Section 122 as a (Partial) Replacement for the IEEPA Tariffs
Apparently, this is the era of dusting off old international economic policy statutes and figuring out what they mean and how they work. After the Supreme Court's ruling today in Learning Resources, holding that "IEEPA does not authorize the President to impose tariffs," we are now going to learn all about Section 122 of the Trade Act of 1974 (entitled "Balance-of-payments authority").
Earlier posts by Mona and Bryan on this statute looked at specific issues under Section 122. Mona talked about the standard of non-discrimination, among other things; Bryan focused on whether there is, in fact, a "fundamental international payments problem" right now. At the time they wrote their posts, the issues were theoretical, as Section 122 had not been invoked. But now it has been, with President Trump announcing a 10% "temporary import surcharge" to be imposed starting February 24 and lasting for 150 days. A White House fact sheet is here, and the presidential proclamation is here.
Bryan's point was that after the United States adopted a system of floating exchange rates in 1973, which allowed currency values to adjust according to market forces, there was no need for the government to maintain reserves to defend a fixed dollar value and therefore there could be no balance-of-payments problem. Is he on to something here? In the fact sheet, the White House explains how it sees the "fundamental international payment problems," noting among other things that:
At the end of 2024, the U.S. net international investment position was $26 trillion, which was 89% of U.S. GDP. This means that if all of the obligations to foreigners that the United States has incurred were to come due today, and even if all of the foreign assets that the U.S. owns could be instantly deployed as payment, the United States would still end up needing to make payments equal to 89% of its annual economic output in order to meet its obligations. ...
As a practical matter, "if all of the obligations to foreigners that the United States has incurred were to come due today" seems unlikely to occur. How unlikely is it? One in a thousand? One in a million? One in a billion? At a certain point, I think it's possible a court might say this is too speculative a "problem" to justify action. But of course, Section 122 has never been used before, so any thinking about what a court might do is also speculative.
In the proclamation, President Trump states: "the United States faces fundamental international payments problems, such as large and serious balance-of-payments deficits, an imminent and significant depreciation of its currency in foreign exchange markets, or an international balance-of-payments disequilibrium." He also has some detailed references to the assessments provided to him by his advisors, including the following:
Among other things, I have been informed by my advisors that the United States balance-of-payments position, under any reasonable understanding of the term in the context of section 122, is currently a large and serious deficit. My advisors have studied different methods of evaluating balance-of-payments deficits, including calculations based on current-account statistics. In my advisors’ opinions, under any of these methods, the United States balance-of-payments position is a large and serious deficit.
There is a lot more to it, but I didn't want to clutter this post up with too long a quote. It will be interesting to see economists discuss and debate these points.
Shifting to the discrimination issue that Mona talked about, as set out in the fact sheet the following goods, among others, will not be subject to the duty:
USMCA compliant goods of Canada and Mexico; and
textiles and apparel articles that enter duty-free as a good of Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, or Nicaragua under the Dominican Republic-Central America Free Trade Agreement.
The proclamation then states: "I find that each exception described in paragraph 14 of this proclamation — in whole or in part, separately or in any combination — is consistent with the limitations of section 122." So what about the issue of discrimination? The relevant provision of the statute says:
(d) Nondiscriminatory treatment of import restricting actions
(1) Import restricting actions proclaimed pursuant to subsection (a) shall be applied consistently with the principle of nondiscriminatory treatment. ...
(2) Notwithstanding paragraph (1), if the President determines that the purposes of this section will best be served by action against one or more countries having large or persistent balance-of-payments surpluses, he may exempt all other countries from such action.
...
However, the statute also says this:
(e) Broad and uniform application of import restricting actions
Import restricting actions proclaimed pursuant to subsection (a) shall be of broad and uniform application with respect to product coverage except where the President determines, consistently with the purposes of this section, that certain articles should not be subject to import restricting actions because of the needs of the United States economy. Such exceptions shall be limited to the unavailability of domestic supply at reasonable prices, the necessary importation of raw materials, avoiding serious dislocations in the supply of imported goods, and other similar factors. In addition, uniform exceptions may be made where import restricting actions will be unnecessary or ineffective in carrying out the purposes of this section, such as with respect to articles already subject to import restrictions, goods in transit, or goods under binding contract. Neither the authorization of import restricting actions nor the determination of exceptions with respect to product coverage shall be made for the purpose of protecting individual domestic industries from import competition.
Do these provisions offer enough discretion to justify the USMCA/DR-CAFTA exemptions?
Let's also think about the possible end point of these tariffs. The statute says "the President shall proclaim, for a period not exceeding 150 days (unless such period is extended by Act of Congress)" a "temporary import surcharge" (or a quota, but that's not being used here). The Section 122 surcharge goes into effect on February 24, so 150 days takes us to July 24.
What happens on that date? Does Congress extend the surcharge? That's a little hard to imagine at the moment, but I suppose you never know.
If Congress does not extend it, the Trump administration might – as too many people for me to cite have suggested – decide to just ... proclaim a new temporary surcharge for another 150 days.
Can they do that? I don't know! A big question here will be, can U.S. businesses that are affected file lawsuits and effectively challenge the initial action and any subsequent ones?
Before anyone gets too obsessed with Section 122 though, keep in mind this statement from a USTR press release about the Supreme Court ruling:
The Trump Administration will ... [i]nitiate several investigations under Section 301 of the Trade Act of 1974 (“Section 301”) to deal with unjustifiable, unreasonable, discriminatory, and burdensome acts, policies, and practices by many trading partners. We expect these investigations to cover most major trading partners and to address areas of concern such as industrial excess capacity, forced labor, pharmaceutical pricing practices, discrimination against U.S. technology companies and digital goods and services, digital services taxes, ocean pollution, and practices related to the trade in seafood, rice, and other products. We intend to conduct these investigations on an accelerated timeframe, in keeping with the Section 301 statute’s substantive and procedural requirements. If these investigations conclude that there are unfair trading practices and that responsive action is warranted, tariffs are one tool that may be imposed.
If Section 122 is too economics-focused for you, Section 301 will have plenty of action to keep you occupied.