Trump slaps 50% tariffs on Canadian cars, steel under Section 338 of Tariff Act of 1930

Brad W. Setser, a senior advisor to the U.S. Trade Representative from 2021 to 2022 and author of the Follow the Money blog, previously served at the U.S. Treasury from 2011 to 2015, where he worked on currency policy, financial sanctions, commodity shocks, and other issues. Now a Whitney Shepardson Senior Fellow at the Council on Foreign Relations (CFR), Setser explains the implications of the breakdown in U.S.-Canada trade negotiations.

What Happened

Trade talks between the United States and Canada collapsed last week, clearing the way for the Trump administration to impose new tariffs on Canadian goods.

On Monday, August 24, President Donald Trump outlined the administration's next steps, writing on social media that tariffs on Canadian cars, trucks, automotive parts, and steel would rise to 50 percent on January 1, 2027. He accused Canada of "ripping off" the United States for years and said companies could avoid the levies by producing their goods in the United States.

Canadian Prime Minister Mark Carney responded by stating that Canada would match U.S. tariffs "dollar for dollar," with retaliatory levies placed on U.S. steel, dairy, appliances, agricultural equipment, pulp and paper products, electronics, and other goods beginning September 8.

Legal Basis: Section 338 of the Tariff Act of 1930

The Trump administration is imposing the tariffs using Section 338 of the Tariff Act of 1930. The White House says this dormant tariff authority permits the president to act by proclamation and override the U.S.-Mexico-Canada Agreement (USMCA), which was negotiated during the first Trump administration.

Economic Impact: What Both Sides Stand to Lose

Direct Costs

• The out-of-pocket cost of the new 50 percent tariff is $10 billion — small relative to the overall U.S. economy (less than a twentieth of a percentage point of U.S. GDP).
• For some products, lower-priced substitutes will be available, reducing the harm.
• U.S. exporters to Canada will also face new tariffs, cutting into their sales.

"There won't be a gigantic economic cost to the United States if this doesn't escalate further."

Disproportionate Impact on Canada

• Canada's economy is one-twelfth the size of the U.S. economy.
• Canada's geography complicates finding alternative markets, making the effect much larger.

Hidden Costs of the Breakdown

The real cost exceeds the $10 billion tariff and similar loss of export sales. The proposed deal would have reduced earlier tariffs — including those on primary aluminum — that have increased costs for U.S. businesses without significantly boosting U.S. production.

"The U.S. aluminum market doesn't clear without primary aluminum imports from Canada, so the tariff pushed the U.S. price of aluminum well above the global price — and new investment in aluminum cannot compete with the hyperscalers that are bidding up the price of needed electricity."

What Section 338 Means for the USMCA

The USMCA was already "functionally dead in many ways," according to Setser. The Section 232 national security tariffs on steel, aluminum, autos, and trucks had already ended open and tariff-free trade in key sectors. While the USMCA exception kept most North American trade tariff-free, the United States was already in violation of its USMCA commitments.

Section 338 in theory provides the legal basis for the United States to impose tariffs in retaliation for measures that discriminate against U.S. goods — such as Canada's ban on U.S. alcohol purchases by provincial liquor stores, enacted after earlier U.S. tariffs.

However, Section 338 is legally untested — it has never been used before — and there is a "decent chance" the courts rule that the Trump administration has overstepped its legal authority.

The Bigger Picture: Escalation Without End

"The precise legal tool used here matters less than the reality that the United States and Canada have entered a new round of escalation."

• The 338 tariffs respond to measures Canada put in place after the 232 tariffs on industrial metal, industrial machinery, and autos.
• Canada has announced it will retaliate for the 338 tariffs.
• The United States is threatening to raise the auto tariff to a prohibitive 50 percent if Canada does not back down.

The end result will be a progressive reduction in the amount of tariff-free trade between the two countries.

What's Not Affected (For Now)

Neither side has restricted the biggest trade flow between Canada and the United States: four million barrels per day of oil that Canada sends south.