Trump’s new 10%–15% tariffs under Section 122 of the Trade Act are intended to address what he calls a U.S. balance of payments problem, but economists argue no such crisis exists, raising fresh legal and political risks.
President Donald Trump’s move to impose temporary tariffs of up to 15% under Section 122 of the Trade Act of 1974 has opened a new front in the legal and economic battle over U.S. trade policy, with critics questioning both the statutory basis and the economic rationale behind the action.
The tariffs were announced hours after the Supreme Court of the United States struck down a broad set of duties Trump had previously imposed under the International Emergency Economic Powers Act (IEEPA). In response, the administration turned to Section 122 — a rarely discussed and never-before-used provision that allows the president to impose tariffs of up to 15% for up to 150 days to address “large and serious” balance-of-payments deficits or “fundamental international payments problems.”
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An initial 10% levy took effect shortly after midnight Tuesday, according to a customs notice. Although Trump has said the rate would rise to 15%, only the 10% tariff has been formalized through executive order.
The Economic Argument at the Core
The administration’s order argues that the United States faces a serious balance-of-payments problem, citing a $1.2 trillion annual goods trade deficit, a current account deficit equal to roughly 4% of GDP, and a recent reversal of the U.S. primary income surplus.
In classical economic terms, a balance-of-payments crisis typically refers to a situation in which a country struggles to finance imports or service foreign debt, often accompanied by soaring borrowing costs, currency instability, or capital flight.
Several economists dispute that the U.S. meets that threshold.
Gita Gopinath, former First Deputy Managing Director of the International Monetary Fund, told Reuters that “we can all agree that the U.S. is not facing a balance of payments crisis,” defining such crises as episodes in which countries lose access to financial markets or face sharply rising international borrowing costs.
Gopinath argued that the recent negative primary income balance — the first since 1960 — reflects strong foreign investment in U.S. equities and other risk assets that have outperformed global markets over the past decade. In this framing, the deficit reflects the attractiveness of U.S. capital markets rather than systemic financial stress.
Mark Sobel, a former U.S. Treasury and IMF official, emphasized that balance-of-payments crises are more common in countries with fixed exchange rates, where currency pegs can come under speculative pressure. The U.S., by contrast, operates under a floating exchange rate regime. The dollar has remained relatively steady, the 10-year Treasury yield has not exhibited crisis-level volatility, and U.S. equity markets have performed strongly.
Josh Lipsky of the Atlantic Council noted that a trade deficit — even a large one — is conceptually distinct from a balance-of-payments crisis. The former reflects net import flows of goods and services; the latter signals an inability to finance those flows.
Not all analysts dismiss the administration’s case. Brad Setser of the Council on Foreign Relations has argued that the magnitude of the U.S. current account deficit and the country’s deteriorating net international investment position could provide legal grounds under Section 122’s language.
He noted that the current account deficit is substantially larger than it was in 1971, when President Richard Nixon imposed tariffs amid a genuine balance-of-payments crisis. From this perspective, the statute’s reference to a “large and serious” deficit may give the administration a plausible legal argument, even if economists dispute whether the situation constitutes a crisis in macroeconomic terms.
The legal question may ultimately hinge less on economic orthodoxy and more on statutory interpretation: whether courts view the administration’s justification as within the broad discretion afforded by Section 122.
Refunds and Congressional Pushback
The Supreme Court’s decision invalidating the earlier IEEPA tariffs did not address the issue of refunds; instead, it remanded the case to a lower trade court for further proceedings. That omission has triggered political action on Capitol Hill.
A group of 22 Senate Democrats introduced legislation requiring the administration to refund, within 180 days, all revenue collected from the struck-down IEEPA tariffs, with interest. The bill would direct U.S. Customs and Border Protection to prioritize small businesses in processing repayments.
The co-sponsors include Senate Minority Leader Chuck Schumer, as well as Senators Ron Wyden, Edward Markey, and Jeanne Shaheen.
Wyden said in a statement that “a crucial first step is helping people who need it most, by putting money back into the pockets of small businesses and manufacturers as soon as possible.”
According to estimates by Penn-Wharton Budget Model economists cited by Reuters, more than $175 billion in IEEPA-based tariff collections could be subject to refund. The same analysis estimated that the invalidated tariffs were generating over $500 million per day in gross revenue.
House Speaker Mike Johnson indicated that the Republican-controlled House would not intervene at this stage, stating that the White House should be given time to address the issue. Treasury Secretary Scott Bessent said the administration would follow lower court determinations on refunds, though such rulings could take weeks or months.
Customs and Border Protection is set to halt collection of IEEPA-based tariffs at 12:01 a.m. EST Tuesday.
The shift from IEEPA to Section 122 underlines an effort by the administration to maintain tariff leverage while navigating judicial constraints. However, because Section 122 has never been used, it lacks a clear body of precedent, potentially making it vulnerable to fresh legal challenges.
If courts determine that the United States does not face a qualifying balance-of-payments emergency, the tariffs could again be invalidated. Conversely, a ruling upholding broad presidential discretion under Section 122 would expand executive authority over trade policy.
The uncertainty introduces volatility into trade flows and pricing decisions for markets. Importers face shifting duty rates, while exporters must adjust to potential retaliatory measures abroad.