Gloves Off: Canada Answers U.S. Section 338 Tariffs Dollar-for-Dollar as Washington Escalates with Import Bans

The Canada-United States trade dispute continues to escalate. Effective September 8, 2026, Canada implemented retaliatory surtaxes of 15%, 25% and 50% on approximately C$27.6 billion of U.S.-origin goods. The measures are expressly designed to match the scope and rate of the United States' existing Section 338 and Section 232 measures on Canadian products.

Later the same day, the United States issued a series of presidential proclamations modifying the scope of its existing Section 338 measures and, for the first time, moving beyond tariffs to outright import prohibitions. As discussed in our previous alerts,Tariffs Up, Tariffs Down: What Businesses Need to Know and Canadian Ironman: Carney Imposes New Steel and Lumber Trade Measures, the dispute has evolved from reciprocal tariffs into a broader contest over market access and procurement.

The latest measures represent a significant escalation. Effective September 29, 2026, the United States will prohibit the importation of most packaged Canadian alcoholic beverages, several dairy-adjacent products and inputs, including certain whey products, molasses and non-alcoholic beer, as well as motorcycles with engines exceeding 800cc. Products subject to these new prohibitions previously faced an additional 50% ad valorem duty under Section 338.

The September 2026 measures are significant for two reasons. First, they appear to represent the first use of Section 338 of the Tariff Act of 1930 to prohibit imports outright, rather than impose additional duties. Section 338 itself had not previously been used to impose modern trade measures before the Administration's August 2026 actions against Canada. Second, the measures reflect a shift from tariff-based restrictions to outright import restrictions for certain products. Rather than facing a 50% tariff, certain Canadian products will now be excluded from the U.S. market entirely.

Businesses should note that existing product-specific and company-specific remissions issued under the United States Surtax Remission Order (2025) continue to apply to the new surtax measures. Significant relief remains available for many manufacturers, food processors and commercial packaging operations that rely on U.S. inputs.

Canada’s counter-tariffs: matching Washington, dollar for dollar

Effective 12:01 a.m. on September 8, 2026, Canada imposed surtaxes on approximately C$27.6 billion of U.S.-origin imports under the United States Surtax Order (2026) per Orders- in- Council P.C. 2026-0785 and P.C. 2026-0786 administered by the Canada Border Services Agency through Customs Notice 26-23.

The measures are intended to respond to the United States' Section 338 and Section 232 actions affecting Canadian exports. They are structured to match the value of the United States' Section 338 measures on a dollar-for-dollar basis and to align surtax rates with the corresponding U.S. measures where applicable. Surtaxes apply at rates of 15%, 25% and 50% of the value for duty, with individual tariff lines generally matched to the rate applicable under the corresponding U.S. measure. Existing Canadian countermeasures on U.S. steel and aluminum products increased from 25% to 50% to align with the U.S. rate.

Iron and steel products remain the most heavily targeted sector. Other affected sectors include dairy products, machinery and equipment, appliances, electronics, drywall and other construction materials, textiles, carpets and agricultural equipment.

The scope of the measures changed even before coming into force. On August 26, 2026, Finance Canada revised the proposed surtax list, reducing the number of affected tariff items from 874 to 629. The revisions primarily removed all fish and seafood products (Chapter 3 of the Customs Tariff), while adding several new tariff items, including wood charcoal, printed matter, gypsum board, glass containers and copper wire.

The Canadian measures contain a number of administrative features that will be important to importers. Goods that were in transit to Canada on September 8 are excluded. Where a product would otherwise be subject to both the new surtax order and the Steel Derivative Goods Surtax Order, only one surtax applies. As noted above, existing remissions remain available and continue to apply to the new surtax measures.

United States escalates

The September 8 presidential proclamations establish two separate sets of implementation measures.

Effective September 15, 2026, the United States will modify the scope of certain existing Section 338 duties. Additional products are added to the 50% duty lists, including certain cheeses, paper products, structural steel products and aluminum profiles. At the same time, a number of products have been removed from the duty regime, including salt, Portland cement, chemically pure sugars, toilet and facial tissue stock, paper household and hospital articles, refined lead, certain switchgear assemblies and fishing rod parts. The alcohol measures also narrow the scope of the existing Section 338 tariffs by removing certain bulk whisky and liqueur products from the 50% tariff regime, including HTSUS subheadings 2208.30.6085 (whiskies in containers exceeding four litres) and 2208.70.0060 (liqueurs and cordials in containers exceeding four litres).The removal of several items appears to respond to concerns raised by domestic industries and lawmakers regarding the impact of the duties on downstream users and infrastructure projects. The changes may also reflect growing U.S. political sensitivity to the inflationary effects of the tariff regime, which has increased costs for a range of imported inputs and consumer goods.

Effective September 29, 2026, the United States will prohibit the importation of specified Canadian products identified in separate exclusion annexes for alcohol, dairy, and motor vehicles. These prohibitions replace duties with outright import restrictions for the affected products and apply in addition to existing Section 338 enforcement mechanisms. Products otherwise covered by the exclusions remain subject to the existing 50% duties until that date.

The alcohol measures distinguish between retail-packaged products and certain bulk shipments. While many packaged alcoholic beverages become subject to the September 29 import prohibitions, some bulk products are removed from the tariff regime and do not appear on the exclusion lists. In particular, whiskies and liqueurs imported in containers exceeding four litres are no longer subject to the 50% Section 338 tariff and are not captured by the exclusion annexes. As discussed below, many of the new alcohol prohibitions are limited to products imported in "Packaged" form, preserving access to the U.S. market for certain bulk shipments intended for bottling, packaging or further processing in the United States.

Alcohol Products: The Importance of the "Packaged" Limitation

One notable feature of the alcohol exclusions is their reliance on a defined "Packaged" limitation. The exclusion annex specifies that a product identified as "Packaged" includes only alcoholic beverages imported in bottles, cans, boxes, kegs or similar direct-to-consumption containers. The distinction is also important because some products that become subject to the exclusion regime are no longer subject to the corresponding Section 338 tariffs.

As a result, many retail-ready alcoholic beverages are prohibited from importation beginning September 29, 2026, while certain bulk shipments may remain outside both the exclusion regime and the Section 338 tariffs. The exclusions cover beer, wine, spirits, whisky, vodka, rum, gin, tequila, liqueurs and other alcoholic beverages across a broad range of Chapter 22 tariff classifications, but often only where the product is imported in consumer-ready form. Notably, certain whisky and liqueur products imported in containers exceeding four litres have been removed from the 50% tariff regime and do not appear on the exclusion lists. This distinction may significantly affect supply chains that import bulk product for subsequent bottling, packaging or further processing in the United States.

Procurement Measures and Other Developments

In addition to the tariff and exclusion measures, the Administration has directed the General Services Administration to remove Canadian-origin products from federal procurement schedules.

While the practical implications of that direction remain unclear, it represents a further extension of the dispute beyond customs duties and import restrictions into government procurement policy. Notably, federal procurement preferences, including various Buy American and Buy America requirements, have existed in the United States for decades and already restrict access to portions of the federal procurement market. The extent to which the latest directive materially changes existing procurement opportunities for Canadian suppliers will depend on how it is implemented and whether exceptions, waivers or existing trade agreement commitments continue to apply.

The measure may also raise questions regarding U.S. obligations under international procurement commitments, including the World Trade Organization Agreement on Government Procurement. At this stage, however, the scope of the directive and its practical impact on Canadian suppliers remains uncertain.

Customs and Import Compliance Measures

The recent tariff and exclusion measures also form part of a broader shift toward stricter customs and import rules and enforcement on both sides of the border. In June 2026, the White House issued its Executive Order on Strengthening Customs Enforcement, directing U.S. agencies to review and strengthen a range of customs administration practices, including the rules governing non-resident importers.

Although implementing regulations have not yet been released, the United States has indicated that it intends to substantially revise its non-resident importer (NRI) framework. Depending on the final rules, Canadian businesses that currently act as importers of record into the United States may face additional requirements relating to U.S. presence, assets or operational activities. For some Canadian exporters, the practical effect could be a reduced ability to continue operating as a non-resident importer without a more substantial U.S. footprint.

Canada also appears to be moving toward stricter customs enforcement measures. Among other developments, the government has announced its intention to eliminate the "last sale" valuation rule for customs purposes. Although implementing legislation has not yet been released, the proposed change could increase the customs value, and therefore duty exposure, of certain imported goods. Taken together, these measures suggest that both governments are increasingly focused not only on tariff rates and market access restrictions, but also on customs administration and border enforcement as trade policy tools.

As tariffs continue to escalate, customs authorities on both sides of the border are taking a more aggressive enforcement posture, with increased monitoring of compliance and greater exposure for importers to audits, reassessments, penalties, and other enforcement measures.

What Businesses Should Be Doing Now

Businesses should review whether existing customs and trade-planning strategies remain available, including customs valuation and origin planning, tariff classification reviews, duty drawback, existing remissions and, where appropriate, new remission applications.

They should also assess supply chains and commercial arrangements for opportunities to mitigate exposure through sourcing changes, inventory planning or alternative import structures. Particular attention should be given to products affected by the new alcohol exclusions and anticipated non-resident importer reforms, where packaging, processing, distribution and importer-of-record arrangements may become increasingly important.

Looking Ahead

Taken together, the September 2026 measures mark a significant evolution in the Canada-U.S. trade dispute. Canada's response remains focused on reciprocal measures. The United States, however, has increasingly escalated, first through the unprecedented use of Section 338 duties and now through outright import prohibitions and procurement restrictions.

Although the September measures are significant, the practical impact on trade flows remains uncertain. Several of the new U.S. prohibitions target relatively narrow product categories, and important implementation details remain outstanding. In the alcohol sector, for example, the distinction between packaged and bulk products preserves market access for certain supply arrangements. Similarly, existing procurement preferences and domestic-content requirements already limited access to portions of the U.S. government procurement market before the September 2026 measures.

Notwithstanding the significance of the September 29 exclusions, their immediate economic impact may be more limited than the headline announcements suggest. According to public reporting, the products covered by the new import prohibitions account for approximately 0.25% of Canadian exports to the United States. While the measures will certainly be significant for affected sectors and supply chains, their impact is expected to be concentrated rather than economy-wide.

Businesses should not assume that these measures will affect all cross-border trade equally. Their impact will vary depending on product classification, supply chain structure, packaging formats, procurement channels and the availability of existing exemptions, remissions and trade agreement protections. For businesses dealing in products captured by the prohibition regime, however, the September 29 exclusions may raise market-access considerations in addition to the increased costs associated with the existing tariff measures.

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McCarthy Tétrault’s International Trade and Investment Law Group continues to advise clients across a range of industries on the rapidly evolving Canada-U.S. trade landscape, including retaliatory tariffs, Section 338 duties, import restrictions, procurement measures, customs compliance and supply chain planning. As governments increasingly turn to a broader range of trade measures, businesses should assess not only tariff exposure but also potential impacts on market access, sourcing strategies and cross-border operations. For assistance in assessing the implications of these developments, please contact our team.