Section 122 Was Written for a Dollar Crisis. Trump Just Used It for Something Else.

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Fifty-two years. That is how long Section 122 of the Trade Act of 1974 sat untouched, through the Latin American debt crisis of the 1980s, the 1997 Asian financial crisis, and the 2008 financial collapse, without a single president reaching for it. Then the Supreme Court struck down Trump’s IEEPA tariffs on February 20, 2026, and the administration moved quickly to invoke an alternative authority. A surcharge was imposed on practically every merchandise import entering the United States. It was justified under a statute Congress wrote specifically to address gold depletion and currency collapse.

The pivot shows how executive tariff authority works in practice: broad delegations and narrow-sounding triggers. The administration had clearly prepared for the chance that its primary legal tool might not survive judicial review.

Trade lawyers call this a “drawer strategy” — having multiple legal authorities ready if the first one fails. The question is whether the statute in that drawer was meant for this situation, or whether it is being stretched past its original shape.

For a deeper look at the statutory text itself, including the 15 percent rate ceiling, the 150-day sunset, and the balance-of-payments triggering condition, see our earlier analysis of what Congress intended when it wrote Section 122. The short version: Congress was writing a narrow emergency power into law for extreme financial situations. It was not creating a general tariff instrument to be used whenever policymakers wanted use over trading partners.

August 15, 1971: The Crisis Section 122 Was Designed For

President Nixon closed the gold window on August 15, 1971, ending the ability of foreign central banks to convert their dollar holdings into gold at the fixed rate of $35 per ounce. This was the core rule of the Bretton Woods system, the international financial system that had set the rules for exchange rates since World War II.

By 1971, foreign governments held more dollars than the U.S. Held gold reserves. If central banks began demanding gold for dollars, the U.S. Would run out and be forced into a humiliating devaluation. Nixon’s Treasury Secretary, John Connally, pushed the decision as needed to prevent exactly that outcome and to force other countries to make their currencies worth more relative to the dollar.

On the same day Nixon closed the gold window, he imposed a 10 percent supplemental duty on all dutiable imports. The surcharge was clearly temporary and conditional: it would stay in effect only until other countries agreed to revalue their currencies. Four months later, the Smithsonian Agreement was reached, major currencies were revalued against the dollar, and Nixon lifted the surcharge. The whole episode lasted 127 days, slightly less than the 150-day limit Congress would later embed in Section 122.

The legal authority for Nixon’s action was contested. He had justified the surcharge under the Trading with the Enemy Act, a wartime statute that did not clearly allow tariff increases at all. Importers challenged the surcharge in court. Congress, watching the court case move slowly through the judicial system, decided to write a cleaner statute.

The result was Section 122 of the Trade Act of 1974. It provided explicit authority for the president to impose temporary import surcharges triggered by balance-of-payments deficits or the need to prevent a significant depreciation of the dollar. The statute sets a rate ceiling, a day limit, and specific triggering language; readers should verify those parameters against the statutory text directly.

It made sense in a world of fixed or semi-fixed exchange rates where governments could truly run out of gold or hard currency reserves and face a sharp crisis threatening the entire international financial system.

It made much less sense after 1973. That year, the major economies moved to floating exchange rates, where currencies shift constantly in response to supply and demand, and the United States became the issuer of the world’s reserve currency. In that world, an ongoing goods trade deficit does not create a balance-of-payments emergency. It reflects an inflow of investment capital, a strong dollar, and foreign demand for dollar-denominated assets. By definition in how national accounts work, the current account deficit is exactly offset by a capital account surplus.

No president invoked Section 122 in the floating-rate era. Not during the 1980s, when the U.S. Ran large deficits in both its budget and its trade balance at the same time. Not during the Asian financial crisis of 1997. Not in 2008. The statute sat unused, a leftover from the Bretton Woods era, until February 2026.

The Nixon Precedent: Less Settled Than It Appears

The administration’s strongest statutory argument goes like this: Section 122’s text is satisfied on its face. The United States ran a current account deficit of 3.9 percent of GDP in 2024 and a net international investment position deficit of approximately 89 percent of GDP. The White House proclamation asserts the existence of a “large and serious balance-of-payments deficit” without elaborating on how it interprets that threshold.

Congress, the argument continues, did not write a floating-rate exception into the statute; it could have restricted Section 122 to fixed-rate conditions after 1973 but chose not to. Courts have historically deferred to executive branch factual findings on economic conditions.

That deference makes it hard for a reviewing court to substitute its own judgment about whether a deficit is “large and serious.” Critics find this argument unconvincing despite its textual plausibility, but it is not the weak position that the statute’s opponents sometimes suggest.

The administration’s implied appeal to the Nixon precedent does not hold up under close scrutiny on two points.

The Nixon surcharge worked in a specific, narrow sense: it forced a currency realignment. As economic historian Douglas Irwin has documented, the surcharge gave U.S. Negotiators use to press Japan, Germany, and other trading partners to revalue their currencies against the dollar. Once the Smithsonian Agreement achieved that realignment, the reason for the emergency surcharge disappeared and Nixon lifted it. The surcharge had a clear exit condition, a concrete objective, and a defined endpoint. It was imposed and lifted within the same presidential term, within months.

The current Section 122 use has a much less clear exit condition. The White House proclamation frames the surcharge as a tool to “address” the trade deficit and “rebalance” trade relationships. Most mainstream economists argue that tariffs cannot lastingly reduce trade deficits. They say deficits reflect the gap between national saving and investment, a basic economic identity that tariffs do not change. These economists also argue that manufacturing location is driven by labor costs, infrastructure, and supply chains that tariffs can distort but not lastingly redirect.

Supporters of industrial policy tariffs dispute this view. They point to evidence from specific sectors such as semiconductors and solar panels where lasting protection has supported domestic capacity. They also cite historical cases like South Korea and Taiwan where tariff-backed industrial policy helped manufacturing development. The exit-condition problem, however, remains important regardless of which economic view is correct. The proclamation does not specify what reduction of the trade deficit or what change in manufacturing distribution would allow the surcharge to be lifted. That absence matters legally and practically.

As for legality: no court definitively ruled on whether the Nixon surcharge was constitutional before it expired. A case brought by importers challenging the surcharge, Yoshida International v. United States, worked its way through the courts. The Court of Customs and Patent Appeals ultimately upheld the surcharge in a 1975 decision. By that point, the surcharge had already been lifted and the currency realignment had been completed. The legal question was settled not by a clear court ruling but by acquiescence. Congress did not overturn the surcharge; courts did not issue an injunction; it expired on schedule. That is a different kind of legal approval than a court ruling that the authority is valid before the tariff is in effect.

The current situation is more legally exposed. Courts are already engaged. The Supreme Court struck down IEEPA tariffs on non-delegation grounds, showing real willingness to scrutinize executive tariff authority. As we reported in our coverage of why the next tariffs may survive the Supreme Court ruling, Section 122’s clear grant of authority from Congress and its specific limits may give it better odds than IEEPA. But “better odds” is not the same as being safe from review.

The Balance-of-Payments Finding: Where the Legal Vulnerability Lives

The administration’s legal argument for Section 122 is not obviously wrong on its face. The statute does authorize tariffs for “large and serious United States balance-of-payments deficits.” The U.S. Current account deficit reached 4.0 percent of GDP in 2024, according to the White House fact sheet. That figure is nearly double the pre-pandemic average. The net international investment position deficit reached negative 90 percent of GDP. These are real numbers. The administration’s proclamation argues they meet the statute’s threshold “under any reasonable understanding of the term.”

The problem is not the arithmetic — it is the concept.

Section 122 was written in a world where “balance-of-payments deficit” meant something specific and alarming: a country running out of the foreign currency or gold reserves it needed to maintain its currency’s fixed value. Under the Bretton Woods system, that was a sharp crisis requiring immediate action. It was the kind of emergency for which a 150-day emergency surcharge made clear sense.

In a world of floating exchange rates, a current account deficit is not that kind of emergency. Jennifer Hillman, a former judge on the WTO’s top appeals panel and trade law expert at the Council on Foreign Relations, has argued that in a world of floating exchange rates, the kind of balance-of-payments crisis the statute was designed for no longer happens to countries like the U.S., where money can move freely across borders.

The U.S. Can run goods trade deficits endlessly without facing any currency crisis. The money foreigners invest in U.S. Stocks, bonds, and real estate automatically covers the gap from buying more goods abroad than we sell. That is not a loophole or an accounting trick. That is how floating exchange rates work.

Supporters of the administration’s reading argue that Congress amended the Trade Act multiple times after 1973 without restricting Section 122 to fixed-rate conditions. Some trade law scholars read this as quiet approval of the statute’s broader use for persistent current account imbalances. On this view, Congress knew the world had moved to floating rates and chose to leave the authority in place anyway. This suggests the statute was always meant to address “large and serious” deficits as a matter of scale rather than as a stand-in for a specific monetary regime.

That is a plausible textual argument, though the floating-rate critique remains convincing. The legislative history of Section 122 is specifically tied to the Nixon episode and the Bretton Woods collapse. That history makes it hard to read the statute as a general-purpose tool for trade policy cut off from the monetary conditions that prompted it.

One additional detail has spread through legal commentary: during the IEEPA litigation, the government’s lawyers reportedly stated that “Section 122 has no obvious application” to the Trump tariffs because “the concerns the President identified in declaring an emergency arise from trade deficits, which are conceptually distinct from balance-of-payments deficits.” This claim has not been independently verified against the full litigation record. The administration has not publicly adopted it as a description of its own lawyers’ statements.

Even if the claim is accurate, arguments made in court about one statute’s applicability to a particular set of facts do not necessarily bind the government’s reading of that statute in a different legal setting. Lawyers routinely distinguish between statutory authorities in court without admitting the broader authority is invalid.

Courts will likely trust the president’s judgment on whether the economic conditions qualify. Judges are generally reluctant to second-guess presidential judgments about economic conditions, and the statute does not require that a currency crisis exist. But the deeper argument, that Section 122’s triggering condition has become effectively irrelevant to modern monetary conditions, is not without merit. It might not win at the district court level, but it could gain ground on appeal.

What Importers Are Paying Now

For an importer trying to run a business, the practical question is simpler: how much did the tariff burden change on February 24?

The answer varies widely by product and country of origin.

Take consumer electronics from China. Before February 24, such goods faced IEEPA tariffs that varied by product category and reached as high as 145 percent overall, plus a 25 percent Section 301 tariff (China has faced substantial Section 301 tariffs since Trump’s first term). After February 24, the IEEPA tariff is gone (struck down by the Supreme Court), the Section 301 tariff survives at 25 percent, and the Section 122 surcharge adds 10 percent. Total: 35 percent. The effective rate fell by 10 percentage points.

Now take apparel from Vietnam. Before February 24: 20 percent IEEPA reciprocal tariff, no Section 301, no Section 232. Total: 20 percent. After February 24: no IEEPA, no Section 301, 10 percent Section 122 (subsequently raised to 15 percent). Total: 10 percent on February 24, rising to 15 percent after the rate increase. Also a significant reduction, but from a lower starting point.

Now take USMCA-compliant automotive components from Mexico. Before February 24, these faced a 10 percent IEEPA tariff (Mexico had lower IEEPA rates as part of ongoing USMCA negotiations). After February 24, USMCA-compliant Mexican goods are exempt from the Section 122 surcharge entirely. Total: zero. The tariff burden fell from 10 percent to nothing.

The pattern: countries that faced high IEEPA tariffs see modest reductions, while USMCA members see the largest overall reductions and now enjoy a significant cost advantage over competitors.

The Budget Lab at Yale estimates that the overall average effective tariff rate on U.S. imports fell from roughly 16 percent under the full IEEPA regime to approximately 13.7 percent with the Section 122 surcharge in place. If the Section 122 tariffs expire on schedule in July 2026 without replacement, that rate would settle around 9.1 percent — lower than the IEEPA peak, though subsequent tariff actions had already pushed average effective rates well above that level, reaching approximately 18 percent or more by mid-2025.

For consumers, this means modest price relief on some categories (electronics, apparel, furniture, toys) but continued elevated costs on others (automobiles, steel products, anything with significant aluminum content). The relief is real but uneven, and it depends completely on whether the Section 122 tariffs expire in July.

The Exemption Architecture and Who It Favors

The Section 122 proclamation published in the Federal Register is not a simple across-the-board tariff. It is a layered structure of exemptions that work alongside surviving Section 232 and Section 301 duties, producing actual tariff rates that can vary by 20, 30, or even 40 percentage points depending on the product’s makeup, its country of origin, and whether it qualifies for a specific carve-out.

The exemptions cover steel and aluminum products (already subject to Section 232 tariffs), USMCA-compliant goods from Canada and Mexico, certain critical minerals, energy products, pharmaceuticals, selected agricultural products, passenger vehicles, and certain aerospace products. These reflect real policy choices about which sectors the administration wants to protect from additional tariff burden, but they also create unequal competitive conditions.

A Vietnamese apparel manufacturer faces the full 15 percent Section 122 surcharge. A Mexican manufacturer faces zero, if USMCA-compliant. The incentive to shift production to Mexico, or to increase investment in Mexican manufacturing capacity, is immediate and strong. Once a manufacturer has invested in new production capacity and built new supplier relationships, they are unlikely to shift back even if the tariff field changes again. This means the Section 122 surcharge may have lasting effects on the shape of global supply chains, even though it is technically temporary.

The exemption architecture also creates what trade lawyers call “tariff engineering” chances: redesigning products to fall within an exemption. A manufacturer currently using Chinese steel (facing a Section 232 tariff of 50 percent alone, with Section 301 duties stacked on top) has strong reason to look into whether substituting an exempted material or restructuring its supply chain could reduce that burden. These are standard responses by rational economic actors facing tariffs that treat some countries differently from others.

The WTO Dimension: Procedural Exposure the Administration Is Ignoring

When the U.S. Imposes tariffs for balance-of-payments reasons, it is supposed to follow specific procedures under the World Trade Organization, particularly Article XII of the foundational WTO trade rulebook, known as GATT. Article XII allows WTO members to impose trade restrictions to protect their balance-of-payments position, but only under specific conditions. The member must notify the WTO, consult with other members, provide supporting documentation, and accept review by the Balance-of-Payments Committee.

The review is not a veto — countries do have the right to impose balance-of-payments restrictions — but the procedural requirements exist to ensure openness and engagement with other members, shaped by IMF findings about whether a country faces a balance-of-payments problem. Under WTO rules, member countries must accept the IMF’s factual findings on currency and reserve conditions when balance-of-payments claims are reviewed. If the IMF concludes the U.S. Does not face a balance-of-payments crisis, that finding carries significant weight in WTO proceedings.

As of late February 2026, the U.S. Had not filed the required WTO notification for the Section 122 surcharge. The Trump administration has historically been skeptical of WTO restrictions on U.S. Tariff authority. It is possible the administration will simply skip the notification and treat Section 122 as a domestic matter. Other WTO members can then file their own notice flagging the measure and start a formal dispute.

The EU, China, Japan, and other major trading partners have all indicated they will respond to the Section 122 surcharge. The specific approach, whether WTO dispute, bilateral negotiation, or retaliation, remains unclear as of late February 2026. The EU Commission urged MEPs to vote through a trade deal with the U.S. that had been crafted in the context of the IEEPA tariff negotiations, pressing ahead with the agreement despite the new Section 122 tariffs. India postponed high-level delegation visits to assess the implications of the new regime.

The WTO dimension matters because it gives other countries a procedural pathway to challenge the U.S. Invocation without taking the more confrontational route of challenging the tariff on its substance. Following the proper procedures would head off some of those challenges. Skipping them hands other countries a ready-made basis for objecting.

July 24 and the Question of What Comes Next

The Section 122 statute is unambiguous: the temporary surcharge cannot remain in effect for more than 150 days unless Congress votes to extend it. The clock started February 24, 2026. It runs out July 24, 2026.

The administration has signaled its plan for what happens after that deadline: use the 150-day window to push forward investigations under Section 232 and Section 301 that can justify longer-lasting tariffs with no automatic expiration. Section 122 is a “bridge” while more lasting authorities are built through the investigative process. As we covered in our analysis of whether importers can challenge the new tariffs, Section 232 and Section 301 have survived judicial review before. That track record is part of why the administration views them as more durable foundations.

The obstacle is timing: Section 232 and Section 301 investigations require formal procedures in which the Commerce Department or U.S. Trade Representative must run the investigation, consult with affected parties, hold public hearings, and issue reports. These processes typically take many months. Launching new investigations in February 2026 means they likely will not be finished before July 24. The administration would need to either rush the processes, opening them up to legal challenge, or find some other short-term mechanism.

Congress faces a genuine dilemma. Senate Democrats declared their opposition and introduced legislation against the IEEPA tariffs, but had not passed formal votes. The House of Representatives voted 219 to reject the tariffs, while Senate action remained at the level of statements of intent and bill introductions. Many Republican members have expressed concern about the tariff burden on their constituents, particularly in districts where manufacturers rely heavily on imported parts and materials. A vote to extend Section 122 beyond 150 days would force members to choose. They could own the tariff policy going into the 2026 midterm elections, or vote no and watch the overall average tariff rate paid on imports fall from 15 percent to roughly 9 percent. Neither option is comfortable, and the outcome is genuinely uncertain.

A third scenario is already spreading among legal scholars: the administration issues a new Section 122 proclamation after the first one expires, effectively resetting the 150-day clock. Some believe this is allowed under the statute’s text; others argue that issuing successive proclamations to circumvent the statutory limit would be an abuse of authority subject to challenge. No court has ruled on this question, and it may become the central legal fight of the summer.

What seems clear is that by July 2026, the tariff field will look substantially different from today, in ways that are not yet determined. Either Congress will have voted on an extension, creating political accountability that does not currently exist, or the Section 122 tariffs will expire and be replaced by a narrower set of tariffs based on Section 232 and Section 301. Alternatively, courts will have begun ruling on the legality of Section 122 itself. The 150-day window is not merely a technical provision. It is a forcing event, one that will require Congress, the courts, and trading partners to take positions they have so far managed to avoid.

The deeper question the July deadline raises is one American trade law has never fully settled: who decides tariff policy? Congress delegated broad authority to the executive across several statutes — Section 232 in the Trade Expansion Act of 1962, IEEPA in 1977, and Section 301 in the Trade Act of 1974 — each of which sounded narrow and carefully limited.

Each contained flexible thresholds — “large and serious deficits,” “threats to national security,” “unfair trade practices” — that allowed a determined administration to steer toward its desired outcome.

The Supreme Court has shown it is willing to draw a line. Where that line falls for Section 122, and whether Congress draws one of its own before July 24, is the question that will shape the next chapter of this dispute.

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