The Trump administration’s use of Section 122 to get around the Supreme Court ruling against IEEPA hinges on whether there’s a “large and serious” balance of payments deficit problem in the US, but it’s not a “self-judging” matter. Whenever a country restricts imports due to an international payments problem, the IMF steps in to review the case — with the WTO.
In response to the US Supreme Court decision that the Trump administration cannot use the International Emergency Economic Powers Act (IEEPA) to impose tariffs, the administration announced that it would implement tariffs under Section 122 of the Trade Act of 1974. This statute allows the President to impose tariffs up to 15% (the administration first set 10%, then 15%, then 10% as of 23 February) for 150 days, unless Congress agrees to extend, in response to “large and serious” balance of payments deficits or “to prevent an imminent and significant depreciation of the dollar.”
But what defines a balance-of-payments crisis, in which a country cannot pay for essential imports or service its foreign debt? Its features typically mean a country cannot borrow from abroad, a massive depletion of foreign exchange reserves, and sudden and swift capital flight. Who determines if such a crisis warrants the imposition of trade measures to help remedy the situation? Spoiler alert: unlike “national security”, most countries do not view a determination on whether a balance-of-payments crisis exists as “self-judging”.
The President asserted in his February 20 proclamation that his senior advisors have informed him that “fundamental international payments problems within the meaning of Section 122 exist and that special import measures to restrict imports are required to address these problems.”
The Trump administration is not the first to make such a determination. In the days of fixed exchange rates and more limited capital mobility, especially around the time of the founding of the World Trade Organization’s (WTO) predecessor, the General Agreement on Trade and Tariffs (GATT), balance-of-payments crises were more frequent in other parts of the world. Thus, the founders of the GATT, led by the United States, established rules for reviewing when import measures could be used to address such crises.
WTO balance-of-payments provisions, embodied in and incorporated as Articles XII (general) and XVIII:B (developing countries) of the WTO’s foundational treaty GATT 1947, allow WTO members to temporarily restrict imports to address critical monetary reserves shortages. Such measures are to be temporary, transparent, and limited to controlling the general level of imports. The WTO Committee on Balance-of-Payments Restrictions (BOP Committee) reviews these measures, ensuring they adhere to WTO rules.
That check requires the International Monetary Fund (IMF) to review if a country has a balance-of-payments crisis that merits imposing trade measures. As laid out in GATT Article XV:
“In such consultations, the CONTRACTING PARTIES shall accept all findings of statistical and other facts presented by the Fund relating to foreign exchange, monetary reserves and balances of payments, and shall accept the determination of the Fund as to whether action by a contracting party in exchange matters is in accordance with the Articles of Agreement of the International Monetary Fund, or with the terms of a special exchange agreement between that contracting party and the CONTRACTING PARTIES. The CONTRACTING PARTIES in reaching their final decision in cases involving the criteria set forth in paragraph 2 (a)of Article XII or in paragraph 9 of Article XVIII, shall accept the determination of the Fund as to what constitutes a serious decline in the contracting party’s monetary reserves, a very low level of its monetary reserves or a reasonable rate of increase in its monetary reserves, and as to the financial aspects of other matters covered in consultation in such cases.”
In practice, a country notifies the WTO when it plans to impose balance-of-payments measures, providing information on the balance-of-payments crisis and intended trade measures to address the crisis. WTO members review the notification in the BOP Committee and consult with the IMF, which provides its analysis on whether a balance-of-payments crisis exists. Members take the IMF analysis into account when determining if trade measures are warranted. The WTO members may approve or deny the trade measures, and often work with the country to develop a phase-out plan.
Several economies in Europe, Asia, and South America invoked such balance-of-payments crisis response measures under GATT, but phased them out in the early years of the WTO. India remained a frequent user of these balance-of-payments provisions in the early years of the WTO to justify quantitative restrictions on over 2,700 tariff lines. However, in 1997, the IMF indicated that India’s monetary reserves were no longer inadequate, suggesting that the balance-of-payments justification was weakening. India agreed to begin phasing out its trade measures, but due to disagreements on the phase-out timeline, the United States requested a panel in November 1997, arguing that the restrictions were no longer necessary. The panel and subsequent Appellate Body report in 1999 largely found that India’s restrictions were not justified under WTO rules, leading to a mutually agreed phase-out.
Since the late 1990s, usage of these balance-of-payments provisions has declined significantly as WTO disciplines moved toward price-based and less trade-distorting measures and required clear notification and time-bound plans. Recently, only Ukraine and Ecuador formally notified and invoked balance-of-payments measures at the WTO in 2015. The IMF was consulted in each instance and confirmed balance-of-payment pressures in each country. However, the measures were withdrawn relatively quickly, in 2015 for Ukraine and 2017 for Ecuador.
Thus, it is extraordinary that the United States is justifying its latest round of tariffs under the rationale of a balance-of-payments crisis, even among a host of other “extraordinary” trade measures. If the United States seeks to justify this action at the WTO (which it is required to do under WTO rules), it will need to establish that it meets the requirements of GATT Article XII and the 1994 Understanding on Balance of Payments Provisions. Article XII limits any restrictions to those necessary to “forestall the imminent threat of, or to stop, a serious decline in… monetary reserves.” The 1994 Understanding imposes a high threshold for quantitative restrictions, which are available only in a “critical” balance-of-payments situation where price-based measures cannot arrest a “sharp deterioration in the external payments position.”
If the US measures are notified to the WTO, the IMF will be called upon to review whether the United States meets these thresholds.
It would surprise few if the United States does not notify the WTO of its new use of Section 122 tariffs. It would be ironic if the US does not notify the WTO given a key tenet of the US submission on WTO reform on December 2025 addresses the US position on transparency and notifications:
“Transparency plays a critical role in delivering value to Members and our stakeholders. Certain Members’ lack of transparency and chronic lack of adherence to WTO notification obligations prevent other Members from effectively using the WTO committee system to monitor compliance with WTO rules and principles, a core function of the WTO.”
The United States is also the architect of the proposed “General Council Decision on Procedures to Enhance Transparency and Strengthen Notification Requirements”, which seeks to penalize WTO members who fail to submit timely, mandated notifications on trade policies. The United States was also the first country to employ the practice of counter-notifications in 2018. Under this practice, a WTO member reports another member’s trade measure that has not been properly notified, thus enhancing transparency, accountability, and permitting members to challenge or clarify undisclosed policies.
Despite its strongly proclaimed commitment to transparency and notifications, if for some reason the United States does not notify the WTO of its new tariffs under Trump’s latest balance-of-payments measures, another Member could (or should) counter-notify the measures, triggering a review.
Even if the US measures under Section 122 are only temporary, until the United States can put in place more permanent tariffs under Section 301 of the 1974 Trade Act, additional tariffs under Section 232 of the Trade Expansion Act of 1962, and/or possibly other provisions, other WTO members should still notify the WTO. There is no certainty on whether the United States may seek to extend the tariffs under Section 122 or reimpose them at some point in the future. A WTO and, by extension, IMF review and determination could influence future actions on the part of the United States and other members of the global trading system. The current US action may even provide the WTO and IMF an opportunity to reassert their relevance in the global economy.
For those who find this new US application of tariffs to be unsettling, there is some hope to be found in the fact that the US system of checks-and-balances has reaffirmed itself and struck down the highly arbitrary IEEPA tariffs. While the new Section 122 tariffs are above what the US committed to in its tariff bindings at the WTO, the US “most-favoured-nation” (MFN) tariff plus the Section 122 tariff will still be below several other countries’ WTO bound rates. Beyond that, the Trump administration is seeking to use this US statute to modify its applied tariffs in a manner that could be justified under WTO rules. The general uniformity of tariff application across products and countries under Section 122, setting aside the question of the legality of their usage in this case, is also in line with the principle of MFN treatment. MFN is still not dead yet.
Whatever happens next, it would be useful to have the IMF sharpen their pencils and start its work to clarify for everyone if a balance-of-payments crisis indeed exists in the United States (and get ahead of the WTO asking for such a review).
To read the full article as it was published by Hinrich Foundation , click here.