On Monday, July 20, President Trump signed three Proclamations invoking Section 338 of the Tariff Act of 1930 to impose 50% tariffs on certain Canadian origin goods (Section 338 Tariffs). These tariffs are scheduled to enter into force at 12:01 AM EST on August 19, 2026. The Proclamations cite various actions by Canada that allegedly discriminate against the commerce of the United States in three core areas related to the USMCA/CUSMA: automotive, dairy, and alcohol products. The fact sheet is available here. Canada’s Prime Minister, Mark Carney, responded Monday evening with a statement noting that Canada has approached the US with a “series of detailed and comprehensive proposals” to resolve the ongoing trade dispute and to “modernise” the USMCA/CUSMA and stands “ready to intensify” these discussions in the coming weeks. The United States Trade Representative advises the Section 338 Tariffs target USD 20 billion in imports from Canada.
Although Section 338 has been available to the Administration, it has historically not been invoked as it is directed at a narrow set of circumstances. As a result, companies should not assume that Section 338 will become a routine tool of U.S. trade policy. At the same time, the use of this authority should not be viewed as merely symbolic, as it can have significant commercial consequences for affected industries, and warrants close attention.
What Importers/Exporters Need to Know
- Certain Canadian origin goods including furniture, lighting fixtures, plastic household goods, packaging and paper products, textiles, wood products (MDF, plywood and veneer panels), apparel (knit, woven, and made-up textile articles), telecom equipment, routers, wireless communications equipment, cameras, perfumes, makeup, machinery, jewellery, toys, and sporting goods will be subject to 50% ad valorum tariffs, in addition to existing customs duties applicable under the US HTS.
- The Section 338 Tariffs will be applied to the lists of tariff items annexed to the individual proclamations: Annex 1 (Motor Vehicle Proclamation); Annex 1 (Alcohol Proclamations); Annex I (Dairy Proclamation).
- USMCA/CUSMA originating goods are not exempt from the Section 338 Tariffs.
- The Section 338 Tariffs will not apply to energy, potash, fish, critical minerals, civil aircraft/parts qualifying under the WTO Agreement on Trade in Civil Aircraft and Canadian origin goods that are currently subject to Section 232 tariffs (e.g. autos, buses/heavy trucks, steel, aluminum, copper, certain derivative products, and lumber/forestry products).
- US-Canada negotiations to revise the USMCA/CUSMA remain ongoing. This action reflects the difference between the US-Canada negotiations and the US-Mexico negotiations that we have seen before and can expect will continue. All three issues – autos, dairy, and wine / alcohol – have been contentious throughout the NAFTA-USMCA relationship. Both sides understand these issues would have to be addressed in any re-negotiation or review. The difference now is that Section 338 has broadened the impact and other sectors may now face a risk of collateral damage.
- Canada has not indicated that it intends to retaliate with tariffs on US origin goods.
The Proclamations
Three Proclamations (Dairy, Autos, Alcohol) target Canadian trade practices in relation to motor vehicles, alcoholic beverages, and dairy. All proposed tariffs are imposed under Section 338 of the Tariff Act of 1930 (19 U.S.C. 1338) which permits the President of the United States to impose duties at a maximum rate of 50% on foreign imports in order to offset the effect of the foreign country’s discriminatory practices or unequal imposition on US commerce. There is no precedent for implementing tariffs under Section 338. Unlike the tariffs initiated under Section 122 of the Trade Act of 1974, Section 338 of the Tariff Act of 1930 does not impose a time limit for tariffs.
The Proclamations allege the following discriminatory conduct by Canada:
- Motor Vehicles: On April 9, 2025, Canada imposed 25% tariffs on US motor vehicles that do not qualify for USMCA/CUSMA tariff treatment under the United States Surtax Order (Motor Vehicles 2025). For non-qualifying US motor vehicles, Canada applies a 25% tariff rate on the value of all goods that do not originate in Canada or Mexico used in the production of the vehicle, up to 85% of the total value of the vehicle. For USMCA/CUSMA qualifying vehicles, Canada applies an automaker-specific TRQ to incentivize investment in Canada. Canada does not apply the same tariffs on like articles of every foreign country.
- Alcoholic Beverages: Several provinces and territories of Canada halted the purchase, distribution and retailing of US alcoholic beverages in March 2025. US exports of alcoholic beverages fell by approximately 81%. The provinces and territories that maintain restrictions on US alcohol products do not maintain similar restrictions on alcohol products originating in other countries, benefitting those other countries to the detriment of the United States.
- Dairy: Canada administers its TRQs implemented under the USMCA/CUSMA and the Canada-EU FTA differently. Under the CETA, retailers are eligible for TRQ allocations, while retailers are not eligible for TRQ allocations under the USMCA/CUSMA. Canada is denying the US the same favourable treatment that it provides to the EU and its member states.
Business Considerations
Businesses importing into the United States should consider the following:
- Review each Annex I to identify the 8-digit tariff items subject to the proposed Section 338 Tariffs against tariff classifications of imported goods to determine duty exposure.
- Verify current tariff classifications and origin determinations. While USMCA/CUSMA qualifying goods are not exempt, only Canadian origin goods will be subject to the Section 338 Tariffs.
- Calculate the projected duty burden under the Section 338 Tariffs based on annual import volumes.
- Prepare a landed cost model for each affected SKU.
- Consider inventory, warehousing availability and freight lead times to plan for the August 19 implementation date.
- Consider contractual allocation of tariff burden as between exporter, importer and end-user, as applicable.
Baker McKenzie’s cross-border US-Canada customs teams continue to work with North American importers/exporters to address the implications of unilateral US tariff measures on supply chain and customs planning.
