Tax Insights: US imposes 50% tariffs on Canadian dairy, alcoholic beverages, motor vehicles and various other goods

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Issue 2026-26

In brief

What happened? 

On July 20, 2026, US President Donald Trump signed three proclamations¹ under section 338 of the US Tariff Act of 1930, imposing, effective August 19, 2026, an additional 50% tariff — the maximum permitted under the statute — on certain Canadian‑origin dairy products, alcoholic beverages and motor vehicles, as well as a variety of other goods.

The tariffs are assessed in addition to all other applicable tariffs, taxes, fees and charges, and apply regardless of whether the goods qualify under the Canada‑United States‑Mexico Agreement (CUSMA). Certain products are excluded from these section 338 tariffs, including goods that are already subject to the section 232 tariffs under the US Trade Expansion Act of 1962.

Why is it relevant?

These proclamations mark the first use of section 338 in modern trade practice, continuing the US Administration’s expansion of executive tariff authority beyond the more commonly invoked International Emergency Economic Powers Act (IEEPA) and section 232 tariff authorities. Each proclamation identifies distinct Canadian trade practices that the President has found to discriminate against US commerce: dairy, alcoholic beverages and motor vehicles. These tariffs represent a substantial additional expense on a broad range of Canadian‑origin products that enter the US market.

Actions to consider

Organizations with Canadian trade exposure should act promptly to:

• identify affected Harmonized Tariff Schedule of the United States (HTSUS) classifications, quantify their potential exposure and assess how it might affect pricing, profitability and contractual obligations with suppliers and customers
• confirm whether products qualify for any exclusions or carve‑outs, and evaluate alternative sourcing, manufacturing or supply chain structures
• review customs valuation and transfer pricing policies to ensure they align with related‑party transactions and monitor ongoing US Customs and Border Protection (CBP) guidance and HTSUS amendments

In detail

Background

Section 338 of the US Tariff Act of 1930 authorizes the President, upon finding that a foreign country discriminates against US commerce or imposes unreasonable or unequal restrictions, to proclaim additional tariffs of up to 50% on products from that country. Unlike section 232 (national security) or IEEPA (emergency powers), section 338 is specifically designed to address discriminatory trade practices — a narrower, but legally distinct, basis. Section 338 requires a minimum 30‑day effective date (in this case August 19, 2026, 30 days after the signing of the proclamations), which gives importers a defined compliance window.

Canadian trade practices considered to be discriminatory

The President has found that the following Canadian trade practices discriminate against US commerce:

• Dairy – Canada’s CUSMA cheese tariff‑rate quota (TRQ) allocation rules exclude retailers from accessing quota quantities, while the Canada‑European Union (EU) Comprehensive Economic Trade Agreement (CETA) TRQ permits retailer access — an asymmetry the proclamation finds disadvantages US cheese exporters relative to EU competitors.
• Alcoholic beverages – Since March 2025, all but two Canadian provinces have halted the purchase, distribution or retailing of US alcoholic beverages while continuing to import from other countries.
• Motor vehicles – Canada’s United States Surtax Order (Motor Vehicles 2025) imposes a 25% tariff on US vehicles (or on non‑Canada/Mexico content up to 85% of value) and applies exclusively to US‑origin vehicles.

Scope and mechanics of the section 338 tariffs

The three proclamations share a common structure:

• Rate – 50% tariff (the maximum rate under section 338).
• Stacking – The 50% tariff is in addition to existing tariffs. For products also subject to general most‑favoured nation (MFN) rates, the total applicable tariff may now exceed 50% when combined with the underlying rate.
• CUSMA irrelevance – Preferential CUSMA‑originating status does not exempt goods from the section 338 tariff. This represents a significant departure from the trade agreement framework.
• Foreign trade zone (FTZ) treatment – Covered goods must enter FTZs under privileged foreign status, which ensures that they are dutiable at the rate that applies on the date of admission rather than the potentially lower rate at the time of entry for consumption.
• Exclusions – Section 232‑covered goods (which includes steel, aluminum, copper and certain automobiles), civil aircraft agreement goods, energy, potash, fish and critical minerals are excluded.

The goods subject to the section 338 tariffs are listed in Annex I and Annex II of the proclamations and include goods in addition to those related to dairy, alcohol and motor vehicles. CBP can also make HTSUS technical modifications by giving notice through the Federal Register, which does not require additional presidential actions; this means that the product scope can shift over time.

Transfer pricing and cost allocation implications

For businesses that import into the United States from Canadian affiliates, the 50% additional tariff raises immediate transfer pricing questions. The customs value on which the tariff is assessed must align with the arm’s length transfer price. When the tariff‑inclusive landed cost increases are material, businesses should evaluate whether existing intercompany pricing appropriately allocates the tariff burden and whether the transfer pricing methodology or cost‑sharing arrangements need to be adjusted.

Next steps for Canadian businesses

Canadian businesses that export to the United States should:

• review their tariff classification – Confirm HTSUS classification of affected imports to identify potential misclassification risk and ensure goods are correctly captured (or excluded), based on Annex I and Annex II of the proclamations.
• quantify their tariff exposure – Model the financial impact of the 50% tariff on current import volumes into the United States, factoring in any existing MFN or section 232 rates that already apply.
• perform a contractual review – Examine purchase agreements, distribution contracts and customer pricing to determine tariff pass‑through rights and renegotiation triggers.
• consider a protest and refund strategy – If the legal basis of section 338 is challenged (which has occurred with other executive tariff authorities), timely protests will be essential to preserve refund rights.

Canadian multinational enterprise groups should:

• explore alternative supply chains – Assess whether sourcing from non‑Canadian suppliers, shifting production to the United States, or restructuring supply chains to fall outside the scope of the section 338 tariffs is commercially viable before August 19, 2026.
• align their customs valuation with transfer pricing – Ensure customs valuations and intercompany transfer prices are consistent, particularly for related‑party imports of dairy, beverages or vehicle components.
• ensure cross‑functional coordination – Engage tax, legal, procurement and trade compliance teams and ensure they coordinate given the range of affected product categories and the compressed 30‑day implementation timeline.

The takeaway

The section 338 tariffs represent a new front in the US‑Canada trade dispute, imposing the maximum statutory tariff on a targeted, but commercially significant, set of Canadian products. US businesses with Canadian trade exposure should immediately assess their import portfolios, quantify their financial impact and evaluate both compliance obligations and potential mitigation strategies. The application of these tariffs irrespective of CUSMA status underscores the US Administration’s willingness to override preferential trade agreement treatment — a development with potentially broader implications for cross‑border supply chains.