A new legal argument is adding another layer of complexity to Canada’s escalating tariff fight with the United States. A September 23 report from the Montreal Economic Institute warns that Ottawa’s decision to retaliate against U.S. tariffs could inadvertently strengthen part of the Trump administration’s legal defence. The concern centres on Section 338 of the U.S. Tariff Act of 1930, an obscure provision designed to respond when another country discriminates against American commerce.
The warning does not mean Canada has suddenly validated President Donald Trump’s tariffs. Instead, the report argues that Canadian counter-tariffs could make one particular statutory challenge more difficult while leaving several other legal arguments untouched. That distinction could become increasingly important if American companies take the latest Canada-specific tariffs to court.
The Report Identifies a Narrow but Potentially Important Legal Risk
The Montreal Economic Institute’s Economic Note was prepared by George Mason University law professor Ilya Somin, who is also an MEI senior fellow, in collaboration with Renaud Brossard. Its central argument is unusually specific. Section 338 allows a U.S. president to respond to discriminatory treatment of American commerce. When Trump initially invoked the provision against Canada, critics argued that several Canadian measures cited by Washington did not actually discriminate against American products compared with equivalent goods from other countries.
Canada’s latest retaliation changes that factual landscape. Counter-tariffs directed specifically at U.S.-origin goods are, by their nature, country-specific. Somin argues that lawyers defending the administration could therefore point to those measures as evidence of discrimination against American commerce. At the same time, the MEI report acknowledges an obvious complication for Washington: Canada imposed the newest counter-tariffs after Trump’s Section 338 measures were announced. A court could therefore focus on conditions at the time of the original U.S. action rather than subsequent retaliation. The report itself says it is difficult to predict how judges would resolve that timing issue.
Section 338 Was Written Specifically Around Discrimination
The legal debate matters because Section 338 is not a general presidential tariff statute. Enacted as part of the Tariff Act of 1930, it addresses situations in which another country imposes unequal restrictions on American goods or otherwise places U.S. commerce at a disadvantage relative to commerce from third countries. The statutory text allows additional duties when those conditions are met and permits duties designed to “offset” the identified commercial disadvantage.
There are limits written directly into the law. Additional duties under the provision cannot exceed 50 per cent ad valorem, and the statute also assigns the U.S. International Trade Commission a role in monitoring discriminatory practices and advising the president. Section 338 contains a further escalation mechanism: if a foreign country maintains or increases discrimination after an initial proclamation, the president can, under specified conditions, exclude affected products from the United States entirely. Those unusual provisions explain why the legal definition of “discrimination” has suddenly become central to the Canada-U.S. dispute rather than a technical side issue.
Canada’s September Retaliation Was Deliberately U.S.-Specific
Ottawa’s latest measures took effect September 8 after the federal government announced it would respond “dollar for dollar” to new American duties. Canada imposed surtaxes of 15, 25 and 50 per cent on selected U.S.-origin products, with individual rates generally corresponding to the tariffs Washington had placed on Canadian goods. The Department of Finance says the measures cover approximately $27.6 billion worth of imports from the United States.
The targeted categories include steel and aluminum, dairy products, appliances, agricultural equipment, pulp and paper, plastics and electronics. Canada Border Services Agency guidance makes clear that the new surtaxes apply specifically to goods considered to originate in the United States under Canadian origin rules. That design is understandable as retaliation: Ottawa wanted its response directed at the country imposing the original duties rather than at imports generally. Legally, however, that country-specific character is exactly what the MEI report believes could give U.S. government lawyers another fact to cite when defending Section 338.
Washington Has Already Used Canadian Retaliation in Its Justification
The concern is not merely theoretical. After Canada’s September 8 measures took effect, the U.S. administration explicitly invoked what it described as Canada’s “continued retaliation and discrimination” when announcing additional Section 338 actions. U.S. Trade Representative Jamieson Greer said the administration viewed the Canadian response as justification for modifying the earlier tariff measures and moving toward restrictions on additional Canadian products.
Separate September 8 presidential proclamations go further. They provide for the exclusion of specified Canadian motor-vehicle, dairy and alcoholic-beverage products from the U.S. market beginning September 29, 2026. Those bans had not yet taken effect when the MEI report was released on September 23. The administration describes them as a response to continued Canadian discrimination; Ottawa disputes the broader U.S. characterization of the trade relationship and says its countermeasures are responses to earlier American tariffs. The competing narratives show how retaliation can become part of the evidence used by both governments to justify their next move.
Canada’s Counter-Tariffs Do Not Resolve the Bigger Legal Questions
Even if the counter-tariffs make the discrimination issue harder for future challengers, Section 338 faces other unresolved questions. Legal scholars Peter Harrell and Jennifer Hillman have argued that the statute requires tariffs to “offset” specific discriminatory treatment rather than serve as an unlimited power to impose duties across unrelated Canadian goods. Other critics argue that later trade legislation may have displaced some of Section 338’s operative authority. Those theories have not yet produced a definitive judicial ruling on Trump’s current Canada tariffs.
The broader judicial backdrop is significant. On February 20, 2026, the U.S. Supreme Court held in Learning Resources v. Trump, consolidated with Trump v. V.O.S. Selections, that the International Emergency Economic Powers Act did not authorize presidential tariffs. The Court emphasized the importance of clear congressional authorization when sweeping tariff powers are claimed. In May, the U.S. Court of International Trade separately concluded that another tariff program exceeded Section 122 of the Trade Act of 1974, although that dispute proceeded into an appeal. Neither ruling decides the Section 338 question, but both demonstrate that the statutory basis for presidential tariffs is receiving close judicial scrutiny.
CUSMA Adds Another Layer to the Dispute
The Section 338 conflict also sits awkwardly beside the Canada-United States-Mexico Agreement. Canadian government guidance states that products qualifying for preferential treatment under CUSMA are not exempt from the new American Section 338 tariffs. That distinguishes them from some other U.S. tariff programs under which CUSMA-compliant Canadian goods continue to receive exemptions. For Canadian businesses that invested heavily in satisfying North American rules of origin, the distinction has immediate commercial consequences.
The governments also sharply disagree over some of the underlying practices Washington has cited. The Trump administration says Canadian policies concerning automobiles, alcohol and dairy have disadvantaged American commerce. Canada, by contrast, maintains that its administration of CUSMA dairy tariff-rate quotas complies with the trade agreement and characterizes its newer tariffs as countermeasures against U.S. action. Those competing positions should not be confused with the narrower MEI argument. A U.S. court examining Section 338 would be considering the requirements of American domestic law, and success or failure on one statutory argument would not by itself settle every CUSMA-related disagreement between the countries.
Retaliation Also Carries an Economic Cost at Home
The legal debate arrives alongside an economic question Canada has encountered before: how much of a retaliatory tariff is ultimately paid by Canadian businesses and households. Bank of Canada researchers examined more than 110,000 products from seven major retailers during Canada’s 2025 counter-tariff episode. They found that prices of affected products eventually rose about 6 per cent more than comparable untariffed goods. That represented roughly one-quarter of the 25 per cent tariff being passed through to retail prices.
The study estimated that those counter-tariffs added approximately 0.3 percentage points to consumer-price inflation during that episode, though prices moved back toward previous relative levels after most tariffs were removed. The circumstances in 2026 are different, particularly because many of the latest Canadian measures target intermediate products rather than final consumer goods. Bank of Canada officials consequently expect a more muted and gradual inflation effect from the newest measures, while still acknowledging that they can raise input costs. Ottawa has paired its trade response with a $7.5-billion support package for tariff-affected workers and businesses.
The Legal Fight Is Still Developing
For now, the most important conclusion is that the MEI warning concerns one argument, not the entire legal case against the U.S. tariffs. A future plaintiff could still challenge whether the administration satisfied Section 338’s statutory requirements, whether the duties truly “offset” the alleged disadvantage, whether the law remains fully operative after decades of newer trade legislation and whether the claimed presidential authority is consistent with constitutional limits identified in recent tariff cases. The Canadian counter-tariffs simply make the discrimination question less clean than it previously appeared.
More procedural developments are already coming. The U.S. International Trade Commission is accepting public comments through November 8 on how it should carry out its responsibilities under Section 338, while specified American import bans are scheduled to begin September 29. Political conditions are also fluid: an August 28–30 Ipsos poll of 1,023 U.S. adults found 57 per cent opposed additional tariffs on Canada and 20 per cent supported them, with a margin of error of plus or minus 3.5 percentage points. Courts, negotiations and economic pressure are therefore moving simultaneously—and none has yet produced a final resolution to the dispute.
