The US Balance-of-Payments Gamble: All About the Section 122 Strategy
The Association of Foreign Press Correspondents (AFPC-USA) hosted a podcast, in partnership with the Hinrich Foundation, titled, “The US Balance-of-Payments Gamble: All About the Section 122 Strategy.”
According to Dawn Shackleford, the President of Looking Glass Trade, LLC, after the US Supreme Court ruled the Trump administration could not use the International Emergency Economic Powers Act (IEEPA) to impose tariffs, the administration shifted to Section 122 of the Trade Act of 1974 as an alternative legal authority. Section 122 allows the president to impose temporary tariffs of up to 15% for 150 days, unless Congress extends them, when facing serious balance-of-payments deficits or a risk of significant dollar depreciation. The administration initially set the tariffs at 10%, and although President Donald Trump later said he wanted to raise them to 15%, they remained at 10%.
Shackleford explains that a true balance-of-payments crisis generally involves severe financial distress — such as a country being unable to pay for essential imports or service foreign debt, along with rapid depletion of foreign exchange reserves, loss of access to foreign borrowing, and sudden capital flight. Crucially, unlike national security claims, whether such a crisis exists is not typically considered self-judging by governments; instead, international institutions — particularly the International Monetary Fund (IMF) — play a role in evaluating whether the economic conditions justify trade restrictions.
The podcast episode was hosted by Roseanne Gerin, an assistant editor at the newsletter International Trade Today, who has worked in journalism for more than 25 years.
This podcast episode was produced in partnership with the Hinrich Foundation. AFPC-USA is solely responsible for the content of this episode. The podcast transcript can be found HERE.
Gerin opened by noting that after the Supreme Court ruled the Trump administration could not use IEEPA to impose tariffs, the White House pivoted to Section 122 of the Trade Act of 1974, a move that relies on a balance-of-payments justification and potentially invites scrutiny from the International Monetary Fund. She asked Shackleford why the administration chose that route instead of expanding tariffs under national security authorities, which generally give the United States greater unilateral flexibility.
Shackleford explained that while the administration stepped away from IEEPA, it still maintains numerous Section 232 national security tariffs on products such as steel, aluminum, copper, automobiles, and auto parts. However, she said those tariffs require a lengthy process: the Commerce Department must conduct a study that can take close to 300 days, followed by presidential review before any tariffs can be imposed. Because the administration “really needed something that was going to be quick,” she said, officials turned to Section 122, which can be implemented immediately. Other legal authorities were considered — including Section 338 of the Smoot-Hawley Tariff Act — but she said there was likely hesitation to revive a tool closely associated with the tariffs that “drove the US into the Great Depression.” In her view, the need for speed ultimately “drove the choice of the Section 122 tariffs.”
Dawn Shackleford
When Gerin suggested that invoking Section 122 — a statute designed for the Cold War-era of fixed exchange rates and limited capital mobility — might be an attempt to create a legal fallback after the Supreme Court blocked other tariff tools, Shackleford agreed. She said the measure functions as a temporary stopgap that allows the administration to maintain tariffs while pursuing more durable mechanisms. Section 122 tariffs are capped at 15%, she noted, with the current surcharge set at 10%, meaning the administration would need different authorities if it wants to go higher. Shackleford said those longer-term tools are likely to come through Section 232 investigations and newly launched Section 301 probes targeting roughly 60 countries, particularly on issues such as forced labor and industrial overcapacity, which could eventually replace the Section 122 tariffs.
Gerin asked how the broad list of product exemptions in the US World Trade Organization (WTO) notification — covering items such as critical minerals, pharmaceuticals, aerospace products, and vehicles — affects the credibility of the administration’s claim that the tariffs are necessary to address a balance-of-payments crisis. Shackleford acknowledged that the carve-outs “do bring that into question.” She explained that the architects of the General Agreement on Tariffs and Trade (GATT) envisioned balance-of-payments restrictions as across-the-board trade measures covering all products. However, she noted that historical practice has often diverged from that ideal. Countries that have used similar provisions — such as India, Ecuador, and Ukraine — implemented restrictions covering only portions of their tariff schedules rather than blanket measures. India’s restrictions applied to about 2,700 tariff lines, Ecuador’s to roughly 30% of trade, while Ukraine’s measures also included exceptions. As a result, Shackleford said the US approach may not align with the original intent of GATT’s designers but is “not necessarily completely out of line with…past practice.”
Turning to the International Monetary Fund’s role, Gerin asked how the IMF evaluates whether a country truly faces balance-of-payments pressures. Shackleford clarified that the review is formally a World Trade Organization process, triggered by agreements under GATT Article 15, in which the WTO requests IMF expertise because its members are primarily trade specialists rather than monetary experts. The IMF then analyzes key indicators to determine whether a country faces a genuine crisis — such as an inability to finance imports or service foreign debt, rapid depletion of foreign exchange reserves, large capital outflows, or unsustainable currency pressure. Drawing on its regular monitoring of these indicators, the IMF compiles a macroeconomic assessment and presents it to WTO members, though its conclusions are not always definitive.
When Gerin asked about the reputational risks for the United States — particularly if the IMF were to determine that such crisis conditions do not exist for the issuer of the world’s reserve currency — Shackleford suggested the IMF may be unlikely to reach a firm judgment. She noted that US foreign exchange reserves currently stand at roughly $252 billion, indicating that reserves appear adequate. At the same time, she emphasized that IMF findings must be approved by its executive board, which includes 25 members, among them a US representative. Because the board must agree on the statement presented to the WTO, Shackleford said it could be difficult for the IMF to produce a clear, unanimous conclusion that the US lacks a balance-of-payments crisis. In such a scenario, the IMF might provide detailed data and analysis but stop short of making a definitive determination.
When asked about her observation that the IMF may need to “sharpen its pencils” when evaluating the Trump administration’s balance-of-payments claim, Shackleford explained that her remark was less about skepticism toward the US claim itself and more about the lack of institutional familiarity with the process. Because balance-of-payments provisions have rarely been used in recent decades, she said many officials at the WTO and among member governments have little experience with them. The last major cases — Ecuador in 2015 and Ukraine in 2017 — required policymakers to essentially “dust off” the rules after years of inactivity. As a result, she argued that officials should revisit the relevant legal framework, including GATT Articles 12 and 15 and the Uruguay Round understanding on balance-of-payments provisions, to ensure the process is properly applied. While some observers believe the IMF may not provide input, Shackleford said she disagrees, expecting the Fund to weigh in — even if its conclusions stop short of declaring definitively whether a crisis exists.
Gerin then referenced India’s late-1990s balance-of-payments case, in which the IMF determined that India’s external position was not weak enough to justify its restrictions, undermining its argument at the WTO. She asked whether the United States might be counting on its economic size and influence to avoid a similarly critical assessment. Shackleford suggested the administration may instead be “gambling on time.” She noted that the Section 122 tariffs can remain in place for 150 days, meaning they could expire around July 24, while WTO procedures allow four months for consultations following the March 20 notification. That timeline, she said, could stretch close to the end of the tariff period, and consultations do not necessarily produce immediate conclusions. Drawing on past cases like Ecuador’s, where discussions extended for months, Shackleford said the United States could ultimately remove the measures before the consultation process fully concludes.
On the subject of why the United States chose to formally notify the WTO, despite speculation that it might avoid doing so, Shackleford said the decision was consistent with Washington’s longstanding emphasis on transparency and notification obligations within the WTO system. The United States has repeatedly pushed other countries to provide more detailed disclosures — particularly criticizing China for failing to notify certain industrial subsidies — and has promoted reforms on transparency since 2017. Given that stance, she said it would have been “odd” for the US not to notify the organization. Moreover, there was little downside to filing the notification: the administration had already declared domestically that it was invoking Section 122 due to a balance-of-payments problem, and WTO rules allow the Balance-of-Payments Committee to initiate a review regardless of whether a country files. As a result, Shackleford said the notification simply formalized the process and reinforced the US position that it was following the rules it encourages others to observe.
In response to Gerin’s question about how other WTO members might respond now that the United States has formally notified the organization of its Section 122 tariffs, and whether a review by the Balance-of-Payments Committee is likely, Shackleford said she expects the committee chair to schedule a meeting following the notification, noting that the chair has already indicated publicly that he is monitoring the issue closely and anticipates being busy with it in the coming months. She said it is unlikely the United States would request such a review itself, but once the notification is filed, the chair can initiate the process. The timing, she added, will depend partly on coordination with the International Monetary Fund, which typically requires at least eight weeks to produce its assessment of whether a balance-of-payments crisis exists. Because the United States has representation on the IMF’s executive board, she suggested the process could take longer, which may influence when the committee meeting ultimately occurs.
Shackleford said she does not expect the Section 122 tariffs themselves to dominate conversations at the WTO’s 14th Ministerial Conference in Cameroon, largely because their current level — 10%, capped at a maximum of 15% — is lower than other tariff measures the administration has pursued. Instead, she said many countries are more concerned about existing and potential tariffs under other authorities, including Section 232 national security tariffs, which in some cases reach 50% on steel and aluminum, and Section 301 tariffs, which could be set even higher. As a result, governments are likely to focus their diplomatic efforts on securing bilateral agreements with the United States or preserving deals already negotiated, in hopes of ensuring that whatever replaces the temporary Section 122 tariffs does not become more trade-disruptive.
Shackleford said she believes the US decision to follow WTO notification rules, even if its justification is contested, could strengthen Washington’s position in broader WTO reform discussions. By formally notifying the WTO and participating in the review process, the United States can demonstrate that it is “actively engaging” with the institution and adhering to the rules it encourages others to follow. She noted that Washington has long pushed for greater transparency and notification compliance, particularly regarding issues such as unreported subsidies by other members. Being able to point to its own compliance — even in a controversial situation — allows the United States to argue that all members should similarly engage with the system, which she said ultimately benefits both US credibility and the WTO as an institution.
She also said the temporary nature of the 150-day sunset clause attached to the US Section 122 tariffs does make retaliation less likely in the near term. She explained that when the WTO Balance-of-Payments Committee reviews such measures, its goal is typically to work with the country in question to determine whether trade restrictions are actually necessary to address a balance-of-payments problem. In those discussions, members often explore whether alternative tools — such as fiscal or monetary policy — could address the issue instead of trade barriers. Countries that have previously imposed balance-of-payments restrictions have usually been asked to develop phase-out plans for those measures.
In the US case, she noted, Washington has effectively already provided a phase-out timeline by declaring that the tariffs will expire in July. If the United States tells the committee that the measures will automatically end on that date, much of the committee’s typical work — negotiating a timetable for removing the restrictions — has essentially already been done. She also pointed out that retaliation would require a formal dispute process, either through the WTO or through a relevant free trade agreement, and those cases typically take years to resolve. Because of that timeline, she said the Section 122 tariffs could easily expire before any dispute settlement ruling occurs, further reducing incentives for immediate retaliation.
Shackleford said she expects countries to follow the WTO process, noting that the organization already has a well-established framework for dealing with balance-of-payments claims. Under those rules, the IMF is explicitly tasked with providing economic assessments to inform WTO members’ discussions, and a formal cooperation agreement between the IMF and WTO governs how that information is shared. She acknowledged, however, that the IMF may face political sensitivities when evaluating the US claim. If the executive board cannot reach consensus on whether the United States truly faces a balance-of-payments crisis, she suggested the IMF might issue a carefully worded statement that presents the relevant economic indicators without delivering a definitive judgment, effectively sidestepping a direct conclusion while still participating in the process.
Gerin turned to the broader implications for the most-favoured-nation (MFN) principle, which requires WTO members to apply the same tariff rates to all trading partners unless specific exceptions apply. She asked whether the US decision to notify the WTO and apply the Section 122 surcharge uniformly helps preserve the MFN framework by placing the measure within a transparent, rules-based process.
Shackleford said the situation illustrates how difficult it is for countries to move away from an MFN-based system, even when pursuing aggressive trade measures. While she said the WTO notification is helpful for transparency, she noted that even if the United States later relies more heavily on authorities such as Section 232 national security tariffs or Section 301 tariffs, some level of uniformity is still likely to remain. She explained that the US tariff schedule is currently structured in a relatively simple format with only a few columns: the standard MFN rate, a Column Two rate applied to countries such as North Korea and Cuba, and preferential rates under free trade agreements. This structure makes tariffs easy for importers, consumers, and foreign governments to understand. Creating a system with numerous country-specific tariff columns would dramatically increase complexity and create administrative burdens for US companies. Because of those practical constraints, she suggested policymakers will likely continue to rely on broadly uniform tariff layers, such as an additional Section 301 rate applied across many countries, rather than highly fragmented country-by-country tariffs. In that sense, the Section 122 tariffs reflect an ongoing preference for some degree of uniformity in the system.
Shackleford noted that the Section 122 tariffs are unlikely to dominate the ministerial discussions, suggesting that reporters should instead focus on a few key issues shaping the future of the WTO. One of the most important is the e-commerce moratorium, a long-standing agreement under which WTO members refrain from imposing customs duties on digital transmissions, including data flows, movies, and music downloads. The moratorium must be renewed periodically, and some members are pushing to make it permanent. She said losing it would represent a major setback for the WTO, making it one of the most significant items on the ministerial agenda. Another major topic, she said, will be whether the organization can expand the use of plurilateral agreements — trade deals negotiated among subsets of WTO members rather than the entire membership of 166 countries. Some countries, particularly India, have historically resisted this approach. As a result, a key storyline at the ministerial will be whether other members can persuade India to allow more flexible negotiating structures, which could shape how the WTO develops new trade rules going forward. Because of those broader institutional debates, Shackleford suggested that reporters are likely to see more attention on digital trade and WTO reform than on the temporary Section 122 tariffs themselves.
To better understand these issues, Shackleford recommended that journalists begin by understanding the WTO’s tariff binding system, which governs how high countries are allowed to set their tariffs under international agreements. She noted that the United States has some of the lowest tariff bindings at the WTO, typically in the 2% to 4% range, meaning it has relatively little flexibility to raise tariffs without breaching its commitments. By contrast, other major economies — including India and Brazil, with bindings around 50%, and even the European Union, which has higher bindings than the US — have far more room to increase tariffs while still remaining within WTO rules. Because the United States agreed to such low limits, measures like Section 122 tariffs, earlier IEEPA tariffs, and potential future Section 301 tariffs often attract criticism for exceeding those agreed-upon ceilings. Shackleford said reporters should therefore pay close attention to what tariff bindings actually allow, how they differ across countries, and what legal procedures exist to modify them. She emphasized that changing tariff bindings is extremely difficult under WTO rules. Most were negotiated during the Uruguay Round and finalized in 1995, and efforts to renegotiate them collectively have stalled since the collapse of the Doha Round. The main formal mechanism for altering bindings — Article 28 of the GATT — is technically available but widely viewed as impractical and rarely used. As a result, many countries remain effectively locked into tariff ceilings negotiated decades ago, even though the global economy has changed dramatically since then. Understanding these constraints, she said, helps explain why governments sometimes rely on alternative legal authorities or temporary measures rather than attempting to renegotiate their WTO commitments.
Shackleford suggested the first signal to watch for now that the United States has notified the WTO will likely come from the chair of the WTO Balance-of-Payments Committee, who is responsible for scheduling discussions once a notification has been submitted. The chair has already indicated publicly that the issue will keep him “very busy” in the coming months, suggesting that committee activity is likely. She added that while not every WTO member typically participates in such proceedings — often because smaller countries lack the diplomatic resources — the major trading powers are likely to be heavily involved. In particular, she expects active engagement from the European Union, India, and China, along with other large members. Smaller countries may take a more limited role, often relying on the larger players to lead the debate and raise concerns during committee consultations.
According to her, the key takeaway is that the WTO system is still functioning, even amid tensions and criticism. She pointed out that the United States — despite often criticizing the institution — has continued to actively engage with its procedures, including by submitting the balance-of-payments notification related to the Section 122 tariffs. In her view, that step shows the US is still operating within the framework of the multilateral trading system, rather than ignoring it entirely. She also highlighted the United States’ ongoing participation in WTO reform discussions, noting that Washington recently submitted two proposals related to WTO reform ahead of the ministerial conference. Combined with the presence of experienced US trade officials in Geneva — such as the US ambassador to the WTO and the participation of US Trade Representative Jamieson Greer at the ministerial — she said these actions signal that the United States remains engaged in shaping the institution’s future.
