President Trump’s new tariffs were imposed under Section 122 of the Trade Act of 1974, which allows temporary import restrictions when the United States faces “fundamental international payments problems,” including a “large and serious” balance-of-payments deficit. The term is not commonly used outside economic policy circles, but it refers broadly to a country’s financial relationship with the rest of the world.
The balance of payments is a comprehensive record of all economic transactions between a nation and foreign countries. It includes trade in goods and services, income from overseas investments, cross-border financial flows such as purchases of stocks and bonds, and changes in official reserves.
In strict accounting terms, the balance of payments always balances: money leaving the country must be offset by money coming in. But when policymakers refer to a “deficit,” they are usually describing a persistent shortfall in trade and income flows—known as the current account—that must be financed by borrowing or by selling domestic assets to foreign investors.
Historically, under fixed exchange-rate systems such as the postwar Bretton Woods framework, sustained deficits often led governments to lose gold or foreign-exchange reserves as they intervened to support their currencies. Under today’s floating exchange rates, the adjustment typically occurs through capital inflows from abroad, currency movements, or both.
The United States has run current-account deficits for decades, financed largely by foreign purchases of U.S. assets, including Treasury securities, corporate bonds, and equities. This doesn’t mean the deficit disappears. Rather, it is financialized.
Critics argue that because the accounts balance by definition, a balance-of-payments deficit cannot exist in a floating exchange-rate system. Economists generally use the term more loosely to describe sustained external imbalances that require ongoing financing or adjustment rather than a literal mismatch in the accounting totals.
Section 122 uses the terminology common in policy debates at the time the law was enacted. Whether current U.S. conditions meet the statute’s standard is a matter of legal interpretation and presidential judgment.
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