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It may prove the current US administration’s emperor’s-new-clothes moment. On 20 February 2026, the US Supreme Court struck down the central legal pillar of President Trump’s tariff strategy, holding that the International Emergency Economic Powers Act (IEEPA) did not authorise the President to impose tariffs. The now-rejected strategy had been outlined in a November 2024 paper by Stephen Miran, who served as Chair of the Council of Economic Advisers before joining the Federal Reserve’s Board of Governors. The Supreme Court decision reaffirmed that customs duties were, by default, a matter for Congress under Article I, Section 8 of the US Constitution, unless Congress had clearly delegated limited tariff authority by statute—and IEEPA had not done so.

A conventional response would have been to seek legislation for a ‘Liberation Day’ tariff regime. Instead, the administration turned to Section 122 of the Trade Act of 1974, relying on a different emergency clause to defend presidential authority. In a proclamation signed on 20 February, it imposed a ten per cent global import duty—effective 24 February—for 150 days, invoking Section 122’s emergency authority to address ‘fundamental international payments problems’. In a companion fact sheet, the White House argued that the surcharge would ‘stem the outflow’ of dollars and incentivise reshoring. If the situation were left unaddressed, the document warned, the underlying imbalance would endanger the country’s ability to finance its spending, erode investor confidence, distress financial markets, and threaten US economic and national security.

For firms that import, export, invest, and plan, the central question is no longer the tariff rate but whether any given rate will survive the next court filing. The move prompted fresh litigation, alongside claims for potential refunds linked to roughly US$129 billion in estimated IEEPA duty deposits already paid. By 25 February 2026, at least 1,800 companies were reported to have filed lawsuits seeking refunds from the government. The result is tariff whiplash: uncertainty becomes a cost in its own right. For the private sector in the US and among the country’s trading partners, this decision raised a set of critical questions of statutory fit: (i) could today’s US external imbalances plausibly be characterised as the kind of ‘payments emergency’ Section 122 was meant to address; (ii) did the design and breadth of a global ten per cent tariff satisfy the statute’s constraints; and (iii) would the Section 122 rationale withstand legal challenge, or risk the same judicial conclusion—lack of statutory authorisation—that had felled the IEEPA tariffs?

Section 122: an instrument for a different world

Section 122 differs from IEEPA in the way that matters most to judges: it speaks the language of customs duties. It authorises a temporary import surcharge ‘in the form of duties’, so future disputes are less likely to turn on whether tariffs are mentioned than on whether the statute’s predicates are satisfied. The presidential power is tightly cabined: narrow in scope, capped in level, and limited in duration. That shifts litigation from whether tariffs are mentioned to whether the administration can evidence a qualifying ‘payments emergency’ and show a plausible fit between that emergency and a uniform global surcharge.

The statute authorises the President to restrict imports when ‘fundamental international payments problems’ require special measures. The statute identifies three situations in particular, viz., to (i) ‘deal with large and serious United States balance-of-payments deficits’; (ii) ‘prevent an imminent and significant depreciation of the dollar in foreign exchange markets’; or (iii) ‘cooperate with other countries in correcting an international balance-of-payments disequilibrium’. In such circumstances, the President may proclaim—for no more than 150 days (unless Congress extends the period)—a temporary import surcharge of up to 15 per cent ad valorem and/or temporary quotas. The Act describes emergency tools, not a standing trade regime.

Those triggers make sense in the monetary world that Congress, in 1974, had only just left behind: the late Bretton Woods system of fixed exchange rates. The simplest way to see why is through the Mundell–Fleming ‘trilemma’. With high capital mobility, governments can choose only two of three objectives: a fixed exchange rate, an independent monetary policy, and open capital markets. Under a fixed-rate commitment, the exchange rate is not allowed to do the adjusting. In such a system, persistent external deficits must be financed and show up as a loss of central-bank reserves. Because reserves are finite and confidence is fragile, persistent external deficits can become self-reinforcing: once markets doubt the peg, capital moves pre-emptively, reserve losses accelerate, and policymakers are forced either into abrupt tightening or a discrete devaluation—precisely the sort of ‘imminent and significant depreciation’ Section 122 anticipates.

A floating-rate world works differently. When the exchange rate is allowed to move, it can absorb a large share of the adjustment through net exports: a weaker currency tends to make imports dearer and exports more competitive. That is why Milton Friedman argued that floating rates ‘completely eliminate the balance-of-payments problem’: not because external imbalances disappear, but because they are less likely to harden into an immediate crisis. Under a float, adjustment tends to occur through the exchange rate—via higher import prices and improved export competitiveness—rather than through a sudden drain of foreign-exchange reserves. Under a fixed-rate regime, by contrast, the appeal lies in stability: firms gain greater certainty about future exchange rates, and policymakers can use the peg as an inflation anchor. Yet those advantages are conditional. If external deficits persist and confidence falters, defending the peg can force abrupt tightening or an eventual devaluation, causing the sort of macroeconomic rupture that destroys both the promised exchange-rate stability and the credibility of the inflation anchor.

In modern conditions, the US can run sizeable current-account deficits for extended periods because they are financed through capital inflows—foreign purchases of US assets—reinforced by the dollar’s role as the world’s dominant reserve and investment currency. Federal debt stands now at around 121 per cent of GDP, and foreign investors hold roughly 30 per cent of Treasury securities outstanding—an external investor base equivalent to about US$8.5 trillion (end-2024). That scale of foreign demand helps to explain how persistent US external deficits can be financed without an immediate ‘payments crisis’ in the Bretton Woods sense.

Importantly, this difference in monetary mechanics matters for statutory fit. Section 122 is framed around a short-fuse emergency: imminent currency stress, acute payments imbalance, and temporary remedies capped in both level and duration. The more the government’s justification rests on persistent structural imbalances, reshoring ambitions, or long-run fiscal anxieties, the harder it becomes to show that a broad, uniform import surcharge is the kind of ‘payments’ stabiliser Section 122 was designed to authorise—rather than a substitute for macroeconomic, and particularly fiscal, choices recast in emergency language.

Why pass a fixed exchange law in a flexible exchange world?

Douglas Irwin’s (2012) account of US President Richard Nixon’s 1971 import surcharge suggests that the ‘balance-of-payments emergency’ rationale was, in important respects, an ex post justification for what was fundamentally coercive economic diplomacy en route to the Smithsonian Agreement on currency revaluations of the US’s principal trading partners. The 10 per cent surcharge, announced alongside the closing of the gold window on 15 August 1971, was designed to stop the drain on US gold reserves and—crucially—to force key partners to revalue their currencies against the dollar; administration officials believed that closing the gold window alone would not extract sufficient concessions. In internal deliberations, according to Irwin’s paper, Treasury Secretary John Connally pushed the surcharge as ‘leverage’ and as a politically saleable ‘border tax’ that would shock others into bargaining; Nixon himself valued the ‘import duty’ as a means of ‘striking back’ and ‘extracting concessions’. Later, participants such as George Shultz and Kenneth Dam described it in similarly tactical terms—as an ‘attention getter’ and ‘bargaining chip’—even while acknowledging that economists could point to perverse effects, underscoring the extent to which the measure’s logic lay in negotiation rather than in a narrowly technocratic stabilisation instrument.

That framing mattered because it sat uneasily with the constitutional and statutory landscape. Irwin notes that there was no clear precedent for a President unilaterally imposing a general import surcharge and that the statutory basis in the Tariff Act of 1930 and the Trade Expansion Act of 1962 was weak; the administration therefore leaned on the broader emergency authority in section 5(b) of the Trading with the Enemy Act, with Nixon formally declaring a ‘national emergency’ to invoke it. The legality was contested by Yoshida International, a New Jersey-based importer of Japanese textile accessories, which won in the US Customs Court with an initial ruling against the government, stating that ‘nothing in the statutes explicitly allowed the president to impose a surcharge’. While the verdict was being appealed, ‘Congress gave the president’, with Section 122, ‘the explicit authority to impose an import surcharge in the future.’ The history around the closing of the gold window and challenges against the import surcharge had left Congress acutely aware that a major import tax had to be imposed under contested legal foundations and emergency rhetoric.

This is where Bryan Riley’s (2026) contribution helps to sharpen the ex post story. He argues that Section 122 was created precisely to prevent future administrations from improvising Nixon-style surcharges under vague emergency claims, by providing ‘specific statutory guidelines’ and by cabining the power to genuine ‘fundamental international payments problems’ as understood in the context of fixed or managed exchange-rate systems. On Riley’s reading, the fact that the United States moved to floating exchange rates soon after helps to explain why Section 122 has never been invoked: its trigger language was written for a payments crisis in a world of pegs. For the current situation, he argued that the US did not face a fundamental international payment problem, adding that it had not had one since the US adopted a floating exchange rate more than five decades ago. In Riley’s conclusion, ‘Section 122 does not give President Trump the legal authority to impose tariffs’.

This point is well argued. The legislative lesson drawn from 1971 was not to legitimise a standing executive tariff power, but to authorise—briefly, conditionally, and within hard caps—an emergency instrument intelligible in a Bretton Woods-type setting of reserve defence and parity stress akin to the coercive economic diplomacy pursued by Nixon during the second half of 1971. According to this document, Congress limited Section 122 as a narrow emergency valve—restricted in duration and designed around specific balance-of-payments triggers—rather than as an open-ended platform for a broad tariff regime.

Economic inefficacy and legal vulnerability

From both economic and legal perspectives, Section 122 was written for moments in which external constraints were immediate and concrete: a country defending a fixed exchange rate, watching reserves drain, and fearing a disorderly break of a financial system that had brought considerable prosperity over the course of the previous quarter of a century. In that setting, a temporary surcharge could be defended as a stop-gap—an emergency brake to buy time for adjustment or negotiation. In a floating-rate, capital-mobile economy, the same instrument looks far less coherent. A broad, uniform import duty is a blunt lever for a problem the White House itself frames in terms of confidence, financing conditions, and long-run external vulnerability. It may reprice some imports, shift supply chains, and redistribute rents; it is far less likely to deliver what the statute presupposes: a targeted response to an imminent payment emergency.

The mismatch is not merely economic. Section 122’s architecture—tight caps, a short fuse, and trigger language about ‘fundamental’ problems and ‘imminent’ depreciation—invites courts to ask whether the administration can evidence that a qualifying ‘payments emergency’ exists and whether the chosen measure is plausibly tailored to it. A tariff justified by structural imbalances and reshoring ambitions risks looking like an ordinary trade programme dressed in emergency language. That is precisely the pattern that has already met judicial resistance under IEEPA—and it is why reliance on Section 122 will remain legally brittle.

The policy implication is straightforward. If the United States wants a lasting tariff regime—predictable rates, stable bargaining positions, clearer rules for firms and trading partners, and minimal exposure to repayment claims—and avoid protracted periods of uncertainty and legal challenges, it must legislate openly and specifically. A durable trade policy is not built on short-term emergency clauses. Conversely, if Washington’s concern is payments stability, the relevant toolkit is macroeconomic: fiscal choices, monetary and financial-stability policy, and measures that address savings and investment behaviour. Trade surcharges can shift the composition of imports; they do not, on their own, repair the underlying financing arithmetic of a reserve-currency economy. A tariff may be imposed by proclamation; macro-fiscal stability cannot—and the thin emergency wardrobe may not make it through court.

Jan-Peter Olters