Guest Post: Are President Trump’s New Section 122 Tariffs Legal?
This is a guest post from Bryan Riley and Joe Bishop-Henchman. Bryan is Director of the Free Trade Initiative at the National Taxpayers Union; Joe is Executive Vice President at the National Taxpayers Union Foundation
President Trump has issued new 10% tariffs, shortly after raised to 15%, based on Section 122 of the Trade Act of 1974. Section 122 allows the President to impose tariffs of up to 15% for up to 150 days to address a “fundamental international payments problem.” Continuation after 150 days requires congressional approval.
Just like his attempt to impose tariffs under the International Emergency Economic Powers Act, his new Section 122 tariffs are not legal. That’s because the purpose of Section 122 tariffs is to address international payments problems that arise under a fixed exchange rate system. The United States has not relied on fixed exchange rates since Nixon was president.
This is not a novel interpretation of the law. In its reply brief to the U.S. Court of Appeals for the Federal Circuit, the Department of Justice wrote: “Nor does [Section 122] 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.” Even the dissenting judges on the Court of Appeals who upheld the tariffs found Section 122 doesn’t apply to current international circumstances: “section 122 does not apply to the problems underlying the reciprocal tariffs, which are not the payments problems that are the precondition to section 122’s application.”
Section 122’s Historical Background
The Nixon Administration began drafting a Trade Reform Act in 1972, which included what became Section 122. The United States had a system of fixed exchange rates at the time. Section 122 was subsequently included in the Trade Act of 1974.
Section 122, sub-paragraph (a) requires the existence of a “fundamental international payments problem” as a prerequisite for tariffs. However, it does not define the meaning of the phrase.
That is because there was no need to. At the time, everyone would have understood the phrase to refer to international payments problems resulting from the government attempting to maintain the value of the dollar under our fixed exchange rate system.
Importantly, the statute does not mean “whenever the president asserts there is an international payments problem.” If that is what the drafters of Section 122 had meant, they would have written something like “Whenever the President determines there is a fundamental international payments problem.” In fact, this exact language was used in sub-section (c) of Section 122, relating to liberalizing imports, which shows that the drafters knew how to use language that defers to the president. By not taking this approach in sub-section (a), the drafters created a provision that requires an objective determination of whether such a fundamental international payments problem exists.
Comparisons to other trade laws are informative here as well. Section 122 differs significantly from other laws that delegate tariff authority to the executive branch, including Section 201 of the Trade Act of 1974, Section 301 of the Trade Act of 1974, and Section 232 of the Trade Expansion Act of 1962. Each of these requires the federal government to conduct investigations before tariffs can be imposed. There was no need for such an investigation under Section 122, because international payments problems would have been self-evident under the fixed exchange rate system of the day.
This is further evident from Section 122’s text explaining that, if (and only if) the United States is facing international payments problems, the President may impose tariffs to deal with balance of payments deficits or to correct an international balance of payments disequilibrium.
Those problems only arise under a fixed exchange rates system.
Section 122 can be invoked to deal with “a fundamental international payments problem” and “large and serious United States balance-of-payments deficits.” These terms do not refer to trade deficits or investment flows, but to the outflow of currency reserves that occurred under the Bretton Woods fixed-exchange system between 1945 and 1971. Most years during that period, dollars and gold flowed out of the United States as we financed European and Japanese recovery and a world trade system denominated in dollars. Our gold and dollar reserves were steadily drained toward zero, while those in other countries grew. When foreign central banks began exchanging these dollars for U.S. gold reserves, they created a payments problem for the United States, which didn’t have enough gold in reserve to cover all the outstanding dollars. President Nixon responded by imposing a 10% import surcharge and suspending the ability to convert dollars to gold. Section 122 was a response to these developments.
Under our modern system, all U.S. international accounts are balanced. As the U.S. Court of International Trade wrote last year, “The balance-of-payments is the [r]ecord of transactions between U.S. residents and foreign residents during a given time period . . . includ[ing] transactions in goods, services, income, assets, and liabilities,’ and always balances to zero.” (Those interested in a more detailed understanding may want to review explanations from the Federal Reserve Bank of Saint Louis in Why Does the Balance of Payments Equal Zero? and by the Congressional Research Service in The Balance of Payments: Meaning and Significance.)
Similarly, Section 122’s reference to “disequilibrium” is meaningless today. Under our modern floating-rate system, international accounts automatically adjust to equilibrium based on the supply and demand for dollars, with no need for federal payments to defend the dollar’s value.
Trump’s Section 122 tariff proclamation fails to demonstrate the existence of a fundamental international payments problem.
A legitimate international payments problem and balance of payments disequilibrium under Section 122 would require a fixed-exchange rate system. Because the United States ditched that system over five decades ago, Section 122 cannot be legally used to impose new tariffs. Certainly, the Trump Administration’s tariff proclamation fails to provide a satisfactory justification.
The Trump Administration could have made a more plausible argument to get around the “international payments problem” roadblock by suggesting that tariffs are needed to support payments on U.S. Treasury securities. However, that’s clearly not the case. Foreign investors continue to purchase federal debt, including $609 billion of U.S. Treasury securities in 2024 and another $500 billion in the first three quarters of 2025. They would not continue to purchase federal debt if they doubted the ability of the United States to make payments on their bonds. Recent history shows that tariffs actually may impede Treasury sales. Global investors initially responded to the imposition of Liberation Day tariffs last year by dumping U.S. Treasury bonds.
Since there is no overall balance of payments deficit, Trump’s proclamation suggested tariffs are necessary to address the trade deficit. That is incorrect. Tariffs may reduce imports by increasing their cost, but they also reduce exports by depriving our trading partners of the ability to earn dollars to spend on U.S.-made products, with no clear impact on the trade deficit. In 2025, for example, the real U.S. trade deficit in goods increased by 5.7% despite an increase in tariffs to the highest level since the 1940s. Tariffs result in less trade; they do not necessarily reduce trade deficits.
The Trump Administration further suggests our “negative net international investment position” shows we have an international payments problem. A negative international investment position results when foreign investment in the United States exceeds U.S. investment in other countries. Despite the confusing name, a negative international investment position simply means the United States excels in attracting foreign investment. The desire of our trading partners to invest in the United States is a sign of economic strength, not an indication of an international payments problem. President Trump has even suggested that tariffs would bring in $18 trillion in additional investment, an amount that would increase our negative international position by nearly 70%.
There are many other dubious allegations in President Trump’s proclamation, none of which demonstrate a fundamental problem with U.S. international payments as required by Section 122. Soon after publishing his official tariff declaration, President Trump indicated the tariffs have nothing to do with an international payments problem and are instead related to a desire for retribution.
The consensus that tariffs imposed by President Trump on February 20 are illegal is beginning to build:
● Harvard economist and former International Monetary Fund Chief Economist Gita Gopinath: “the US does not have a fundamental international payments problem.”
● Economic historian Phil Magness: “There is no ‘fundamental international payments problem’ that could possibly be addressed by Section 122 tariffs right now, because that international payments system no longer exists.”
● Economist Alan Reynolds: “There is no ‘balance of payments’ justification for President Trump’s newest effort to tax American firms and families for buying imports.”
● National Review contributing editor and former Assistant United States Attorney for the Southern District of New York Andrew McCarthy: “These new tariffs are even more clearly illegal than Trump's IEEPA tariffs.”
● Constitutional lawyer Ilya Somin, one of the attorneys who challenged the IEEPA tariffs and won: “I think there are additional reasons why the new Section 122 tariffs are illegal.”
● Former Federal Reserve Bank and White House economist Claudia Sahm: “the new section 122 tariffs are likely illegal.”
● Economist Peter Berezin: “Section 122 of the 1974 Trade Act, on which Trump’s 10% tariff is based, does not apply in the current macro environment. A balance of payments deficit is not the same thing as a trade deficit. You cannot have a balance of payments [deficit] if you have a flexible exchange rate, as the US currently does.”
● U.S. Court of Appeals, 8/29/2025: “section 122 does not apply to the problems underlying the reciprocal tariffs, which are not the payments problems that are the precondition to section 122’s application.”
While Section 122 served a legitimate purpose within the fixed exchange rate framework that governed international trade over fifty years ago, it has no meaningful application in a modern floating exchange rate system. The Trump Administration would be wise to prepare for potential legal challenges to its latest batch of tariffs.