Guest Post: President Trump Cannot Legally Impose Tariffs Using Section 122 of the Trade Act of 1974

This is a guest post by Bryan Riley, Director of the National Taxpayers Union’s Free Trade Initiative

If the Supreme Court strikes down nonreciprocal tariffs imposed under the International Emergency Economic Powers Act (IEEPA), the Trump Administration reportedly plans to re-impose some of the tariffs by citing authorities in other laws. Some of these provisions, such as Section 301 of the Trade Act of 1974 or Section 232 of the Trade Expansion Act of 1962, have already been utilized by Trump as well as previous presidents. One never-before used provision that some officials assert Trump can use to immediately impose new tariffs of up to 15% is Section 122 of the Trade Act of 1974.

They are wrong. Section 122 allows for the president to impose temporary tariffs in the case of fundamental international payments problems. The United States does not have an international payments problem, fundamental or otherwise, and has not had one since we adopted a floating exchange rate more than five decades ago. Therefore, Section 122 does not give President Trump the legal authority to impose tariffs.

What is a “fundamental international payments problem”?

Section 122 does not define the phrase “fundamental international payments problems.” However, its meaning is clear from historical context. The provision was designed to address international payments crises that may arise under systems of fixed or managed exchange rates.

Under the Bretton Woods system that was adopted after World War II, most of our trading partners pegged their currencies to the U.S. dollar, which the United States would maintain at a value of $35 per ounce of gold. But, by the late 1960s, there wasn’t enough gold in Fort Knox to cover the growing volume of dollars held abroad. This created a problem that came to a head in 1971, when European nations and Japan began converting their dollar holdings into gold.

President Nixon responded on August 15, 1971 by ending the gold standard and imposing a temporary 10% surcharge on imports to protect against a possible surge of imports resulting from foreign currencies that were allegedly undervalued. Nixon’s import surcharge was challenged in court as unauthorized under existing law. (It was ultimately dropped that December as part of the Smithsonian Agreement after other countries agreed to strengthen their currencies.)

Section 122 of the Trade Act of 1974, introduced on October 3, 1973, was created in response to these developments. Its purpose was to provide specific statutory guidelines governing the use of such surcharges in the future. 

The narrow scope of Section 122

Section 122 allows the president to impose a temporary import surcharge of up to 15% (or an import quota) for up to 150 days “[w]henever 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, ...”

Thus, there are multiple conditions that must be met in order for the president to impose duties under Section 122. First, the duties may only be applied if the United States is experiencing fundamental international payments problems; and second, the duties must be designed for one of the three purposes set out in the statute.

Section 122 only makes sense under a fixed exchange rate regime, under which the United States could experience a shortage of reserves needed to cover its international obligations.

This was the situation in 1971. But, it no longer applied by the time the Trade Act was introduced. In March 1973, the United States adopted a system of floating exchange rates, which allows currency values to adjust according to market forces. This eliminated the need for the government to maintain reserves to defend a fixed dollar value. As economist Milton Friedman explained, “a system of floating exchange rates completely eliminates the balance-of-payments problem. The [currency] price may fluctuate but there cannot be a deficit or a surplus threatening an exchange crisis.”

As a result, Section 122 was effectively rendered obsolete and has never been invoked. 

Bottom line

Section 122 only authorizes tariffs in the presence of a fundamental international payments problem. Because the United States does not face such a problem, Section 122 cannot legally be used by President Trump to impose new tariffs.