US - Canada Trade Remains in Doghouse

U.S.-Canada trade relations deteriorated further this week as new 50% U.S. tariffs took effect, the White House moved to restrict Canadian goods in federal procurement, and Ottawa accelerated efforts to reduce its economic dependence on the United States. Bilateral trade talks remain suspended, with neither government signaling an immediate return to negotiations.

On September 15, the United States expanded the list of Canadian goods subject to 50% duties under Section 338 of the Tariff Act of 1930. The additions include certain dairy and wood products, furniture, motorboats and all-terrain vehicles. Washington removed other products, including rock salt and cement, from the tariff lists.

The Section 338 duties apply regardless of whether the goods qualify as originating under the United States-Mexico-Canada Agreement and may apply in addition to Section 232 tariffs. The combined duties on some products could therefore reach 100%. White House fact sheet

A second escalation is scheduled for September 29, when the United States will prohibit imports of specified Canadian alcoholic beverages, dairy products, molasses and motorcycles. The White House says Section 338 permits import exclusions when a foreign country maintains or increases measures found to discriminate against U.S. commerce.

The dispute also entered the government-contracting market. In a September 16 memorandum, President Donald Trump directed federal officials to identify Canadian-origin products that can lawfully be removed or made unavailable for federal civilian procurement. 

Canada’s countermeasures remain in force. Since September 8, Ottawa has imposed tariffs of 15%, 25% or 50% on C$27.6 billion in U.S. goods, including steel and aluminum, dairy products, appliances, agricultural equipment, pulp and paper, plastics and electronics. Existing Canadian tariffs on U.S. automobiles also continue.

The Department of Finance maintains an authoritative product list and a separate process through which importers may request remission.

Prime Minister Mark Carney showed little interest this week in restarting the negotiations. Following meetings with European leaders, he called the latest U.S. tariffs a “miscalculation” and said suspending the talks had been the correct decision.

Canada and the European Union are considering a broader strategic relationship extending beyond the existing Comprehensive Economic and Trade Agreement. Ottawa views diversification as a way to reduce the leverage created by Canada’s dependence on the U.S. market.

The legal durability of the U.S. measures remains unsettled. Council on Foreign Relations senior fellow Brad Setser, a former senior adviser to the U.S. trade representative, describes the USMCA as “functionally dead in many ways,” citing the Section 232 tariffs already imposed on steel, aluminum, automobiles and trucks. He calls the administration’s use of Section 338 “legally untested,” noting that the statute had not previously been used and could face judicial scrutiny.

Setser’s assessment does not mean the USMCA has formally ceased to operate. Most qualifying North American trade continues to receive preferential treatment, although the new Section 338 duties contain no USMCA-origin exemption for covered products. The upshot is an expanding division between trade that remains protected by the agreement and strategically important sectors governed by tariffs, exclusions and retaliatory measures.

The week ended without a negotiating path out of the dispute. The immediate compliance priorities are the September 15 tariff changes, the September 29 import prohibitions and the implementation of the federal procurement memorandum.

The issue remains whether the two governments can preserve meaningful USMCA preferences while pursuing trade policies that increasingly conflict with the agreement’s original objective of deeper North American economic integration.