Trump cites "payment crisis" to push for 15% global tax; economists say crisis doesn't exist, legal challenge is on the way.

By launching new global tariffs, President Trump of the United States is not only trying to repair the ineffective trade policies that were invalidated by the Supreme Court, but also declaring that the world's largest economy is facing a profound international balance of payments crisis. However, the core issue facing the Trump administration is that many economists and financial markets have not seen the U.S. teetering on any such cliff edge. This means that his latest tariffs are likely to trigger another legal challenge and bring more uncertainty to trade partners, businesses, consumers, and investors. To introduce a 10% tariff (which Trump later raised to 15%) to replace the tariffs declared invalid by the Supreme Court in a landmark ruling last Friday, Trump invoked Section 122 of the 1974 Trade Act. This regulation allows the U.S. President to impose tariffs for up to 150 days in the event of "fundamental international payment problems." These circumstances include "a large and severe U.S. international balance of payments deficit" and "a significant imminent devaluation of the U.S. dollar." Treasury Secretary Scott Bennett, in an interview on Sunday, stated that the new tariffs will be temporary, aimed at ensuring revenue continues to flow into the Treasury and will eventually be replaced by tariffs imposed under other authorizations, which have "withstood over 4,000 challenges since the President's first term." "This is more like a bridge, rather than a permanent facility," Bennett said. He also said that Section 122 is "a very strong authorization," but did not indicate that the new tariffs are necessary to address a specific payment crisis. The Treasury Department did not respond to requests for comment on Sunday. The executive order signed by Trump on Friday announcing new import tariffs considers the U.S. trade deficit and other capital flows as evidence of a "large and severe" international balance of payments deficit. One of the issues that Trump pointed out is that the U.S. net international investment position, which is the difference between U.S. overseas investments and foreign investments in the U.S., currently has a deficit of $26 trillion. What he did not mention is that his use of tariffs to force U.S. and foreign companies to increase investments in the U.S. will further inflate this figure. He also did not mention that the recent report from the U.S. Bureau of Economic Analysis in January indicated that the increased valuation of the U.S. stock market, which Trump has cheered, is a vote of confidence in the U.S., but is also a major reason for the increase in the U.S. negative international investment position. Most economists see the issue as, despite the President's statement, there is no evidence to suggest that the U.S. cannot pay its bills or fulfill its obligations to international investors. If this were the case, financial markets would sell off U.S. assets, and the dollar would collapse due to a loss of confidence in the U.S. economy and its main reserve currency. "As someone who was at the IMF, I'd say the U.S. does not face fundamental international payment problems," said former IMF First Deputy Managing Director Geetha Gopinath in a social media post on Sunday. She added, "A 150-day tariff will not durably reduce the trade deficit. It will mainly result in trading figures fluctuating again, as importers will try to time their purchases to avoid the tariffs." Jay Shambaugh, who served as the top international official at the U.S. Treasury Department during the Biden administration, stated in an interview that despite Trump's statement, there is no evidence to suggest that the U.S. is facing any international balance of payments crisis. "That would be a situation where there's not enough money coming into the country to balance all the money flowing out," Shambaugh said. But in reality, the financial flows into the country balance the trade deficit. He said if that were not the case, it would show in a "rapid devaluation of the dollar as no one is willing to put money into the U.S. to cover the outflows." Mark Sobel, another former senior U.S. Treasury official, said the entire premise is based on an outdated view of the U.S. economy and relics of the Bretton Woods fixed exchange rate and gold standard, which have long since disappeared. He also believes that Trump is targeting the wrong focus. "The President should be more worried about the fiscal outlook. Many estimates show that our fiscal deficit averages 6% of GDP over the next decade, and then it gets much higher," Sobel said. "This is a massive issuance of debt that the global markets will have to absorb, which could drive up interest rates." The last time a U.S. President imposed tariffs to address international balance of payment issues was in 1971 when Richard Nixon introduced a 10% tariff, which lasted only a few months and aimed to pressure other countries to renegotiate fixed exchange rates and address the issue of an overvalued dollar. The fundamental payment issue the U.S. faced at that time was that there was not enough gold in reserve to match the value of the dollar, leading speculators to attack the dollar. In fact, Section 122 is part of a law passed by Congress in response to Nixon's tariffs, aimed at limiting its use by future Presidents. Some economists believe that the Trump administration's invocation of Section 122 has some merit. Brad Setser, who served in the Treasury and Trade departments and is now at the Council on Foreign Relations, stated that the current U.S. current account deficit, which is around 3-4% of GDP, is significant enough to be defined as "large and severe." However, the question of whether the U.S. faces a "fundamental international payment problem" is "a more difficult one to answer," he wrote in a series of social media posts on Sunday. "The deficit is large," Setser said. But he stated that the portfolio flows into the U.S. are still strong enough to fund a $500 billion external deficit by 2025, "and the dollar is currently quite strong." Some trade experts believe that Trump using an international balance of payments crisis to impose tariffs may lead the U.S. or other countries to report these measures to the World Trade Organization, which could result in IMF intervention and a ruling on whether the U.S. indeed faces a crisis sufficient to justify the tariffs. The legality of Trump's latest tariffs and their rationale may also end up back in front of the Supreme Court. "I don't know if he's meeting the conditions of Section 122, and I don't know if the rationale for this rule still holds, as the U.S. has abandoned the gold standard," said Jennifer Hillman, a former senior trade lawyer and judge who currently teaches at Georgetown University Law School. She said that cases like this would not be as clear-cut as the case that Trump lost in court on Friday because in that case, the Supreme Court found that the 1977 law he initially used did not even mention the word "tariffs." Niel Katyal, a prominent lawyer who defended against Trump's global tariffs case at the Supreme Court last weekend, pointed out that if Trump's new tariffs were challenged, one issue he may face is that his own lawyers previously argued that Section 122 is not applicable to this situation. In a document last year, government lawyers wrote, "(Section 122) has no obvious relevance here, as the concerns that the President identified in declaring an emergency stem from trade, which conceptually differs from balance of payments issues." Setser believes this may not matter in practice. While he is confident that the rationale behind Trump's tariffs will eventually be brought to court, "more importantly, I don't think the lawsuits over fundamental payment problems and international balance of payments implications will be resolved within 150 days," he wrote. "So my guess is that the tariffs will expire before a court ruling."