Why Trump’s Critics Are Misguided About Tariff Powers and Balance of Payments
The Trump administration has relied on Section 122 of the Trade Act of 1974 to enforce interim tariffs, which has sparked intense criticism from economists and trade experts who oppose him. For instance, former IMF chief economist Geeta Gopinath mentioned on social media that the United States is not facing a “balance of payments problem.” Some assert that a balance of payments deficit is “impossible” with a floating exchange rate, claiming the law is not applicable.
However, these critics seem to miss the mark. The authority for such measures is present and quite robust; the administration is well aware of this.
This wasn’t just a spur-of-the-moment decision. The administration had, for months, been structuring the Article 122 framework, building a case that the Act allows for temporary tariffs in response to declining international standing. A thorough examination of the law and its legislative history demonstrates that Article 122 does indeed authorize temporary import surcharges when the U.S. faces significant international payment issues.
Understanding Article 122’s Customs Authorization
Section 122 permits the President to impose temporary import surcharges or quotas if “fundamental international payment issues” necessitate special restrictions. Three specific triggers are identified: addressing a “large and serious” balance of payments deficit, shielding against a potential significant depreciation of the dollar, and collaborating to rectify imbalances in payments.
But it’s not an unchecked authority. There are considerable restrictions. Tariff measures initiated by the President can last for a maximum of 150 days unless Congress decides to extend them. The highest customs duty allowed is capped at 15%. Moreover, quotas can only be implemented in line with international agreements and when surcharges alone wouldn’t suffice. This structure clearly indicates that Section 122 is about providing the President with a limited delegation of authority for temporary import restrictions.
The Argument Against “Impossibility with Variable Interest Rates” Falls Short
A widespread criticism suggests that a balance of payments deficit is “impossible,” asserting that with floating exchange rates, the balance of payments always equals zero. According to this view, current account deficits are counterbalanced by capital inflows, meaning a “balance of payments deficit” could only happen under fixed exchange rates. But there’s a crucial flaw here: Congress passed Section 122 after the U.S. had adopted a floating exchange rate.
The Bretton Woods system initially tied some currencies to the dollar and the dollar to gold at fixed rates, but that collapsed in the early ’70s. Following the Nixon Shock in August 1971, the connection between the dollar and gold ended, leading to fluctuating currencies in March 1973. The Trade Act of 1974 was signed into law on January 3, 1975.
If a “balance of payments deficit” only applied within a fixed rate system, Congress would have included a trigger that couldn’t possibly pertain to the U.S. from the outset. Courts don’t interpret the law in that manner; the norms against redundancy and absurdity call for readings that maintain the law’s relevance in the context Congress intended.
Generally, a more fitting interpretation from the 1970s is that a balance of payments deficit refers to persistent external imbalances needing adjustments—issues like current account deficits and rising debt, rather than a mere mismatch in accounting totals.
Legislative History Supports the Law’s Operability
What does this mean? Looking at reports from the Senate Finance Committee concerning trade law, there is a distinct emphasis on needing “explicit legal authority,” especially after a Customs Court ruled a tariff imposed by Nixon was unauthorized. Section 122 was, therefore, Congress’s way to offer clear authority for future administrations to react to external payment challenges without relying on post hoc legal reasoning.
While Gita Gopinath’s critique is more nuanced, it still has its limitations. She argues that the U.S. doesn’t have a balance of payments issue, suggesting that Trump doesn’t have the authority under Section 122 because such issues arise from market access loss, indicated by a sharp uptick in borrowing costs. According to her perspective, the U.S. doesn’t face a payment problem given the ongoing strong demand for U.S. bonds and stocks.
While this viewpoint aligns with the IMF’s considerations in modern crises, it doesn’t accurately reflect what Congress intended in 1974. The IMF’s framework has evolved, shaped through various crises like those in Latin America during the ’80s and Asia in the late ’90s, primarily focusing on determining when nations need emergency financing without dictating the President’s authority under the law.
If market access loss was the trigger, then Section 122 wouldn’t be a logical solution. The IMF’s strategies tend to revolve around restoring confidence and financing rather than imposing tariffs or quotas.
The Senate Finance Committee referenced historical instances from France in 1955, Canada in 1962, and the U.S. itself in 1971 among others, as precedents for balance of payments tariffs. These weren’t simply financial crises but episodes of significant external pressures regarding exchange rates and reserves needing management.
Congress’s understanding focused on managing external payment stress, highlighting that it isn’t solely about catastrophic financial breakdowns but about dealing with persistent imbalances and deteriorating international standings.
The argument that Article 122 is ineffective under floating exchange rates essentially suggests Congress’s words were meaningless when enacted. Additionally, claiming that Section 122 requires a crisis of access misreads the legal landscape from 1974, which Congress did not adopt.
Ultimately, Section 122 stands as a valid law designed for a post-Bretton Woods context. It functions as a temporary adjustment mechanism, supported by legislative history indicating Congress wished for its continued availability, even if rarely utilized. It’s evident that the Trump administration possesses the authority to enact tariffs under Section 122.
