This article was first published by the Hinrich Foundation.
On February 20, the US Supreme Court ruled that President Donald Trump had exceeded his authority by imposing his so-called “Liberation Day” tariffs under the 1977 International Emergency Economic Powers Act (IEEPA).
In response, President Trump quickly turned to another statute: Section 122 of the Trade Act of 1974. Known as the “balance-of-payments authority,” Section 122 allows the president to proclaim temporary “special import measures,” either as import surcharges of up to 15% ad valorem or quantitative restrictions in the form of quotas, for a maximum of 150 days unless Congress agrees to extend it.
The Trump administration also plans to initiate new trade investigations under Section 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962, providing a continuing legal basis for tariffs once the 150-day Section 122 window expires.
Policy messaging has added uncertainty. Trump initially announced a 10% across-the-board tariff under Section 122, raised the tariff to 15% within hours, and then imposed the 10% surcharge two days later. Complicating matters further, Section 122 requires that measures be applied consistently with the principle of non-discriminatory treatment. Yet, Jamieson Greer, US Trade Representative, has indicated that tariffs could rise to 15% “for some (countries)”, while others might face higher rates to ensure “continuity” with bilateral “reciprocal” trade arrangements negotiated under the now-invalidated IEEPA.
These bilateral agreements, aptly dubbed “napkin deals” due to their lack of legal standing, include tariff commitments that are lower than the 15% Section 122 imposition. Hence, countries that rushed to negotiate exceptions to “Liberation Day” tariffs may end up “paying higher tariff rates than competitors who did not work with the Trump administration on any such agreement.”
Beyond the trade uncertainty compounded by this tariff saga, Trump is also introducing another even more dangerous kind of uncertainty. To justify using Section 122, he has had to assert that America, the country that issues the world’s most important reserve currency and the world’s safest financial asset — US Treasury bonds — is facing “fundamental international payments problems.”
As Gita Gopinath, the International Monetary Fund’s (IMF) former Chief Economist and First Deputy Managing Director, observed on 24 February, the United States does not face a balance-of-payments crisis but rather a persistent trade deficit — a structural feature of its economy that cannot be remedied by a 150-day tariff.
Backing Gopinath’s reasoning, Kristalina Georgieva, the IMF’s Managing Director, has also questioned the rationale for invoking Section 122 and urged the US government to pursue alternative policies to avoid the negative economic consequences of tariffs.
By acknowledging that the US is experiencing serious difficulties in honoring its international financial obligations, the Trump administration is introducing legal and policy risks that extend well beyond trade. His declaration carries significant implications at face value, though fortunately, financial markets have grown accustomed to “discounting” the President’s rhetoric.
Even if the US is running large trade deficits, they are unlikely to cause an “international payments problem” (let alone a “fundamental”) because America can pay for its imports in its own currency and foreigners continue to purchase T-bonds. Repeated current account deficits are not equivalent to an external financial constraint for the issuer of the world’s most important reserve currency. The IMF’s public commentary on the Section 122 issue has underscored this distinction.
However, advancing a balance-of-payments narrative — even if unfounded — risks casting additional doubts on the very foundation of the dollar’s dominance. To be sure, overseas investors are still buying T-bonds, yet dollar investments are being hedged as never before.
Indeed, the dollar’s long-term trajectory has changed. More than in the sheer size of the US economy, its reserve status rests on confidence in the US institutional architecture: respect for the rule of law, the independence of the Federal Reserve, the effectiveness of the judiciary in enforcing contracts, predictable economic governance, and the depth of its financial markets.
Those foundations are now under strain. Repeated confrontations with the courts (including calling justices of the Supreme Court “fools” and “lapdogs” and a “disgrace”), pressure on the Federal Reserve, proposals to tax non-resident purchases of US Treasurys, widening fiscal deficits, and abrupt foreign policy shifts, are increasingly unsettling allies and markets alike.
To be sure, the dollar remains dominant and US Treasurys still constitute the core of global reserve holdings. But trust is fragile; once shaken, it does not fully return. The greenback’s preeminence no longer is as assured as before, not because of unimpeachable fundamentals, but because no fully viable alternative has yet emerged. In short, if the dollar remains king, it is more by default than by virtue.
China, meanwhile, has been expanding the renminbi’s (RMB) international footprint. President Xi Jinping, in contrast with Trump, is unlikely to surprise observers. He does not improvise and he has recently stated China’s ambition to progressively elevate the renminbi’s reserve currency role, supported by the rollout of a central bank digital currency, a web of central bank swap agreements, and the creation of a clearing system — the Cross-border Interbank Payment System (CIPS) — designed to facilitate cross-border payment settlement as an alternative to the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the messaging system that underpins the US-based Clearing House Interbank Payments System (CHIPS). SWIFT still handles about 90% of total global cross-border payment value.
Pragmatism, not shock therapy, defines China’s strategy to progressively internationalize the RMB. Limited, carefully managed windows of convertibility may gradually open China’s currency to more sections of global institutions and traders. Experiments in Hainan — envisioned as a financial gateway to facilitate cross-border capital movement — illustrate Beijing’s cautious approach.
As Dawn Shackleford noted in a 24 February article for the Hinrich Foundation, invoking Section 122 to circumvent the Supreme Court’s ruling hinges on whether the United States is facing a “large and serious” balance-of-payments problem, a factual determination that could be challenged in court.
Under the World Trade Organization’s (WTO) rules, which derive from the US-led 1947 General Agreement on Tariffs and Trade’s Article XII, a country facing balance-of-payments problems may impose restrictions on the quantity or value of imports, but subject to the IMF’s oversight. Indeed, when a government seeks to impose import restrictions to address “fundamental international payments problems” as foreseen in Section 122, the WTO is obliged to “consult fully” with the IMF and must “accept all (IMF’s) findings” of a statistical nature, as well as those related to “foreign exchange, monetary reserves and balances of payments.”
Trump will certainly not request multilateral approval for the trade restrictions he is now imposing to substitute those knocked down by the Supreme Court. It is also highly improbable that the IMF would validate trade restrictions justified under Section 122.
Even if the dollar’s hierarchy will not collapse overnight, a shift in its “exorbitant privilege” is looming on the horizon. A few years ago, the dollar’s supremacy rested securely on the US’ economic strength and institutional credibility. Those foundations still stand as the Supreme Court’s ruling demonstrates — but confidence in the dollar is no longer unconditional. Invoking a balance-of-payments emergency where none exists risks further signaling weakness rather than resolve.
Playing games with tariff authority is one matter. Playing games with the credibility of the US dollar is quite another. And the latter carries consequences far beyond 150 days.
