The Reagan White House Rejected Trump’s Tariff Power Claims

Section 122 was never meant to justify tariffs over ordinary trade deficits.

By Phillip W. Magness. Excerpt:

"Since 1976, the United States has had a near-continuous annual trade deficit. In 1984, this pattern prompted Congress to ask President Ronald Reagan to investigate its causes. The Senate Finance Committee submitted a list of questions to the White House about possible policy responses, including the following: “We would also like your analysis of the applicability of section 122 of the Trade Act of 1974 to the current [trade] imbalance, and the utility of surcharges or quotas to deal with this imbalance.”

The task of answering this question fell to Martin Feldstein, a longtime Harvard economist and a leading expert in macroeconomics, international economics, and public finance. At the time, Feldstein was serving as the chair of Reagan’s Council of Economic Advisers. He delivered the administration’s answer on Section 122 in a committee hearing on March 23, 1984:

On a more technical level, section 122 appears not even to apply to the current situation. The specific language of that section provides for the imposition of a tariff surcharge under two conditions: To deal with large and serious balance-of-payments deficits, and second, to prevent an immediate and significant depreciation of the dollar in foreign exchange markets.

Feldstein then carefully explained the conceptual difference between the “trade deficit” and a “balance-of-payments deficit” as contemplated by the statute:

Now, although we have a trade deficit and a current account deficit, we do not have a balance-of-payments deficit, in the strict sense envisioned in section 122. The technical definition for the balance-of-payments is the rate of accumulation of official reserve assets, including gold. Since net U.S. sales of other assets to foreigners, in other words net private investment in the United States, last year was more than enough to offset our current account deficit, the official U.S. reserves didn’t have to be drawn upon.

At the time of these remarks, official reserve drawdowns had become a thing of the past. Under the old Bretton Woods system, other countries maintained an official currency peg to the U.S. dollar. The dollar was, in turn, pegged to gold. Participants in this arrangement followed a complex set of rules administered by the International Monetary Fund to keep their currencies valued within the target ranges of the peg. As part of the deal, other governments could redeem their U.S. dollar holdings for gold at $35 an ounce. When a foreign government exercised this clause and exchanged dollars, it drew down on official U.S. reserves in gold and led to a “balance-of-payments deficit.”

In August 1971, President Nixon closed the gold exchange window and terminated this policy in a bid to stave off the depletion of U.S. gold reserves. The “Nixon Shock” threw the international exchange system into chaos, although for a while the United States attempted to reinstate a number of fixed exchange rate regimes. Congress passed the Trade Act of 1974, including the Section 122 tariff provision, amid this chaos in an attempt to provide negotiating leverage for a successor to the Bretton Woods system. That successor never emerged and in 1976 the International Monetary Fund formally amended its articles to terminate the fixed exchange rate system. The United States formally gave its assent to this change in October 1976, and exchange rates have floated on an open currency market ever since.

As a result of these changes to the international exchange system, the “balance-of-payments deficit” contemplated under Section 122 is now a relic of the past. Official U.S. reserves are no longer tied up in maintaining a fixed exchange system and are therefore not typically drawn down into deficit. Feldstein explained as much in his 1984 testimony:

Thus, although the current account deficit will be larger in 1984 than it was last year, there is no reason at this time to expect that there will be a balance-of-payments deficit in 1984. We will have a trade deficit, we will have a current account deficit; but there is no reason to think that we will be drawing down U.S. reserves or selling off our gold stock, and therefore we don’t have the balance-of-payments deficit that is required as a condition for triggering section 122.

Trump’s interpretation of Section 122 is not only a misreading of its terminology—it’s a misreading that past administrations investigated in response to similar trade deficit conditions. As Feldstein’s testimony shows, the Reagan Administration explicitly rejected Trump’s current argument and found that a “balance-of-payments deficit” did not exist under the current floating exchange rate system."