By: Marta Bengoa
Trade negotiations between the United States and Canada collapsed late on Friday, August 21, hours before a midnight deadline. By Saturday morning, 50% American tariffs were taking effect on Canadian wine, dairy, cement, furniture, lumber, paper, and hockey equipment: goods worth roughly $20 billion. Canadian Prime Minister Mark Carney promised to answer dollar for dollar, and this week Ottawa published its list: more than 700 American products worth C$27.6 billion, taxed at 15%, 25%, and 50% starting September 8. What separates this escalation from the rounds before it is that the American tariffs bypass the trade agreement the two countries signed, and they do so lawfully under U.S. domestic law.
This escalation did not begin in August. In February 2025, U.S. President Donald Trump imposed 25% tariffs on Canadian goods under the International Emergency Economic Powers Act (IEEPA), citing fentanyl trafficking, but then exempted goods meeting the rules of origin of the U.S.-Mexico-Canada Agreement (USMCA) a month later, which left most of the trade untouched. Canada retaliated in kind. Provincial liquor boards pulled American bourbon and wine from their shelves in March 2025, and Ottawa placed a 25% surtax on American vehicles after Washington's Section 232 auto tariffs. In February 2026, the U.S. Supreme Court struck the emergency tariffs down, holding that the statute conferred no power to impose them. The administration began rebuilding other legal foundations.
The rebuilding coincided with a scheduled test of the agreement itself. USMCA required a joint review on July 1, 2026, six years after it entered into force. Canada and Mexico supported extending it for another 16 years. The United States declined, which, under Article 34.7, turns the review into an annual exercise repeating until the agreement expires in 2036. Negotiations ran through the summer and ended on August 21, with Ottawa calling the final American terms "unfair, uneconomic," and Washington saying Canada had walked back commitments already made.
The instrument had been prepared weeks earlier. On July 20, Trump signed three proclamations imposing 50% duties on Canadian goods under Section 338 of the Tariff Act of 1930. These proclamations name three Canadian practices as discriminatory: dairy quotas that give European retailers access their American competitors cannot obtain, the provincial boycotts of American alcohol, and the vehicle surtax that falls on American cars alone. The duties were due on August 19, suspended for three days while talks continued, and imposed when the talks failed.
Section 338 had been sitting in American law for 96 years without ever being used to impose a tariff. The U.S. Congress wrote it in 1930 to let the president answer countries that treated American goods worse than they treated everyone else's, and it authorizes duties of up to 50%. Presidents held it over trading partners as leverage in market access talks, and it fell into disuse by the 1950s. No administration ever wrote implementing regulations for it, and no court has ever interpreted it.
It is reasonable to wonder how any of this survives a free trade agreement. USMCA obliges the United States to admit qualifying Canadian goods duty-free, and the July proclamations state that a good qualifying for USMCA preference pays the 50% regardless. The distinction that matters is between an international commitment and a domestic power. Section 338 is an American statute, older than the agreement and never repealed by it, and USMCA's answer to a breach is state-to-state dispute settlement, a process measured in years.
For six years, firms across North America have spent real money to earn USMCA preference, documenting where components came from, changing suppliers, certifying origin, and in the auto sector, meeting the 75% regional content rule that was the price of the 2018 renegotiation. That spending bought predictable duty-free access. Section 338 has severed compliance from the access. A company that followed every rule now pays the same 50% as a company that followed none.
Canada's answer mirrors the American structure. The counter-tariffs run at 15%, 25%, and 50%, matched product by product to the American rate, and they fall on steel, dairy, appliances, farm equipment, pulp and paper, electronics, and fish. Canadian Industry Minister Mélanie Joly presented the package as an argument for building at home: "We cannot control the decisions made in Washington, but we can control what we build here at home." Carney, who had spent a year negotiating, was blunter. "You're at war when you get attacked. We got attacked."
The measurable damage lands first on Canada, and it is smaller than the headline rate suggests. The goods affected represent roughly 5% of what Canada sells to the United States. We could expect the tariffs to remove between 0.3 and 0.6 percentage points from Canadian growth over the coming year, with the effective American tariff on Canadian goods rising by about 2.5 points. The Canadian dollar fell 0.6% on August 24, its worst day since June.
Americans pay on both sides of the exchange. Canadian cement, lumber, and paper are inputs to American construction, and a 50% duty on an input will pass through to the price of a house. From September 8, American exporters of steel, appliances, farm equipment, and electronics lose price competitiveness in their largest foreign market. Tariffs under Sections 232 and 301 both carry out exclusion processes through which a company with no alternative supplier can request relief. Section 338 has no such process.
The stated justification does not pass a thorough examination. American vehicle exports to Canada fell about 22%, or $5.6 billion, over the past year, and beverage exports fell 81%, or $582 million. Canada has concluded that the United States is no longer a dependable customer, and it has started selling elsewhere. For decades, roughly three-quarters of everything Canada exported crossed the U.S. border. In the first quarter of this year, that share fell to 64.1%, the lowest in recent history. Canadian exporters found $3.7 billion in new sales outside the United States in three months. Tariffs can be withdrawn by proclamation as quickly as they were imposed, and the September 8 measures may well be traded away in the review that begins next summer. The conclusion Canada has reached about the reliability of its largest customer will take considerably longer to reverse.
Marta Bengoa is a Professor of Economics at the Colin Powell School (CCNY-CUNY) and a Non-Resident Fellow at ORF America.