Balance of Payments (BOP)
The balance of payments is a comprehensive record of all economic transactions between a country and the rest of the world — distinct from the trade deficit. It is now the central legal concept in the 24-state lawsuit challenging Section 122 tariffs.
The balance of payments (BOP) is a comprehensive record of all economic transactions between a country's residents and the rest of the world over a given period. It is a critical concept in international economics and has become central to the legal debate over Section 122 tariffs in 2026.
Components of the Balance of Payments
The BOP consists of three main accounts:
Current Account
Tracks the flow of goods, services, income, and unilateral transfers:
- Trade balance — Exports minus imports of goods and services
- Primary income — Investment returns, wages earned abroad
- Secondary income — Foreign aid, remittances, gifts
Capital Account
Records transfers of capital assets and non-produced, non-financial assets:
- Debt forgiveness
- Migrant transfers
- Sales of patents and copyrights to foreign entities
Financial Account
Tracks investment flows between countries:
- Foreign direct investment (FDI) — Building factories, acquiring companies abroad
- Portfolio investment — Stocks, bonds, and other financial instruments
- Reserve assets — Central bank holdings of foreign currency and gold
BOP vs. Trade Deficit: The Critical Legal Distinction
The distinction between the balance of payments and the trade deficit has become the central legal argument in the 24-state lawsuit challenging Section 122 tariffs (filed March 5, 2026).
Trade deficit measures only the gap between imports and exports of goods (and sometimes services). The U.S. ran a goods trade deficit of approximately $1.2 trillion in 2025.
Balance of payments is the complete picture. While the U.S. imports far more goods than it exports, it also attracts enormous foreign investment — foreign companies and individuals buy U.S. Treasury bonds, invest in American companies, and purchase real estate. These capital inflows largely offset the trade deficit.
The plaintiffs argue that Section 122 of the Trade Act of 1974 authorizes emergency tariffs only to address "large and serious" balance-of-payments deficits as defined by the International Monetary Fund — not trade deficits alone. Since the U.S. does not have a BOP deficit when capital flows are included, the argument is that the legal prerequisite for Section 122 tariffs is not met.
IMF Definition
The IMF defines a balance-of-payments problem as a situation where a country cannot finance its current account deficit through normal capital inflows and must draw down reserves or borrow from the IMF. The U.S. has not faced this situation in modern history — the dollar's status as the world's reserve currency ensures consistent demand for U.S. financial assets.
Why It Matters for Importers
If the CIT agrees with the plaintiffs' interpretation that Section 122 requires a true BOP deficit — not merely a trade deficit — the current 15% global tariff surcharge could be struck down. This would remove one of the three major tariff layers affecting most U.S. imports in 2026.