Council of Councils
Think Global Health
Marc L. Busch is the Karl F. Landegger professor of international business diplomacy at the Walsh School of Foreign Service, Georgetown University. Daniel Trefler is the Douglas and Ruth Grant Canada research chair in competitiveness and prosperity at the Rotman School of Management, University of Toronto.
On July 31, before the Court of Appeals for the Federal Circuit, Department of Justice (DOJ) lawyers spent considerable effort defending President Donald Trump’s sweeping tariffs by drawing a false distinction. They argued that Trump had to use the International Emergency Economic Powers Act (IEEPA) to enact his Liberation Day tariffs because Section 122 of the Trade Act of 1974, which allows the president to use tariffs or quotas to address balance of payments deficits, could not do the job.
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Why? The DOJ put it plainly: balance of payments deficits aren’t the same thing as trade deficits.
This is flat out wrong: more than 90 percent of the balance of payments is the trade deficit.
To begin, there is no standard statistical definition of the trade deficit. Economists debate whether to measure it as the balance on goods trade alone, or goods and services combined. Either way, goods trade is the dominant component of the current account, which is at the heart of the balance of payments. To say that tariffs affect the balance of payments but not the trade deficit is to ignore reality.
This matters because tariffs directly shape the flow of imports. They change the balance of payments. And because goods trade is the largest part of the current account, they also change the trade deficit. The DOJ’s effort to pry those categories apart is not just artificial—it is highly misleading.
Congress did not make this mistake when it wrote Section 122. That provision was crafted to give presidents authority to impose tariffs or quotas in the event of serious balance-of-payments problems. The whole point was to hand the executive a tool to address the very condition the executive now calls the trade deficit. Suggesting otherwise is akin to handing the president a fire hose and insisting it can only be used for kitchen fires, not living room fires.
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The stakes are high. The DOJ wants the courts to believe that Section 122 is too narrow to matter, and is only relevant when foreign exchange reserves are depleted or when the United States is running unsustainable external accounts. By contrast, they contend that the IEEPA is the only general-purpose tool for Trump’s tariffs to address trade balances.
But this is backwards. Section 122 exists precisely to prevent the misuse of emergency statutes like the IEEPA. Congress wanted presidents to address trade imbalances under defined statutory limits, not under boundless emergency powers.
If the courts accept the DOJ’s cramped reading, they risk neutering Section 122 while supercharging the IEEPA. That would leave presidents with weaker tools in the space where Congress meant for them to act, and a dangerous backdoor for rewriting tariff policy through emergency declarations. It would turn the careful architecture of trade law upside down.
Worse still, it would invite presidents to expand the IEEPA well beyond tariffs. If so-called emergencies can be invoked to sidestep Congress on trade, future presidents could conceivably use the IEEPA to raise taxes, rewrite regulations, or even dictate terms of domestic commerce—as long as they can frame it as a foreign policy problem.
The Court of Appeals has a straightforward task: read Section 122 in light of both economics and legislative intent. Goods trade is the core component of the trade deficit, and the trade deficit is central to the balance of payments. Congress knows this, which is why it gave the president tariff authority under Section 122, subject to checks and balances.
The Supreme Court will eventually confront a bigger issue: whether to allow Trump’s IEEPA tariffs to stand as a precedent that transforms the very nature of presidential power. A ruling that does so would not just bend trade law—it would break it, and in the process, unsettle the constitutional balance of powers.
The DOJ’s attempt to wall off balance of payments from trade deficits is a legal fiction. Section 122 was written for both. Pretending otherwise is not just bad economics, it is bad law.