- US President Trump imposed new 15% tariffs under Section 122 of the Trade Act of 1974
- Economists dispute claims that the US faces a large and serious balance-of-payments deficit
- Trump's own Justice Department previously dismissed Section 122 as irrelevant for tariffs
US President Donald Trump's temporary 15 per cent tariffs, announced to replace those struck down by the US Supreme Court, may also land in legal troubles. The US President changed tactics after the American Supreme Court threw out his administration's use of a novel emergency tool—the International Emergency Economic Powers Act (IEEPA)—to implement his tariff policy. But now, economists and lawyers are questioning the legality of new duties under Section 122 of the Trade Act of 1974—a never-used statute that even Trump's own legal team dismissed as irrelevant months ago.
The Trump administration began the collection of the new 15 per cent tariffs at midnight on Tuesday, after IEEPA tariff collections were halted.
Why New Tariffs Can Face Legal Troubles
The Section 122 law allows the president to impose duties of up to 15 per cent for up to 150 days on any country to address "large and serious" balance-of-payments deficits and "fundamental international payments problems." Trump's new tariff order argued that a serious balance of payments deficit existed in the form of a $1.2 trillion annual US goods trade deficit, a current account deficit of 4 per cent of GDP and a reversal of the US primary income surplus.
But economists, including former International Monetary Fund First Deputy Managing Director Gita Gopinath, disagreed with the Trump administration's alarm. Experts pointed out that currently, the US does not face those problems. It is neither facing plunging currency, nor spiking interest rates, nor a freezing up of foreign capital flowing in.
"We can all agree that the US is not facing a balance of payment crisis, which is when countries experience an exorbitant increase in international borrowing costs and lose access to financial markets," Gopinath told news agency Reuters.
Gopinath rejected the White House's claim that a negative balance on the US primary income for the first time since 1960 was evidence of a large and serious balance of payment problem.
She attributed the negative balance to a large increase in foreign purchases of US equities and risky assets over the past decade, which outperformed foreign equities over this period.
"No matter how one looks at the current circumstances—the condition of the US economy, its balance of payments or its currency regime—none of these meets the standards outlined under Section 122," Axios reported, quoting RSM chief economist Joe Brusuelas.
Mark Sobel, a former US Treasury and IMF official, pointed out that balance of payments crises are more associated with countries that have fixed exchange rates and noted that the floating-rate dollar has been steady, the 10-year Treasury yield fairly stable, and US stocks performing well.
Josh Lipsky, chair of international economics at the Atlantic Council think tank, agreed, noting that a balance of payments crisis occurred when a country could not pay for what it was importing or was unable to service foreign debt. That was fundamentally different from a trade deficit, he added.
Team Trump's Earlier Stand On Section 122
In fact, the Justice Department lawyers had themselves dismissed the provision as an option last year. In court filings in its defence of IEEPA tariffs, the Justice Department said Section 122 would not have "any obvious application here, where the concerns the president identified in declaring an emergency arise from trade deficits, which are conceptually distinct from balance-of-payments deficits".
Neal Katyal, who argued at the Supreme Court on behalf of plaintiffs challenging the IEEPA tariffs, told CNBC that the Trump administration's stance against the use of Section 122 for a trade deficit will make those tariffs vulnerable to litigation.
"I'm not sure it will necessarily even need to get to the Supreme Court, but if the president adheres to this plan of using a statute that his own Justice Department has said he can't use, yeah, I think that's a pretty easy thing to litigate," Katyal said.
Legal Troubles Await Trump?
It is unclear who might take the lead in challenging the Section 122 tariffs. Sara Albrecht, chair of the Liberty Justice Center, a nonprofit, public-interest law firm representing several small businesses that challenged the IEEPA tariffs, told Reuters the group would closely monitor any new statutes being invoked.
Albrecht did not reveal any future litigation strategy, adding, "Our immediate focus is simple: making sure the refund process begins and that checks start flowing to the American businesses that paid those unconstitutional duties."
But if Trump's new order is indeed challenged, it's highly unlikely that courts would be able to definitively rule on the legality of the Section 122 tariffs within the 150 days permitted under the statute without congressional buy-in.
This allows Tea Trump more time to pursue carefully tailored tariffs on national security, unfair trade practices, and other grounds using more established legal authorities, known as Sections 232 and 301 of the relevant trade laws.
