Lawsuit challenges Trump's new tariff plan

President Donald Trump's original plan for addressing the purported threat posed by the long-standing U.S. trade deficit, which the Supreme Court rejected in February, involved declaring an imaginary emergency to justify tariffs under a statute that does not authorize them. His backup plan, which he revealed immediately after that decision, avoids the second difficulty but not the first one.

The International Emergency Economic Powers Act, or IEEPA, the 1977 law that Trump cited when he announced his sweeping "Liberation Day" tariffs last year, does not mention import taxes and had never been used to impose them. By contrast, Section 122 of the Trade Act of 1974, the provision Trump cited after his Supreme Court defeat, does authorize tariffs in certain circumstances.

The problem, according to a lawsuit that the Liberty Justice Center filed on Monday in the U.S. Court of International Trade, is that those circumstances "do not currently exist." The center, which spearheaded the legal challenge that defeated Trump's IEEPA tariffs, notes that "Section 122 is limited to international balance-of-payments problems — problems it is economically impossible for the United States to suffer under our current system of floating exchange rates."

Section 122 authorizes the president to impose a "temporary import surcharge" to address "fundamental international payments problems" caused by "large and serious United States balance-of-payments deficits." But the "payments problems" that Congress had in mind stemmed from a monetary system that no longer exists.

Under the 1944 Bretton Woods Agreement, 43 countries made their currencies convertible to U.S. dollars at fixed rates, and those dollars could be exchanged for gold held by the U.S. government. That system became problematic by the early 1970s, when President Richard Nixon responded to dwindling gold reserves and large, persistent balance-of-payments deficits by suspending the conversion of U.S. currency to gold and imposing temporary tariffs.

A federal appeals court ultimately upheld those tariffs under the Trading With the Enemy Act of 1917. But when Congress considered the Trade Act of 1974, the legality of Nixon's tariffs, which a lower court had deemed unlawful, was uncertain. Section 122 was aimed at constraining the president's authority to deal with "fundamental international payments problems" like those Nixon had faced.

Section 122 capped the temporary import surcharge at 15% and limited its duration to 150 days, which could be extended only with congressional approval. It prohibited tariffs that discriminate against particular countries or distinguish between product categories without special justification, and it ruled out tariffs "for the purpose of protecting individual domestic industries from import competition."

Trump's Feb. 20 proclamation invoking Section 122 complies with the first two restrictions, imposing a surcharge of 10% (which he later said would be raised to 15% "for a period of 150 days." But the Liberty Justice Center lawsuit argues that Trump's lists of exceptions for specified countries and goods do not include the findings required by Section 122.

More fundamentally, the center says, the "international balance-of-payments problems" that Trump describes are "no longer economically possible after the end of Bretton Woods." As economist Milton Friedman explained back in 1967, "a system of floating exchange rates completely eliminates the balance-of-payments problem," meaning "there cannot be a deficit or a surplus threatening an exchange crisis."

A look at the balance of payments, which includes all financial transfers between the United States and other countries, confirms that point. The calculation includes the "current account," which consists mainly of imports and exports, but it also includes the financial and capital accounts, which consist mainly of borrowing (such as U.S. bonds) and foreign investment in the United States.

When imports exceed exports, the difference is balanced by inflows of loans, capital and other transfers. That is why, as the government's lawyers conceded during the litigation over Trump's IEEPA tariffs, a trade deficit is "conceptually distinct" from a balance-of-payments deficit.

Trump has now changed his tune and his terminology. But it seems doubtful that his word games will pass judicial muster.

Jacob Sullum is a senior editor at Reason magazine.