50 Percent Opening Bid: Canadian Imports Subject to Section 338 Tariffs Amid USMCA Talks

President Donald Trump on July 20, 2026, signed three proclamations under Section 338 of the Tariff Act of 1930 (19 U.S.C. § 1338), imposing an additional 50 percent ad valorem tariff on specified products of Canada in response to alleged Canadian discrimination against U.S. commerce in three sectors: motor vehicles, alcoholic beverages and dairy. The tariffs take effect at 12:01 a.m. ET on August 19, 2026, and apply to goods entered for consumption or withdrawn from warehouse for consumption on or after that date.

The U.S. Trade Representative (USTR) estimates that the three proclamations collectively cover nearly $20 billion in Canadian imports across hundreds of eight-digit Harmonized Tariff Schedule of the U.S. (HTSUS) classifications, although only the Section 338 tariffs related to Canadian discrimination against U.S. autos impose tariffs on Canadian imports outside the autos sector. These extend beyond the three sectors cited as triggering conduct and target machinery, electrical equipment, textiles, wood products, cement, furniture and consumer goods.

Articles already subject to Section 232 import restrictions are exempt, as are qualifying civil aircraft under General Note 6 of the HTSUS. Energy, potash, fish and certain critical minerals are not included on the tariff lists. The tariffs apply regardless of whether a product qualifies for preferential treatment under the United States-Mexico-Canada Agreement (USMCA). This marks the first time Section 338 has ever been used to impose tariffs, raising significant legal questions that are likely to be tested in the U.S. Court of International Trade.

Section 338 of the Tariff Act of 1930 (19 U.S.C. § 1338) authorizes the president to impose duties of up to 50 percent ad valorem on imports from any country that discriminates against U.S. commerce or imposes unreasonable restrictions on U.S. goods not equally applied to other countries.

Because the statute's "offset" requirement ties the rate to the level of discrimination, resolution of one or more underlying issues could trigger a reduction. The statute requires only a presidential finding and proclamation, with no prior investigation by the U.S. International Trade Commission (ITC), USTR or U.S. Department of Commerce. The president may suspend, amend or revoke any proclamation at any time and may escalate to a full import ban if the discrimination continues.

Impacted Products

The HTSUS codes of the impacted products are set out in each of the annexes to the proclamations.

The scope of covered products is as follows:

• Motor Vehicle Proclamation (Broadest Scope). This annex spans 18 pages and hundreds of classifications extending well beyond motor vehicles. Notably, none of its 439 traded lines falls in the HTSUS vehicles chapter. Covered categories include agricultural products, textiles, wood products, cement, furniture, consumer goods, and select machinery and electrical equipment from Chapters 84 and 85. Representative Chapter 84 items include HTS 8418.69.01 (refrigerating equipment), 8421.99.01 (parts for filtering/purifying machinery), 8422.30.91 (filling/sealing machinery) and 8479.82.00 (mixing, grinding, screening machinery).
• Alcoholic Beverage Proclamation. The alcoholic beverage list covers beer, wine, cider, fermented beverages and distilled spirits.
• Dairy Proclamation. The dairy list covers approximately 52 tariff classifications, including specified milk and cream products, whey, lactose and casein.

Exceptions

Section 232 Carve-Out

The Section 338 tariffs do not apply to articles already subject to Section 232 duties (19 U.S.C. § 1862), including steel, aluminum, and copper products and derivatives, as well as passenger and commercial vehicles and parts, specified wood products, semiconductors and patented pharmaceuticals.

However, the Section 338 tariffs apparently apply on top of other tariff schemes, such as Section 301.

Other Exclusions

• Civil Aircraft: Qualifying civil aircraft and parts under General Note 6 of the HTSUS and the World Trade Organization (WTO) Agreement on Trade in Civil Aircraft are excluded, but unmanned aircraft are not.
• Sector-Level: The tariff lists do not cover energy, potash, fish or certain critical minerals, though importers should verify against the controlling HTSUS annexes.
• Chapter 98: Relief under many Chapter 98 provisions (reimports, personal effects) is preserved, subject to specified exceptions.
• Foreign Trade Zones: Covered goods admitted to a U.S. foreign trade zone (FTZ) on or after August 19, 2026, must enter under "privileged foreign status" (19 C.F.R. 146.41) and will be subject to the Section 338 tariff upon consumption entry.

Chapter 98

Tariff reduction still applies under Chapter 98, meaning the Section 338 tariffs apply only to the value of foreign repairs, alterations or processing performed, as described in subheadings 9802.00.40, 9802.00.50 and 9802.00.60, HTSUS. Likewise, the Section 338 tariffs apply to the value of the article assembled abroad, less the cost or value of such products of the U.S., as described in 9802.00.80, HTSUS.

No USMCA Exemption

USMCA origination does not exempt covered goods from the Section 338 duty, a significant departure from other Canada tariff regimes, e.g., the International Emergency Economic Powers Act (IEEPA)-based tariffs. The additional 50 percent applies in full regardless of USMCA origination status.

Political and Regulatory Context

Triggering Conduct

The three proclamations target distinct areas of alleged Canadian discrimination:

1. Canada's 25 percent surtax on U.S.-origin motor vehicles, applied exclusively to U.S. imports and not to vehicles from any other country
2. The decision by all Canadian provinces and territories, beginning in March 2025, to halt the purchase, distribution or retail of U.S. alcoholic beverages while continuing to sell alcohol from other countries
3. Canada's administration of dairy tariff-rate quotas (TRQs) under USMCA, which impose more restrictive eligibility criteria on U.S. suppliers than those afforded to European Union suppliers under the Canada-European Union Comprehensive Economic and Trade Agreement

Strategic and Negotiating Context

The Section 338 tariffs come during an ongoing USMCA review process, where the U.S.-Canada bilateral dynamic has lagged behind U.S.-Mexico formal negotiations. Addressing the three targeted issues is procedurally simple – two involve Canadian retaliatory actions that could be reversed (the auto surtax and provincial alcohol bans), and the dairy issue is a niche TRQ eligibility problem addressable within the USMCA review – but politically complex for the Canadian government. The 30-day window is widely viewed as a deadline to extract concessions. Prime Minister Mark Carney stated that Canada "stands ready to engage intensively," and USTR Jamieson Greer confirmed that talks have not been cut off.

Legal Uncertainty

Section 338 has never been used to impose tariffs. Open legal questions include whether Section 301 superseded Section 338 and whether the ITC must first investigate. Litigation in the U.S. Court of International Trade is anticipated.

Canada was also subject to a 35 percent IEEPA tariff on non-USMCA-compliant products (10 percent on energy and critical minerals) until these tariffs were found unlawful by the U.S. Supreme Court.

Canada remains subject to a 50 percent Section 232 tariffs on steel, aluminum and copper and a 10 percent Section 122 global tariff that expired July 24, 2026.

Next Steps and Recommended Action Items for Clients and Affected Businesses

• HTS Classification and Supply Chain Review: Review all Canadian-origin imports (finished goods, components and raw materials) against the Annex I lists, confirm classification accuracy (especially in Chapters 84 and 85) and determine whether any items qualify for the Section 232 carve-out.
• Supplier Contract Review: Assess Canadian supplier agreements for duty-risk allocation, price adjustment, force majeure and tariff-escalation triggers and evaluate whether renegotiation or alternative sourcing is warranted.
• Pre-Effective Date Procurement: For any covered goods, evaluate accelerating imports before August 19, 2026, and confirm whether FTZ admissions must convert to "privileged foreign status" on or after that date.
• Regulatory and Litigation Monitoring: Track U.S. Customs and Border Protection (CBP) implementing guidance, Federal Register annex modifications and anticipated legal challenges in the U.S. Court of International Trade.
• Bilateral Negotiations and Escalation Risk: Monitor the 30-day negotiating window and note that Section 338(b) authorizes the president to escalate to a full import ban if Canada maintains or increases its discrimination.

For questions regarding a particular fact situation, consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.