On August 22, 2026, U.S. tariffs of 50 percent imposed under Section 338 of the Tariff Act of 1930 (19 U.S.C. § 1338) took effect against a range of imports from Canada, including chemicals, prepared food and beverages, plastics, metal items, machinery, cosmetics, wood and paper products, industrial equipment, and electronics and telecommunication products, among others. The tariffs were first announced in three proclamations issued by President Trump on July 20, 2026, in response to Canadian measures that the President found to discriminate against U.S. commerce. The delay between the issuance of the proclamations and the effective date of the tariffs provided a strategic window for U.S. and Canadian officials to hold negotiations seeking to resolve several outstanding bilateral trade irritants and avert the duties. While bilateral talks intensified and a deal seemed forthcoming, talks ultimately broke down. In response to the U.S. tariffs, Canada announced its own responsive tariffs, which are scheduled to take effect on September 8.
Under Section 338 of the Tariff Act of 1930 (“Section 338”), the President is authorized to impose tariffs up to 50% on any foreign country that he finds discriminates against U.S. commerce vis-à-vis products from other foreign countries. If a country continues to discriminate against U.S. goods after tariffs are imposed, or increases such discrimination, the President is authorized to take further action to restrict or exclude imports from that country. Section 338 confers significant discretion to the President to impose tariffs and block imports without first undertaking the investigatory and administrative steps required under many other statutes.
Following its establishment in 1930, Section 338 was largely used (as was its predecessor statute) as a tool to advance a U.S. commercial policy that encouraged equal treatment among all trading partners, treatment also known as unconditional most-favored nation (“MFN”) treatment. While the U.S. government threatened use of Section 338 to impose tariffs in several instances prior to 1949, the statute has effectively remained unused for more than 75 years, and its use has not previously been tested by U.S. courts. Unilateral responses to trade discrimination by the United States in the past several decades have instead been addressed primarily under Section 301 of the Trade Act of 1974 (“Section 301”).
On July 20, 2026, President Trump issued three proclamations imposing tariffs of 50 percent under Section 338 on Canadian products, based on a determination that Canadian measures affecting trade in motor vehicles (Proclamation 11048), dairy products (Proclamation 11047), and alcoholic beverages (Proclamation 11046) discriminate against the United States. The proclamations initially provided that tariffs would become effective after a 30-day period, on August 19, 2026. On August 18, President Trump suspended the duties for an additional three days, or until 12:01 a.m. ET on August 22.
The new tariffs affect Canadian products listed in Annex I of each proclamation. Although the proclamations focus on Canadian measures impacting U.S. exports of motor vehicles, dairy, and alcoholic beverages, the lists of affected products spread pressure across the Canadian economy rather than track only those sectors. Indeed, the products subject to the new tariffs span a wide range of sectors, including chemicals, prepared food and beverages, plastics, metal items, machinery, cosmetics, wood and paper products, industrial equipment, and electronics and telecommunication products (including printed circuit boards).
The proclamations further specify that:
- There is no “on the water” or in-transit exception. Goods entered for consumption before August 22 avoid the tariff, whereas goods withdrawn from a bonded warehouse for consumption on or after August 22 do not.
- With one exception, the new tariffs apply in addition to any other applicable duties (including standard tariff rates listed in Column 1 of the U.S. Harmonized Tariff Schedule, as well as antidumping and countervailing duties and tariffs imposed under Section 301). They do not apply to articles subject to tariffs imposed under Section 232 of the Trade Expansion Act of 1962 (“Section 232”).
- Aside from certain passenger vehicle parts, there is no exception for goods that qualify as originating under the U.S.-Mexico-Canada Agreement (“USMCA”).
- The new tariffs also do not apply to articles subject to the World Trade Organization (“WTO”) Agreement on Trade in Civil Aircraft.
Two of the Canadian measures prompting the U.S. tariffs—the measures on U.S. autos and alcohol—were imposed by Canada in 2025 in response to Trump Administration tariff actions affecting Canadian goods. Canada enacted a 25 percent tariff against U.S. autos in April 2025 (subsequently amended in August 2025), in response to the imposition by the Trump Administration of Section 232 tariffs on global imports of autos and auto parts. Separately, provincial governments in Canada banned the sale of U.S. alcoholic beverages in spring 2025, also in response to the imposition of U.S. tariffs on Canadian exports in March 2025. The third Canadian measure prompting Section 338 tariffs relates Canada’s dairy supply management system, which the United States has long contended restricts market access for U.S. dairy exports, including through tariff rate quotas (“TRQs”) and marketing restrictions.
This marks the first time in modern history that Section 338 has been invoked by the United States to threaten—let alone actually impose—tariffs. This unprecedented use of Section 338, under circumstances distinct from the MFN objective underlying the statute, raises questions that may prompt legal challenges.
Given the explicit statements in the proclamations that they were intended to “spur Canada to remove” its discriminatory trade practices, the announcement was also seen, at least in part, as an effort by the Trump administration to ratchet up pressure on Canada to accelerate progress and engagement on these and other broader bilateral trade issues and irritants, including negotiations relating to the USMCA. The time period between announcement of the tariffs on July 20 and their entry into force on August 22 provided a strategic window for U.S. and Canadian negotiators to address these issues and seek to avoid imposition of the tariffs, and both U.S. and Canadian leaders confirmed their agreement to intensify talks shortly after the July 20 announcement. Senior Canadian trade officials then visited Washington on several occasions in July and August to discuss a possible solution.
On August 18, 2026, an amicable resolution appeared within reach, when President Trump announced that the countries had reached a deal, and that he was delaying the effective date of the Section 338 tariffs for three days, until August 22, to allow negotiators to finalize an agreement. While negotiations continued, talks ultimately broke down on August 21, and U.S. tariffs took effect at 12:01 am on August 22.
Canadian and U.S. negotiators subsequently traded accusations that the other made last-minute demands that ultimately sank the deal. Among the reported sticking points were Canadian claims that the proposed U.S. tariff liberalization on autos and steel also did not go far enough, that the U.S. had demanded that Canada remove requirements on streaming providers to prioritize local content (with implications for French language content), and that U.S. proposals would have restricted Canada’s ability to negotiate free trade agreements with third countries. Canadian officials also claimed differing views on concessions relating to Section 232 tariffs among U.S. officials—namely U.S. Trade Representative Jamieson Greer and Commerce Secretary Howard Lutnick—played a role in the breakdown of the talks. U.S. officials, for their part, claimed that they had agreed to significant concessions, but that Canada refused to finalize the deal that was on the table, and accused Canadian Prime Minister Carney of sinking the agreement for domestic political reasons.
After the collapse of negotiations, Canadian Prime Minister Mark Carney announced on August 25 that Canada would impose retaliatory tariffs against U.S. imports, designed to match the impact of the U.S. tariffs “dollar-for-dollar.”
The Canadian tariffs are scheduled to take effect on September 8, and—after some adjustments made to remove seafood from the list of targeted products and add copper wire, charcoal, glass containers, and a few other products—are set to impact a range of more than 600 product categories. According to Canadian officials, the tariffs are intended to target $27.6 billion in U.S. goods, focusing on sectors that have been the hardest hit by U.S. tariffs, including steel and aluminum, dairy, textiles and apparel, appliances, agricultural equipment, pulp and paper, and electronics. The tariffs applicable to these U.S. goods will be 15 percent, 25 percent, or 50 percent, depending on the product.
In addition to retaliatory tariffs, Canada also announced that it would establish a C$7.5 billion package of new and enhanced support for workers and businesses affected by the U.S. tariffs.
Following the breakdown in bilateral negotiations and the announcement and implementation of these recent trade actions by the United States and Canada, there remains a material risk of further escalation. Even before Canada publicly announced its plans to implement responsive tariff measures, President Trump warned of severe consequences for Canada for failing to reach a deal with the United States, and the Trump Administration has reportedly been weighing additional trade measures against Canada in the wake of Canada’s own tariff announcement (including a threat by President Trump to increase tariffs on all Canadian cars and trucks, as well as automotive parts and steel to 50 percent beginning January 1, 2027). On August 27, U.S. Trade Representative Jamieson Greer further suggested that the United States was considering potential import bans on Canadian goods, while President Trump followed through on a threat made days before to rename Lake Ontario as Lake America, via executive order. For its part, Canada’s retaliatory actions have avoided significantly more inflammatory—and potentially impactful—areas of leverage, such as export restrictions on energy products and certain critical minerals, which appear to remain options should retaliation escalate. While the scope and timing of any additional trade measures that the two countries may enact—beyond those already announced—remains unclear, these areas for further retaliation, together with hardening sentiment among policymakers in both countries, increase the prospect that the current dispute could develop into a more entrenched North American trade conflict.
Businesses whose operations, supply chains, or commercial arrangements are reliant on U.S.-Canadian trade should remain vigilant. In addition to monitoring the announcement of new measures, businesses should assess changes to existing tariffs and related exemptions, keeping in mind that these new Section 338 tariffs may apply on top of (or “stack”) with other U.S. tariffs applicable to Canadian goods, including antidumping and countervailing duties, as well as tariffs imposed under Section 301 of the Trade Act of 1974. Companies should also evaluate potential exposure across their supply chains and consider contingency measures to address further increases in costs, border delays, sourcing constraints, or import restrictions affecting particular products.
Covington’s trade lawyers have been advising a wide range of clients regarding recent tariff actions. Covington can assist with related customs and supply chain questions, such as how Section 338 tariffs interact with other tariffs, as well as with assessing exposure to Canadian retaliatory trade actions and evaluating options for navigating such measures. If you have any questions concerning this alert, please contact the following of our Trade Policy practice.
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