Trump Pivots to Section 122 Tariffs After Supreme Court Ruling — Balance of Payments Argument Faces Scrutiny

New Tariffs Take Effect After Supreme Court Strikes Down IEEPA Duties

The U.S. trade landscape shifted dramatically this week as President Trump moved to impose emergency tariffs under a previously unused legal authority. Hours after the Supreme Court struck down broad tariffs enacted under the International Emergency Economic Powers Act (IEEPA) last Friday, the administration pivoted to Section 122 of the Trade Act of 1974 — a statute that permits the president to levy duties of up to 15% for 150 days to address balance of payments problems.

An initial 10% across-the-board tariff came into effect at midnight on Tuesday, February 24. The administration has signaled an increase to 15%, though only the 10% rate has been formally signed via executive order so far.

The Administration's Balance of Payments Case

The executive order frames the tariff action around what it describes as a serious balance of payments deficit. The White House points to three key data points to support its position:

Indicator	Value	Significance
Annual U.S. goods trade deficit	$1.2 trillion	Largest ever recorded
Current account deficit	~4% of GDP	Well above historical averages
U.S. primary income balance	Negative	First time since 1960

The reversal of the primary income surplus — meaning the U.S. is now paying more to foreign investors than it earns on its overseas investments — is being cited as evidence of a fundamental shift in the country's external financial position.

Economists Push Back on Crisis Narrative

The characterization of the current situation as a balance of payments crisis is drawing significant pushback from prominent economists and former policymakers.

Former IMF First Deputy Managing Director Gita Gopinath has argued that the negative primary income balance is better explained by a surge in foreign purchases of U.S. equities and risky assets over the past decade — assets that outperformed foreign alternatives and thus generated higher returns flowing abroad.

Former U.S. Treasury and IMF official Mark Sobel noted that balance of payments crises are typically associated with countries operating under fixed exchange rate regimes. He pointed out that the dollar has been stable on a floating basis, 10-year Treasury yields remain fairly steady, and U.S. equity markets continue to perform well — none of which are typical indicators of a payments crisis.

Josh Lipsky of the Atlantic Council drew a further distinction, noting that a genuine balance of payments crisis involves a country that cannot pay for its imports or service its foreign debt — a fundamentally different situation from running a trade deficit.

A Contrarian Perspective

Not all analysts dismiss the administration's argument outright. Brad Setser of the Council on Foreign Relations has acknowledged that the current account deficit is far larger than when President Nixon imposed tariffs in 1971 under similar balance of payments reasoning. The U.S. net international investment position has also deteriorated significantly, which may provide the administration a legitimate legal foundation for the action.

Legal Vulnerability and Revenue Projections

The legal durability of the new tariffs remains in question. Notably, the Justice Department itself had previously argued that Section 122 was the wrong statute to address trade deficits — a position that opponents are expected to use in future court challenges.

Key fiscal impact: The Tax Foundation estimates the combined Section 232 and Section 122 tariffs will raise $668 billion in revenue over 2026–2035 on a conventional basis while reducing GDP by approximately 0.2% before accounting for foreign retaliation.

Adjusted for the negative economic effects, projected revenue falls to $523 billion over the decade. If the Section 122 tariffs expire after 150 days as the statute requires, the average effective tariff rate for 2026 would be roughly 6.0% — the highest since 1971.

Market Implications

Traders should monitor several key factors in the weeks ahead:

• Duration risk: Section 122 tariffs are capped at 150 days, creating a potential policy cliff in mid-July 2026
• Litigation timeline: Legal challenges are expected imminently, and the administration's prior statements against Section 122 weaken its defense
• Escalation path: Whether the 10% rate gets raised to the full 15%, and how trading partners respond with retaliatory measures
• Dollar and yield reaction: Any signs of actual balance of payments stress would first show up in currency markets and the Treasury curve

The combination of legal fragility and a 150-day statutory limit means markets are pricing these tariffs as temporary — but the political dynamics around trade policy remain highly unpredictable.