Tit For Tat? Section 338 Tariffs Take Effect As Canada Prepares To Retaliate

As we noted in our previous article, “The Latest Shot Across the Bow: U.S. Threatens 50% Tariffs on Canadian Goods,” U.S. President Trump’s three Section 338 proclamations announced the imposition of a 50% tariff on over 550 Harmonized Tariff Schedule (HTS) subheadings of Canadian goods, effective August 19, 2026. Canada and the United States engaged in negotiations during that window, with the looming Section 338 deadline serving as the catalyst. The U.S. extended the deadline by 72 hours as the parties continued negotiating, but ultimately, no agreement was reached.

On Friday, August 21, Prime Minister Mark Carney suspended trade negotiations and recalled Canada’s negotiators to Ottawa. The 50% Section 338 tariffs took effect hours later, at 12:01 a.m. Eastern Time on Saturday, August 22, 2026, covering approximately US$20 billion in Canadian exports, some 5% of Canada’s total exports to the United States. The tariffs target dairy, alcoholic beverages, and motor vehicles as headline categories, but the scope extends well beyond those sectors to cover a wide range of Canadian goods, including electronics, cement, wood and paper products, sporting goods, furniture, and textiles. Notably, the tariffs apply regardless of CUSMA origin, meaning Canadian exporters cannot rely on preferential treatment under CUSMA to avoid the 50% duty.

PM Carney subsequently pledged “dollar-for-dollar” retaliatory measures, expected to take effect on Tuesday, September 8, 2026.

Below, we examine how the negotiations broke down, the potential impact of the Section 338 tariffs, how Canada and the provinces are expected to respond, and what practical steps businesses should consider.

Key issues in dispute

The negotiations centred on several longstanding tensions in the bilateral trade relationship:

• Steel, aluminum, and auto tariffs: The U.S. sought to have Canada entirely lift its retaliatory tariffs on steel, aluminum, and automobiles imposed in response to the U.S. Section 232 duties. Canada, in turn, sought substantial reductions to the existing Section 232 tariffs on steel, aluminum, copper, and autos and auto parts. Reportedly, Canada had been prepared to lay down its remaining retaliatory measures imposed under former PM Trudeau in exchange for lower Section 232 sectoral tariff rates.
• Dairy: The U.S. has long targeted Canada’s supply management system, which allows a certain amount of U.S. dairy to enter Canada tariff-free under tariff-rate quotas (TRQs) before steep duties exceeding 200% are applied. The Section 338 dairy proclamation specifically alleged that Canada discriminated against U.S. cheese by allowing Canadian retailers to obtain TRQ allocations for EU cheese under CETA but excluding them from comparable allocations under the CUSMA cheese quota. The U.S. sought expanded market access for American dairy producers. Canada sought to preserve its supply management system, with the Dairy Farmers of Canada warning that “our food sovereignty is not for sale,” though Canada was reportedly willing to make administrative changes to the dairy sector as part of a broader deal.
• Provincial alcohol bans: The U.S. administration cited an 81% drop in U.S. alcohol exports to Canada and pressed for the provincial bans on U.S. alcohol—led by Ontario’s Liquor Control Board (LCBO) and Quebec’s Société des alcools du Québec (SAQ) – to be reversed immediately and permanently. Reports suggest that PM Carney asked the provinces to end the U.S. alcohol ban in an effort to finalize the deal.
• CUSMA exemptions: The Section 338 tariffs apply regardless of CUSMA origin, a significant departure from the rules-based framework. Canada sought exemptions for CUSMA-compliant goods, but the U.S. did not agree.

What led to the ultimate breakdown

While it appeared that a deal was imminent as the 30-day deadline approached, and the U.S. extended the period by three days as a result, the talks ultimately broke down as the second deadline to reach agreement approached.

USTR Greer has stated that Canada “declined to finalize the trade deal under the terms agreed earlier this week,” while Canada has pointed to last-minute U.S. conditions as the cause of the breakdown. Three elements emerged as central to the collapse of negotiations:

• Trade autonomy: The U.S. reportedly introduced terms that would have constrained Canada’s ability to forge new independent trade agreements, including expectations that Canada align its tariff rates on third-country imports with those of the United States.
• Sovereignty and culture: The U.S. reportedly raised issues relating to Canadian language and cultural protections that Ottawa had signalled throughout negotiations were not open for discussion, including the regulatory treatment of foreign streaming platforms under Canada’s online content framework.
• Automotive tariff relief: Reports indicated the proposed deal would have reduced the Section 232 tariff on Canadian-assembled vehicles from 25% to 15% on non-U.S. content. However, the U.S. reportedly proposed limiting this concession to passenger cars, leaving medium- and heavy-duty vehicles such as pickup trucks outside the scope of a deal—a carve-out that would have had significant implications for Ontario assembly operations.

As of August 24, 2026, there have been no public announcements of a resumption of formal trade negotiations. The timing of any return to the table may depend in part on the evolving political landscape in the United States. However, the trajectory of U.S. trade policy toward Canada over the past 18 months has been characterized by abrupt reversals, and an earlier resumption of discussions cannot be ruled out.

What to expect next

Canada’s retaliatory response

Timing: Prime Minister Carney announced that retaliatory tariffs will take effect on September 8, 2026, the Tuesday after Labour Day. On August 22, the government stated it will release detailed product lists “in the coming days,” along with support measures for affected industries.

Targeted sectors: Carney identified the following sectors for retaliation: steel, dairy, appliances, agricultural equipment, pulp and paper, and electronics, along with products currently subject to U.S. Section 232 and 338 tariffs. These selections are consistent with Canada’s previous retaliatory list, including:

• Final consumer goods over intermediate inputs or capital equipment, to minimize disruption to integrated North American supply chains;
• Products with available domestic or third-country substitutes, to reduce self-inflicted harm on Canadian consumers;
• Politically significant U.S. products, selected to maximize pressure on U.S. constituencies and lawmakers (e.g., agricultural products from farm states, bourbon from Kentucky); and
• Products that are themselves targets of the U.S. tariffs, to support the development of alternative domestic supply.

The countermeasures list is to be finalized in the coming days.

Legal process: Canada’s retaliatory tariffs are imposed by Order in Council under the Customs Tariff (S.C. 1997, c. 36), on the recommendation of the Minister of Finance and the Minister of Foreign Affairs, pursuant to subsection 53(2) and paragraph 79(a) of the Act. The 2018 round included a 15-day public consultation period, but in 2025 the government demonstrated it can move from announcement to implementation in as little as three days. Given the September 8 effective date – just over two weeks from the announcement of retaliation – there will likely be a compressed or abbreviated consultation process. Based on the 2018 and 2025 precedents, the surtaxes are not expected to apply to U.S. goods that are already in transit to Canada on the day the Order comes into force.

Remission framework: Canada’s tariff relief process operates post-implementation rather than pre-implementation, through remission orders issued under section 115 of the Customs Tariff. The 2025 United States Surtax Remission Order provided a precedent, granting categorical relief for a range of goods and importers approximately six weeks after surtaxes took effect. Businesses should anticipate a similar framework following the September 8 implementation, and we would be happy to advise on eligibility and the claims process.

Potential provincial retaliatory measures

In addition to federal dollar-for-dollar counter tariffs, provinces may continue to consider deploying or escalating non-tariff retaliatory measures as part of a broader “Team Canada” response to the Section 338 tariffs. Since early 2025, these measures have included:

• Alcohol bans: Eight of ten provinces – Ontario, Quebec, British Columbia, Manitoba, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador – continue to restrict or ban the sale of U.S. alcohol through government-controlled liquor boards. Alberta and Saskatchewan lifted their restrictions and resumed accepting U.S. alcohol imports in June 2025; however, with the deal collapsed there appears to be little near-term incentive for the remaining provinces to follow suit, though this may change if negotiations resume.
• Procurement restrictions: Ontario has banned American companies from provincial procurement contracts; Quebec imposes penalties of up to 25% on bids by American businesses without Quebec establishments; Alberta, Saskatchewan, and Nova Scotia have adopted preferential procurement rules for Canadian suppliers.
• Energy export measures: Ontario imposed a 25% surcharge on electricity exports to Minnesota, New York, and Michigan on March 10, 2025, which was suspended after one day but remains as a potential retaliatory tool.
• Critical mineral restrictions: Ontario has explored stockpiling and halting exports of high-grade nickel. Provinces with significant mining sectors may consider formalizing restrictions on exports of strategic inputs on which the U.S. is dependent.

The timing and scope of further retaliatory measures may also be shaped by the broader political calendar, including upcoming federal by-elections and Quebec’s October 2026 provincial election. 

Canada is expected to continue its trade diversification efforts

The collapse of negotiations to resolve the Section 338 tariffs is expected to reinforce the Government of Canada’s commitment to trade diversification. Even before the breakdown, Canada had been pursuing an ambitious agenda to reduce its dependency on the U.S. market, and these developments are likely to intensify those efforts. PM Carney has signalled that Canada will pursue accelerated trade promotion abroad and seek significant foreign investment to bolster Canadian economic confidence.

Canada has already moved quickly on this front, concluding new trade agreements with Indonesia and the United Arab Emirates, launching free trade negotiations with the Philippines, Thailand, and India, and advancing discussions with the South American Common Market (Mercosur) bloc. Canada has also deepened critical mineral and energy partnerships, such as a critical minerals cooperation agreement with Germany, and a critical minerals and commercial agreement with Japan with a total estimated value of over $1 billion.

These developments warrant close attention from businesses. As new trade agreements come into force, they may open preferential access to new export markets, create alternative sourcing options, and reduce overall exposure to U.S. tariff risk.

What can businesses do to prepare?

We suggest that businesses potentially impacted by the Section 338 tariffs and retaliatory measures consider the following, both within the near-term window between now and September 8 and beyond:

• Tariff classification review: As stated in our previous article, the Section 338 tariffs cover a broad range of goods—well beyond the headline categories of dairy, alcohol, and motor vehicles. Importers and exporters should conduct a line-by-line review of their tariff classifications against the published annexes and the U.S. Customs and Border Protection (CBP) Section 338-Canada HTS List.
• In-transit protections and shipment timing: Based on the 2018 and 2025 precedents, Canada’s retaliatory surtaxes will likely not apply to goods already in transit to Canada on the day the Order in Council comes into force. Importers would be well-advised to document shipment dates and transit status carefully. On the U.S. side, the Section 338 tariffs apply to goods “entered for consumption or withdrawn from warehouse for consumption” on or after August 22. The 17-day gap before Canadian countermeasures take effect on September 8 creates a narrow but real opportunity for importers of U.S. goods to revisit open purchase orders, assess whether any deliveries can be brought forward ahead of the effective date, and begin identifying alternative sourcing options where feasible.
• Remission planning: Based on the 2025 precedent, Canada’s post-implementation remission framework will likely offer categorical relief for importers in sectors such as manufacturing, health care, aerospace, and motor vehicle production, among others. The claims process operates on a defined timeline and requires supporting documentation. Businesses that may qualify should begin organizing their records now so they are positioned to file promptly once the framework is published. Our International Trade & Customs Team can assist with assessing eligibility and preparing remission claims.
• Supply chain, cost modelling, and customs valuation: While Section 338 tariffs do not stack on top of existing Section 232 duties—the proclamations exclude articles already subject to Section 232 at the HTS-line level—for goods not covered by a Section 232 duty, the 50% Section 338 rate may apply alongside other applicable duties, such as the 10% Section 301 forced-labour tariff on Canadian goods. This means that cumulative duty exposure for certain Canadian exports to the U.S. could be significant. It is worth modelling the total landed cost impact and evaluating whether sourcing adjustments, production relocation, or tariff engineering (e.g., reclassification, further processing to change origin) may be viable. It is also worth noting that both the U.S. Section 338 duties and Canada’s retaliatory surtaxes are calculated as a percentage of declared value for duty. Because the surtax compounds on top of the customs value, the way a cross-border transaction is commercially structured – including the allocation of costs between the parties—can materially affect the total duty payable. This is an area where careful planning, consistent with applicable valuation rules, may yield meaningful savings.
• Government engagement: Both the Canadian and U.S. governments have historically used public comment and consultation periods to refine retaliatory tariff lists. The Canadian government received over 1,100 submissions during its 2018 consultation. Businesses with specific concerns about the retaliatory list should be prepared to submit comments once the product list is published in the coming days.
• Legal avenues: Canada has already challenged the Section 232 tariffs at the World Trade Organization (WTO). As we noted in our previous article, Section 338 of the Tariff Act of 1930—a rarely invoked, nearly century-old provision—raises distinct legal questions about whether the U.S. has met the statutory prerequisites for a finding of “discrimination.” Businesses with significant exposure may wish to explore whether legal challenges or requests for administrative review are warranted.

Looking ahead

In our previous article, we suggested the Section 338 proclamations may be more tactical than durable. While that may still be at play, the breakdown of negotiations complicates the outlook. A deal appeared within reach before last-minute shifts in the U.S. position ended the talks. USTR Greer has since said the U.S. is “moving forward with measures that respond to Canadian retaliation,” while PM Carney indicated that Canada remains open to resuming discussions on acceptable terms.

Businesses should approach the current situation with a degree of caution informed by recent history. The trajectory of U.S. trade policy toward Canada over the past 18 months has been notably unpredictable. The Section 338 tariffs themselves were paused for 72 hours mere days ago on the strength of what the U.S. President described as a deal. The current breakdown may not be permanent, and the possibility that negotiations resume, terms shift, or tariffs are modified with short notice remains real. We encourage businesses to plan for the tariffs as they stand today, while remaining positioned to respond quickly if circumstances change, and considering alternatives available through Canada’s existing and emerging trade agreements.

The uncertainty surrounding these disputes is compounded by the outcome of the CUSMA joint review on July 1, 2026, in which the U.S. did not agree to extend the agreement for a further 16 years under Article 34.7, triggering annual reviews beginning in 2027. Although CUSMA itself remains in force through at least July 1, 2036, these developments reinforce the strategic importance of trade diversification, an area where, as discussed above, Canada has already been moving with considerable urgency.

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