Clark Packard and Alfredo Carrillo Obregon
On June 2, the Trump administration submitted a document to the World Trade Organization’s (WTO) Balance-of-Payments Committee supposedly justifying its Section 122 tariffs. The filing is revealing—not for what it gets right but for what it exposes about the administration’s bad faith legal theory. To establish that the United States is experiencing a “large and serious” balance-of-payments (BoP) deficit—as Section 122 requires and Article XII of the General Agreement on Tariffs and Trade (GATT) permits—the administration points to the current account deficit, driven by the trade deficit, as the “most appropriate measure” of a BoP deficit. The argument does not just strain the domestic statute, but it also flatly contradicts how a BoP deficit has been defined in international trade law for decades. By openly and deliberately flouting the GATT, the administration is also exposing its use of Section 122 in a way that undermines the congressional intent when the provision passed—and the larger statute it is a part of.
The Trade Act of 1974 was broad legislation. It granted the president negotiating authority to tackle tariff barriers with other contracting parties to the GATT, which the US subsequently used to negotiate and complete the Tokyo Round of Multilateral Trade Negotiations. The act also handed the executive branch significant new tools to restrict imports unilaterally, including Sections 122, 201, and 301. Critically, Congress enacted this legislation with full awareness of the GATT’s framework, including how the agreement defines a BoP crisis. That definition is unambiguous: GATT Article XII permits contracting parties (now WTO member states) to impose trade restrictions only to (a) “forestall the imminent threat of, or to stop, a serious decline in [a member state’s] monetary reserves” or (b) “achieve a reasonable rate of increase in its reserves,” in case they are “very low.” In other words, a BoP crisis under the GATT—and therefore under Section 122 of the Trade Act of 1974—is about monetary reserves, not trade and current account deficits. The GATT thus codifies, even more explicitly than Section 122 itself, the Bretton Woods–era understanding of what a BoP deficit meant.
Yet, the administration’s WTO filing does not offer any evidence that US monetary reserves are declining. It cannot. US official reserves are neither in “serious” decline nor is there a reason for them to precipitously decrease in the foreseeable future. The United States does not struggle to attract private capital from abroad, and it does not peg the value of the dollar against another currency or monetary asset. The conditions for triggering the GATT’s BoP exception are simply not met.
By deliberately ignoring the plain text of Article XII, the administration is not simply acting in bad faith in fulfilling its GATT obligations. It is also openly contravening Congress’s intent to align the BoP provisions in the GATT with those of Section 122. This is most clearly evinced in Section 121 of the statute, which directed the president to seek the revision of certain provisions of the GATT, among them, Article XII. The enacted legislation only directly revised Article XII “to recognize import surcharges as the preferred means by which industrial countries may handle balance-of-payments deficits.” Not only is there no mention of altering the qualifications for action under Article XII(2), but such a reform would have also codified in the GATT the hierarchy of BoP-related trade barriers outlined in Section 122(a)(3)(C), which authorizes quotas “only to the extent that the fundamental imbalance cannot be dealt with effectively by a surcharge.”
In sum, Congress was aware of the qualifications for action under GATT Article XII; Congress tacitly accepted those qualifications when it instructed the president to reform other elements of Article XII; and the reforms Congress instructed the president to pursue would have further aligned the GATT regime with the trade authority delegated under Section 122. The administration is subverting this intent by deliberately contradicting the plain text of Article XII.
The administration’s filing also opens the door to essentially limitless tariff power with no meaningful legal constraint. In arguing the existence of a BoP deficit through an analysis of the current account, the administration almost entirely excludes the US financial account from the picture. The filing merely acknowledges the countervailing effect of net foreign direct investment receipts but omits most other subcomponents of the financial account because “in modern-day financial markets they can exhibit high degrees of liquidity and volatile flows.” Not only is the empirical support for this assertion scant—the administration only cites a 1976 Bureau of Economic Analysis report on different methodologies for measuring the BoP—but more importantly, because the BoP is an accounting identity in which a deficit in the current account is necessarily offset by a surplus in the financial account, the administration’s tactic of picking and choosing among financial account subcomponents all but ensures that there will always be a BoP deficit that warrants tariffs. This logic thus amounts to a blank check for protectionism.
The Trump administration is digging in its heels at the WTO on a legal strategy that has already failed in a US federal court, and it is doing so even though the GATT could not be more explicit in refuting the administration’s core argument that a current account deficit is equivalent to a BoP deficit. More importantly, the implication of this argument is that the United States and any other WTO member registering a current account deficit could abrogate their GATT commitments at any time and raise tariffs. That cannot be what Congress intended when it passed Section 122 as part of a carefully calibrated statute to operate within the GATT’s existing framework—and to further commit the United States to the rules-based international trading order through other provisions in the Trade Act of 1974. The administration desperately wants courts and trading partners to believe it is acting within the rules, but its bad faith filing at the WTO demonstrates otherwise.