New Report Warns Canada’s U.S. Counter-Tariffs Could Complicate Ottawa’s Legal Fight Against Trump Duties

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Canada’s decision to fight U.S. tariffs with tariffs of its own may carry an unexpected legal complication. A new Economic Note from the Montreal Economic Institute argues that Ottawa’s latest countermeasures could give the Trump administration additional material to defend its unprecedented use of Section 338 of the U.S. Tariff Act of 1930.

The warning does not mean Canada’s legal position has collapsed. Several separate arguments remain available to businesses, states or other plaintiffs seeking to challenge the American duties. Instead, the report focuses on a narrower problem: Section 338 is explicitly concerned with foreign measures that discriminate against U.S. commerce, and Canada’s new counter-tariffs deliberately apply to American goods. That creates a more complicated factual landscape just as the Canada-U.S. tariff confrontation is moving into largely untested legal territory.

The Report Identifies a Very Specific Legal Risk

The September 23 report was prepared by George Mason University law professor Ilya Somin, who helped litigate the successful challenge to President Donald Trump’s earlier emergency tariffs, together with Montreal Economic Institute executive Renaud Brossard. Their central argument is not that Canadian retaliation makes Trump’s Section 338 duties automatically legal. Rather, they contend that the retaliation could weaken one particular argument that challengers may use against them.

Section 338 allows action when another country discriminates against American commerce compared with commerce from other countries. Critics of Trump’s tariffs have argued that some of the Canadian policies originally cited by Washington did not meet that test. Canada’s September counter-tariffs create a different fact pattern because they expressly target goods originating in the United States. Somin argues that administration lawyers could point to those measures as evidence of discrimination. Challengers could respond that the relevant legal question should be based on conditions when Trump originally imposed the Section 338 duties, before Ottawa’s newest retaliation took effect.

Section 338 Is an Almost Century-Old Trade Power

The legal fight is unusual partly because Section 338 has essentially no modern judicial history. Congress enacted the provision as part of the Tariff Act of 1930. It permits a president, under specified conditions, to impose additional duties of up to 50 per cent when a foreign country places American commerce at a disadvantage through discriminatory or unequal measures.

Trump became the first U.S. president to actually impose tariffs under the provision. On July 20, 2026, the White House issued separate proclamations concerning Canadian motor vehicles, dairy products and alcoholic beverages. The administration maintained that Canadian policies in those areas disadvantaged U.S. businesses relative to competitors from other countries. U.S. Trade Representative Jamieson Greer said the actions placed 50 per cent tariffs on nearly US$20 billion in Canadian imports. After a short postponement, the measures took effect on August 22. Because Section 338 had never previously been used this way, courts have little direct precedent telling them how broadly its presidential powers should be interpreted.

Canada Answered With $27.6 Billion in Counter-Tariffs

Ottawa’s response was deliberately designed to match Washington’s economic pressure. The federal government announced tariffs of 15, 25 and 50 per cent on $27.6 billion worth of goods imported from the United States, with the measures taking effect on September 8. The government described the approach as matching the American action dollar for dollar and, where applicable, rate for rate.

The targeted products extend across major parts of the economy. The federal list includes goods in steel and aluminum, dairy, appliances, agricultural equipment, pulp and paper, plastics and electronics. Ottawa also established a remission process for businesses facing exceptional circumstances, including situations where necessary inputs cannot reasonably be sourced domestically or from countries other than the United States. From the Canadian government’s perspective, the tariffs are retaliatory measures intended to defend affected industries. The legal complication identified by the MEI is that their country-specific design also gives Washington a new example of Canadian trade measures that explicitly distinguish American imports from those originating elsewhere.

That Does Not Resolve the Bigger Challenge to Trump’s Tariffs

Even if Canada’s retaliation complicates one argument, Section 338 faces several other potential legal challenges. Georgetown trade-law scholars Peter Harrell and Jennifer Hillman have argued that the Trump administration may have interpreted the statute too broadly. One issue is whether tariffs imposed under the provision must be closely calibrated to the specific commercial disadvantage they are supposed to offset rather than applied across a much wider range of imports.

Other questions involve the administration’s factual process and the continued legal status of Section 338 itself. The statute assigns the U.S. International Trade Commission a role in identifying discrimination, yet critics say there was no comparable ITC investigation before the 2026 tariffs. Some scholars also argue that later trade laws enacted in 1962 and 1974 effectively displaced portions of the much older provision. Others disagree and maintain Section 338 remains available to presidents. Those issues have not been definitively resolved by a court. The MEI report therefore describes Canada’s counter-tariffs as a complication rather than a decisive answer to the broader dispute over presidential authority.

Earlier Tariff Cases Show the Courts Can Still Matter

The current legal uncertainty follows a major defeat for the Trump administration earlier in 2026. On February 20, the U.S. Supreme Court ruled 6-3 that the International Emergency Economic Powers Act did not authorize the sweeping tariffs Trump had imposed using emergency powers. The challenge involved small American companies, including wine importer V.O.S. Selections, whose import costs had increased under the duties.

That ruling established an important limit on presidential tariff authority, but it did not decide the meaning of Section 338. The administration subsequently turned to other statutes as alternative sources of power, producing additional litigation. The U.S. Court of International Trade also ruled against tariffs imposed under Section 122 of the Trade Act of 1974, although that dispute followed its own procedural path and involved a different statute. The lesson for the Canada dispute is therefore limited but significant: courts have already scrutinized aggressive interpretations of presidential trade powers, while every new statutory mechanism must still be evaluated according to its own wording and history.

The Dispute Has Already Escalated Beyond Ordinary Tariffs

The stakes became even higher on September 8 when the White House announced another step under Section 338. Trump issued proclamations moving toward import exclusions covering certain Canadian products connected with motor vehicles, dairy and alcoholic beverages. Those restrictions are scheduled to become effective on September 29, with affected goods shifting from high tariffs to outright exclusion from the American market.

Section 338 specifically contains language allowing import exclusions when a country maintains or increases discrimination after an earlier presidential proclamation. The White House has argued that Canada’s continuing and expanded retaliation satisfies that condition. Ottawa rejects Washington’s broader characterization of its trade policies and has described its own measures as a response to unjustified American tariffs. This distinction is likely to become important if litigation proceeds. A court could eventually have to separate the administration’s political description of the trade dispute from the narrower statutory questions of what constitutes discrimination, when it must exist and whether the remedies imposed actually match the commercial disadvantage identified.

The Economic Relationship Makes Every Legal Move More Consequential

The dispute is unfolding across one of the world’s largest bilateral trading relationships. Statistics Canada reported that 71.7 per cent of Canadian merchandise exports went to the United States in 2025, down from 75.9 per cent in 2024. The United States supplied 58.8 per cent of Canadian merchandise imports that year. Canada still recorded an $81.6-billion merchandise trade surplus with its southern neighbour, although that was down from $101.3 billion a year earlier.

Those numbers help explain why tariff decisions that appear targeted on paper can have broader effects on investment and business planning. The Bank of Canada said in September that newly imposed U.S. tariffs affected roughly 5 per cent of Canadian goods exports to the United States. Policymakers expected the direct economy-wide impact to be relatively modest but warned that renewed trade uncertainty could weigh more broadly on investment, hiring and household confidence. The Bank also judged that the inflation impact of Canada’s counter-tariffs could be muted because many affected products are intermediate inputs or have Canadian substitutes.

U.S. Public Opinion Adds Another Dimension

The legal battle is not taking place in a political vacuum. An Ipsos poll released September 1 found 57 per cent of Americans opposed additional tariffs on Canada, compared with 20 per cent who supported them. Sixty-eight per cent said the United States should be willing to make tradeoffs with Canada rather than insist on obtaining most of what it wants in the dispute.

Those findings do not determine what a judge will decide, but they matter to the broader strategy surrounding the conflict. The MEI report argues that Canada could benefit from recognizing the domestic U.S. opposition to tariffs rather than relying principally on retaliation. Ottawa, meanwhile, has framed its countermeasures as necessary to defend Canadian workers and industries while negotiations remain stalled. Both approaches carry tradeoffs. Political pressure can change faster than litigation, while court challenges can take months and produce uncertain remedies. Canada is therefore balancing economic retaliation, negotiations and the possibility that American courts may ultimately narrow or invalidate parts of Trump’s tariff strategy.

The Timing Question Could Become the Crucial One

Perhaps the most consequential legal question raised by the new report is deceptively simple: when should a court examine whether Canada discriminated against U.S. commerce? When Trump issued his Section 338 proclamations in July, Canada’s September counter-tariffs did not yet exist. That could allow plaintiffs to argue that later Canadian retaliation cannot retroactively justify duties that were allegedly unlawful when proclaimed.

The administration could counter that Section 338 gives presidents continuing authority to supplement or amend measures when discriminatory conditions change. Washington has already relied on that interpretation to justify further action after Canada imposed its latest tariffs. As of the MEI report’s publication, the new Section 338 duties had not yet produced the same definitive court test that Trump’s earlier emergency tariffs faced. That makes sweeping conclusions premature. What is clearer is that a trade strategy designed primarily to create economic leverage has also changed the facts that future U.S. judges may be asked to evaluate. Canada’s counter-tariffs remain a negotiating weapon, but they may now become evidence in the courtroom as well.

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