Smoot-Hawley revived: a never-before-used Depression-era law is invoked against Canadian trade

“Anyone, anyone?”

Mr. Lorensax, the Economics Teacher

On July 20, 2026, the president of the United States signed three proclamations covering motor vehicles, alcoholic beverages and dairy, imposing additional 50 per cent tariffs on Canadian goods said to account for roughly US$20 billion in annual imports. Although there is some question about exactly how many of the listed products Canada exports into the United States, and how much, if we take that figure at face value, it would be just over five per cent of the US$380 billion in goods U.S. private interests and public procurement authorities buy from Canadian exporters each year.

The accompanying fact sheet characterizes the measures as a response to Canadian “discrimination” against U.S. exports. The annexed lists deal with products ranging from wine and cement to furniture, textiles, machinery and hockey sticks, and thus extend well beyond the three named sectors. The duties purport to apply to goods entered for consumption on or after 12:01 a.m. ET on Aug. 19, 2026.

Like the section 232 tariffs, the new measures apply regardless of CUSMA origin. This means that the “rule of origin” shield that has protected the majority of Canadian exports from IEEPA and section 122 tariffs since March 2025 does not apply.

And, of course, like the IEEPA or the section 122 tariffs, the legal authority invoked, Section 338 of the Tariff Act of 1930, has never before been used to impose tariffs in its near century on the statute books.

This explainer situates the new measures within the full arc of the dispute, which we have tracked since before the first tariff proclamation was signed, canvasses Canada’s responses, and assesses what Section 338 is, why it was chosen, and where this goes next.

The U.S. measures: Threats and tariffs since the “fentanyl” announcement

The current dispute dates to Nov. 25, 2024, when the then president-elect announced that among his first executive acts would be a 25 per cent tariff on all Canadian and Mexican goods, tied to fentanyl and the border. Our analysis at the time drew on the 2018 steel and aluminum experience to anticipate what followed: unilateral measures, retaliation, remission frameworks and negotiation under duress. What we did not anticipate was quite how many statutory vehicles the exercise would consume.

a. The IEEPA phase (February 2025 – February 2026)

On Feb. 1, 2025, the president signed Executive Order 14193: “Imposing Duties to Address the Flow of Illicit Drugs Across Our Northern Border” imposing a 25 per cent tariff on nearly all Canadian goods (10 per cent on a defined set of energy resources), invoking the International Emergency Economic Powers Act. Following a negotiated 30-day suspension (Executive Order 14197), the tariffs took effect March 4, 2025. A critical feature emerged days later: goods qualifying for preferential treatment as CUSMA-originating were exempted. That carve-out transformed origin compliance from a duty-savings exercise into the difference between zero and 25 per cent and, because a substantial share of Canadian exports had historically entered under MFN rates without claiming preference (where MFN was already zero, certification cost outweighed benefit), it sent companies scrambling to qualify goods, assemble certifications and document regional value content for the first time.

b. The Section 232 sectoral architecture (2025–2026)

In parallel, the administration built out sectoral tariffs under Section 232 of the Trade Expansion Act of 1962, the national-security authority, on steel and aluminum (March 2025), automobiles and parts (Proclamation 10908, effective April 3, 2025, for vehicles and by May 3, 2025, for parts, with a temporary exemption for CUSMA-eligible parts pending a content-based assessment system), copper, and later medium- and heavy-duty vehicles (October 2025), timber and lumber, and pharmaceuticals. Crucially, none of the foregoing comes with a standing exemption for CUSMA-compliant goods.

The auto measures came with their own relief valve: an “import adjustment offset” of 3.75 per cent of the MSRP of U.S.-assembled vehicles in year one, stepping down thereafter, which is a regime that has since expanded to the medium- and heavy-duty sector. In September 2025, the U.S. Department of Commerce added a petition process allowing U.S. producers to seek expansion of the Section 232 autoparts scope, an accretion mechanism that continues to pull new tariff lines into coverage.

c. Learning Resources and the post-IEEPA scramble

On Feb. 20, 2026, the U.S. Supreme Court held in Learning Resources, Inc. v. Trump that IEEPA does not authorize broad-based import tariffs, invalidating the centrepiece of the 2025 architecture. As we wrote at the time, the decision left the availability, timing and mechanics of refunds uncertain. Businesses that paid IEEPA-based tariffs were advised to assess steps to preserve refund rights, particularly where entries had not yet liquidated. That advice has aged well, and it applies with equal force to what follows.

The administration’s response was a statutory scramble: temporary 10 per cent across-the-board tariffs under Section 122 of the Trade Act of 1974, capped at 150 days absent congressional extension and largely exempting CUSMA-compliant goods. Those tariffs expire this week. The administration also accelerated its Section 301 investigations. We flagged in March that Section 301, with its USTR investigations, consultations, and findings, would become the workhorse for targeted action; it has since produced 25 per cent tariffs on Brazil and forced-labour-related measures targeting Canada. But Section 301 takes time and process. Section 338, as we discuss below, requires neither.

One further development frames everything: earlier this month, at the first joint review, the United States declined to renew CUSMA in its current form. The agreement remains in force, but the non-renewal opens rolling annual reviews that could run to the agreement’s 2036 sunset and converts every U.S. tariff measure into negotiating leverage for that process.

Canadian responses

d. Measures imposed, and removed

Canada responded swiftly:

• March 4, 2025. Twenty-five per cent counter-tariffs on C$30 billion in U.S.-origin goods, including food products, wine, spirits, beer, appliances, apparel, cosmetics, pulp and paper, with a second phase to expand coverage to C$155 billion. The tariffs applied only to goods originating in the U.S. under the CUSMA marking rules, a mirror image of the origin logic on the U.S. side.
• March 12, 2025. C$29.8 billion in counter-tariffs responding to the U.S. steel and aluminum measures.
• April 9, 2025. Twenty-five per cent surtaxes on non-CUSMA-compliant U.S. fully assembled vehicles and certain parts, the auto countermeasures and associated quota administration that the U.S. motor-vehicles proclamation now cites as “discrimination”.
• Relief in parallel. From the outset, Ottawa paired retaliation with a remission framework under which importers could seek relief where inputs could not be sourced domestically or from non-U.S. suppliers, or in other exceptional circumstances with severe economic impacts, the same two-ground structure we saw in 2018. The United States Surtax Remission Order (2025) granted six-month remissions for manufacturing, food and beverage packaging, and public health and safety inputs (later extended); a performance-based remission framework supported automakers maintaining Canadian production; and the Large Enterprise Tariff Loan Facility provided liquidity.
• Sept. 1, 2025. The pivot: Canada removed retaliatory tariffs on CUSMA-covered U.S. goods, roughly 90 per cent of U.S. imports by coverage, to match the U.S. exemptions and restart negotiations, while maintaining countermeasures on steel, aluminum and autos pending resolution of the corresponding Section 232 tariffs.
• Dec. 26, 2025. Canada tightened steel tariff-rate quotas against global imports, reducing quota levels for non-FTA countries to 20 per cent of 2024 volumes, protecting domestic producers from supply diverted by U.S. measures, while honouring the CUSMA carve-out.
• Provincial measures. Nearly every provincial and territorial liquor authority delisted U.S. alcohol from public shelves, the measure the alcoholic-beverages Proclamation now targets, and to which we return below.

e. The dispute settlement track

Canada also litigated. In March 2025, Canada requested WTO consultations on the IEEPA and steel/aluminum tariffs; on April 3, 2025, it initiated WTO dispute proceedings challenging the Section 232 auto tariffs as inconsistent with the GATT 1994, including the U.S.’s bound tariff commitments under Article II and MFN obligations under Article I. The U.S. response was telling: it invoked Article XXI, asserting that national-security measures are self-judging and beyond the reach of WTO dispute settlement, a position panels have repeatedly rejected, but which the U.S. can maintain indefinitely because the Appellate Body’s paralysis lets it appeal any adverse panel report “into the void.” The consultations remain, formally, pending. The merits are strong; the remedy is the problem.

f. The search for diversified trade

The track for Canadian trade diversification has been quieter but real: more than 20 new economic and security partnerships since early 2025; the September 2025 strategic-industries measures; public consultations on CUSMA (September 20 to November 3, 2025) feeding Canada’s positions for the joint review; and sustained outreach to the EU, the U.K., and the Indo-Pacific under existing agreements. The results are measurable if modest: the U.S. share of Canadian goods exports fell from nearly 76 per cent in 2024 to just under 72 per cent in 2025. Diversification is a decade-long project, but the effects should prove noticeable quarter to quarter.

The new measures

a. Scope

Each of the three July 20, 2026, proclamations imposes an additional 50 per cent ad valorem duty on a distinct annex of HTSUS tariff lines applicable to goods entered for consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. ET on Aug. 19, 2026, the 30-day minimum lead time the statute itself requires. Key parameters:

• No CUSMA carve-out. The duties apply whether or not goods qualify as originating. This severs, for the first time, the link between origin compliance and tariff protection that has structured the entire dispute since March 2025. A valid certification of origin is simply irrelevant to a covered line.
• Coverage well beyond the named sectors. Although the three proclamations are framed around autos, alcohol and dairy, the annexes reach foodstuffs, wood products, paper, textiles, machinery, furniture and consumer goods. The measures are calibrated to Canadian export exposure, not to the sectors in which discrimination is alleged. They comprise retaliation across the tariff schedule, not a mirror-image response.
• Exclusions. Energy, potash, critical minerals, fish, and goods already subject to Section 232 duties are excluded. Note the phrasing: autos, steel, aluminum, lumber, and pharmaceuticals escape the Section 338 duties only because they already face Section 232 tariffs. This is an anti-stacking rule, not an exemption. The exclusions spare Canada’s largest export categories, which is why the measures reach “only” US$20 billion.
• No sunset, and an escalation mechanism. Unlike Section 122’s 150-day cap, the proclamations advance an interpretation that the Tariff Act allows Section 338 tariffs to continue indefinitely unless the president reduces, modifies or terminates them. Section 338 also contains a further step no other modern tariff authority replicates: if the president finds the discrimination is maintained or increased after duties are imposed, the statute authorizes him to exclude the country’s products from importation altogether. The ceiling on escalation, in other words, is not a higher rate, it is an embargo.

b. What is Section 338?

Section 338 (19 U.S.C. § 1338) is a surviving fragment of the Smoot-Hawley Tariff Act, descended from Section 317 of the Tariff Act of 1922. This section authorizes the president to impose duties of up to 50 per cent on imports from a country he “find[s] as a fact” discriminates against U.S. commerce, directly or indirectly, by law, administrative regulation or practice, in a manner that disadvantages U.S. commerce relative to that of third countries, with the duties calibrated to offset the resulting burden. There is no public record of tariffs actually imposed under the provision since at least 1949. The provision was conceived for a world of bilateral tariff bargaining, before the GATT, before MFN as a multilateral norm, before trade agreements with built-in dispute settlement, and its anachronisms are now glaring:

• “Discrimination” is undefined. In a world of MFN obligations, preferential agreements that discriminate by design (every FTA treats parties better than non-parties, that is the point), and treaty-sanctioned countermeasures, the term is doing enormous unexamined work. The measures Washington complains of are themselves responses to prior U.S. tariffs, many imposed in violation of CUSMA. Whether lawful countermeasures can constitute “discrimination” under a 1930 statute is, to put it gently, open.
• The dairy grievance has already been litigated, under CUSMA. The United States twice challenged Canada’s dairy TRQ allocation practices under CUSMA Chapter 31. The first panel (2021) found Canada’s process of reserving TRQ pools inconsistent with the agreement. Canada revised its practices, and the second panel (2023) largely rejected the renewed U.S. claims. The dairy Proclamation thus recasts, as unilateral “discrimination,” a grievance the U.S. pursued through the agreed mechanism and substantially lost. The comparison to EU access under CETA misses the mark: differential treatment across trade agreements is what trade agreements do.
• The provincial dimension. The alcoholic-beverages Proclamation attributes to “Canada” the demarketing decisions of provincial liquor monopolies. State attribution of sub-federal measures is familiar terrain in trade law. GATT Article XXIV:12 and CUSMA both address it through undertakings to engage in consultations in such circumstances. A presidential “finding of fact” that sweeps in the purchasing decisions of provincial Crown retailers, without any collaborative discussion or investigative process, compounds the statute’s core due-process problem.
• The ITC’s role has never been tested. Section 338 sits in the part of the Tariff Act concerning the International Trade Commission (ITC) and assigns the Commission a duty to keep itself informed of discrimination and bring matters to the President’s attention with recommendations. Whether that is a procedural prerequisite or merely an advisory channel is unresolved. The Proclamations proceed on presidential findings alone, with no apparent ITC process.
• The offset mismatch. The statute directs duties calibrated to offset the burden on U.S. commerce. The White House’s own figures put the alleged injury at roughly US$5.6 billion in lost auto exports and US$582 million in alcohol. A uniform 50 per cent rate, the statutory maximum, applied to US$20 billion in products largely unrelated to the affected sectors sits uneasily with a remedial, offset-based design.
• Implicit supersession. There is a respectable argument that Section 338 was superseded by the modern, process-laden authorities Congress enacted decades later, Section 301 in particular, which occupies precisely the same field (foreign practices that burden or discriminate against U.S. commerce) but conditions action on USTR investigation, consultation, and findings. On this view, reading Section 338 as a process-free bypass renders Congress’s later procedural architecture optional.

Prospects

U.S. courts. Litigation is certain, and Learning Resources frames it: a broad, undefined, never-used delegation invoked for sweeping economic measures is the fact pattern that attracts major-questions scrutiny. The government’s position is not without foundation. Section 338, unlike IEEPA, expressly speaks of duties, expressly caps them at 50 per cent, and expressly places the power in the hands of the President. But the missing ITC process, the elasticity of “discrimination,” the offset mismatch, and the supersession argument all offer footholds.

For affected entities, the practical lesson of the IEEPA litigation is that real remedies may not emerge quickly from the court system. The Supreme Court vindicated the challengers in Learning Resources, and yet the refund mechanics remain unresolved months later.

Trade law. Fifty per cent duties on originating goods are flatly inconsistent with U.S. tariff commitments under CUSMA and exceed U.S. bound rates under GATT Article II; applied to Canada alone, they raise Article I MFN questions. Expect Canada to supplement its pending WTO consultations and to consider CUSMA Chapter 31 proceedings, where, unlike at the WTO, panel reports cannot be appealed into the void, and where Canada’s success in the dairy TRQ disputes shows the mechanism can work. The constraint is time: panels take the better part of a year at best. The remedy is prospective, and CUSMA itself is under renegotiation, a negotiation in which these tariffs are, transparently, leverage.

The negotiating table. The USTR statement is explicit that Canada’s sin is retaliation: only Canada and China responded to the 2025 tariffs with countermeasures rather than negotiated deals. The Section 338 action is thus designed, at least in part, to price retaliation itself, and its embargo endgame is the threat that gives the pricing teeth. Ontario Premier Doug Ford has urged a dollar-for-dollar response; the prime minister’s statement calls the measures a direct violation of CUSMA while signalling readiness to engage intensively. Ottawa’s dilemma is acute: the domestic politics of the past 18 months reward firmness, but Section 338’s escalation mechanism means counter-retaliation invites a finding that discrimination has “increased.” Expect Canada to pursue all three tracks at once: a calibrated response, dispute settlement and an intensified push at the CUSMA table, with the Sept. 1 precedent (concede the symbolic but hold the sectoral tariffs) as the likely template.

What businesses should do before August 19

The 30-day window is short, and duties attach based on the date of entry for consumption, not order, shipment or border-crossing dates for goods in transit. Canadian exporters and U.S. importers of Canadian goods should:

• Map exposure against the annexes at the HTSUS line level. Coverage does not always track sector intuition. Classification determinations may now determine whether a good faces a tariff of 0 or 50 per cent. See our overview on goods classification and CUSMA rules of origin.
• Do not rely on CUSMA origin, but do not abandon it. Origin provides no shelter from Section 338 duties but remains important for the Section 122 regime’s CUSMA exemption while it lasts, Canada’s countermeasures and any negotiated resolution.
• Confirm the interaction with Section 232. Goods subject to Section 232 duties are excluded from Section 338, an anti-stacking rule that makes scope determinations under the 232 programs, including the expanding auto-parts petitions and the offset regimes, newly consequential.
• Accelerate entries where commercially feasible. Goods entered before 12:01 a.m. ET on Aug. 19 escape the duties. Warehouse withdrawals count as entries. Inventory sitting in bonded warehouses should be evaluated now.
• Review contracts and pricing. Tariff-allocation clauses, price-adjustment mechanisms, hardship and force majeure provisions, and Incoterms determine who bears a 50 per cent duty. Revisit both existing agreements and templates and, as we have advised since the first round, build express tariff language into new contracts rather than litigating silence later.
• Preserve refund rights from the first entry. Document duty payments, monitor liquidation, and consider protests.
• Monitor Ottawa. Canadian counter-measures, remission frameworks (with their two-ground test and documentary template), and support programs have followed every previous round of U.S. action. Businesses that assembled remission files in 2025 should keep them current; those that did not should start.
• Engage. CUSMA consultations, remission processes, and any U.S. comment opportunities are channels through which affected businesses shaped outcomes in earlier rounds, including the September 1 removals and the exclusion architecture itself.

BLG’s International Trade and Investment group is monitoring the annexes, the litigation, and any Canadian response, and has advised clients through every phase of this dispute, including on origin qualification, remission requests, classification and scope determinations, contractual risk allocation, and refund preservation. For assistance, contact any member of our team, and follow developments on our Tariffs and Trade Resource Centre and The Tariff Home Companion podcast.