measures that happened to raise revenue.
By contrast, the Court of International Trade, which first heard the challenges to the tariffs, was explicit that the “reciprocal” IEEPA tariffs were illegal because the trade deficit was not an emergency.2 Moreover, they noted that the government always had the option to use Section 122 to impose tariffs to manage the trade deficit. The key difference was that this law limited the president’s ability to impose tariffs arbitrarily:
In 1974, Congress enacted the Trade Act, including Section 122 dealing with remedies for balance-of-payments deficits…Section 122 sets specific limits on the President’s authority to respond to balance-of-payments problems, such as a 15 percent cap on tariffs and a maximum duration of 150 days. Congress’s enactment of Section 122 indicates that even “large and serious United States balance-of-payments deficits” do not necessitate the use of emergency powers and justify only the President’s imposition of limited remedies subject to enumerated procedural constraints…Trade deficits are one of the key balance-of-payment deficits and can be directly impacted by mechanisms such as import quotas and tariffs, as authorized by Section 122. As a result, tariffs responding to a trade deficit fit under Section 122.
While the Court of International Trade is not necessarily the last word on this question, the fact that they explicitly endorsed the use of Section 122 to address the administration’s concerns seems like an important indicator of whether the new tariffs are legal. As Peter Harrell noted, the Court was explicit that Section 122 “refers, necessarily, to deficits within the various accounts comprising the balance-of-payments (including the trade of goods) rather than to an overall summary deficit, because there cannot be a balance-of-payments deficit per se.”
We do not need to take their word for it. There are plenty of reasons to think that Section 122 tariffs would be legal under today’s circumstances, although not necessarily helpful.
Tariffs as Balance of Payments Tool: GATT and the IMF
The founders of the post-WWII order were explicit that trade openness depended on international financial stability. Following Keynes, they knew that the threat of capital flight was a legitimate justification for mercantilist trade restrictions, which was they wanted to create institutions to prevent balance of payments crises. The International Monetary Fund (IMF) says it exists to “facilitate the expansion and balanced growth of international trade” precisely because its founders believed that balance of payments crises were a valid reason to restrict trade.
The General Agreement on Tariffs and Trade (GATT), which later evolved into the World Trade Organization (WTO), was explicit that any member was allowed to use broad-based import restrictions “in to order safeguard its external financial position and its balance of payments” as long as they notified other members and engaged in consultations. Originally, this procedure was only meant to allow import quotas that were otherwise supposed to illegal. Tariffs and other “price-based measures” for managing the balance of payments were apparently allowed with no restrictions.
The U.S. Senate Finance Committee’s report on Section 122 noted that many countries other than the U.S. had taken advantage of this over the years, including France (1955), Canada (1962), the U.K. (1968), and Denmark (1971), but those episodes occurred outside of any formal legal framework, just like Nixon’s 1971 tariffs. Congress therefore wanted the new law to help “the President seek modifications in international agreements aimed at allowing the use of surcharges in place of quantitative restrictions and providing rules to govern the use of such surcharges as a balance-of-payments adjustment measure”.
That is what ended up happening. The basic language of the original GATT has persisted into modern times, but there was a shift in 1979 away from using import quotas in favor of “import surcharges, import deposit requirements or other equivalent trade measures with an impact on the price of imported goods”, with “quantitative restrictions for balance-of-payments purposes [allowed only when] price-based measures cannot arrest a sharp deterioration in the external payments position”.
So tariffs are allowed in response to a balance of payments “problem”. Answering when that would be depends on understanding what the balance of payments actually represents.