New Tariffs Imposed by President Trump
President Trump has implemented new tariffs under Section 122 of the Trade Act of 1974. This section allows for temporary restrictions on imports when the U.S. is experiencing “fundamental international payment problems.” This includes situations where there is a “large and severe” balance of payments deficit. Although not a term used frequently outside of economic discussions, it essentially deals with a country’s financial interactions with the global market.
The balance of payments serves as a detailed record of all economic exchanges between a country and others. This encompasses trade in goods and services, income generated from foreign investments, capital movement across borders—including stock and bond transactions—and variations in public reserves.
From a strict accounting perspective, the balance of payments is always in balance. In simpler terms, the money exiting a country must equal the money entering. However, when the term “deficit” is used, it typically refers to a long-term imbalance in trade and income, known as the current account balance. This imbalance usually requires financing through borrowing or selling domestic assets to foreign investors.
Historically, during periods of fixed exchange rates, like the post-war Bretton Woods system, continued fiscal deficits often drained gold and foreign reserves as governments intervened to uphold their currencies. Today, with floating exchange rates, adjustments usually arise from capital infusions from abroad or fluctuations in currency values, or a combination of both.
The U.S. has been grappling with a current account deficit for many years, primarily financed through foreign investments in U.S. assets, such as Treasury bills and corporate stocks. This doesn’t indicate that the deficit will simply vanish, but rather that it has evolved into a financialized issue.
Some critics point out that, under a floating exchange rate system, balance of payments deficits are theoretically impossible since the balance should always reflect equivalency. Economists tend to use the term to address ongoing external imbalances requiring continuous financing or adjustment, rather than focusing on precise accounting inconsistencies.
Section 122 employs language that was prevalent during its creation. Whether the present circumstances in the U.S. align with the statute’s criteria is subject to interpretation and depends on presidential discretion.
