U.S. President Donald Trump has recently enacted a new set of global tariffs, invoking a seldom-used trade provision from 1974 amid claims of a significant balance-of-payments deficit—a stance that has drawn skepticism from several economists and investors. This decision follows a Supreme Court ruling on February 20, which concluded that Trump had overstepped his authority by implementing prior tariffs using a 1977 emergency powers statute.
To circumvent the limitations set by the court, Trump activated Section 122 of the Trade Act of 1974. This provision allows the president to impose tariffs for up to 150 days in response to “fundamental international payments problems,” including significant deficits or depreciation of the dollar. In the wake of this action, the president introduced an initial 10 percent tariff, later increasing it to 15 percent.
Treasury Secretary Scott Bessent remarked that these tariffs are temporary measures aimed at maintaining revenue while developing more sustainable ones under different legal authorities. Bessent characterized Section 122 as a “robust authority” but did not indicate that the tariffs were essential to resolve any specific payment crisis.
In the executive order detailing the new duties, Trump highlighted the trade deficit and the U.S.’s net international investment position, which currently stands at a staggering $26 trillion deficit. This figure represents the difference between U.S.-owned assets abroad and foreign-held assets in the United States. However, economists note that high U.S. equity valuations have significantly contributed to this widening investment gap. Many assert that the U.S. economy is not facing any issues meeting external obligations; financial markets reflect stability, and the dollar remains strong.
Former IMF Deputy Managing Director Gita Gopinath stated that the U.S. does not have a fundamental international payments problem, adding that the newly imposed tariffs are unlikely to reduce the trade deficit significantly. Furthermore, Jay Shambaugh, a former Treasury official, echoed these sentiments, asserting that financial inflows have been sufficient to cover the trade deficit.
Critics of the administration’s rationale—including Mark Sobel, a former senior Treasury official—argue that the justification for the tariffs stems from outdated economic perspectives born out of earlier fixed exchange rate systems. Sobel emphasized that the focus should be on long-term fiscal outlooks rather than short-term trade deficits.
Historically, the last time tariffs were explicitly implemented to tackle balance-of-payments issues was in 1971, under President Richard Nixon. Congress later enacted Section 122 to restrict presidential tariff authority in light of Nixon’s actions. Some economists argue the administration may possess a partial justification for invoking this provision; however, determining whether the U.S. is facing real “fundamental international payments problems” remains a complex issue.
As the situation evolves, it is possible that the new tariffs will face further legal scrutiny. Jennifer Hillman, a former trade judge, indicated that it remains uncertain whether the administration has fulfilled the necessary conditions under Section 122. Legal expert Neal Katyal expressed skepticism regarding the applicability of this section to the current context, adding that prior administration claims had suggested it was not suitable for similar situations.
As these tariffs take effect, the debate surrounding their legality and economic rationale is expected to continue, highlighting a crucial intersection of trade policy and legal authority. While this move generates significant discussion, the overarching sentiment among many economists is that the U.S. economy remains resilient and capable of managing its financial responsibilities. This might provide hope that these measures, viewed as temporary and transitional, will pave the way for more stable and effective economic policies in the future.