US Section 338 Tariffs Against Canada Take Effect, Commencing New Trade War

• The US imposed 50% tariffs on around US$20Bn of Canadian imports on August 22, 2026, under Section 338 after talks broke down. Prime Minister Mark Carney pledged “dollar-for-dollar” retaliation from September 8, prompting Trump to threaten 50% tariffs on Canadian autos and steel from January 1, 2027
• BMI estimates that the Section 338 measure raises the effective tariff rate (ETR) on Canadian imports into the US from 3.4% to 5.6%, while lifting the global ETR on total US imports only marginally, from 10.7% to 10.9%.
• BMI’s base case is that the August 22 tariffs and Canada’s retaliation remain in place until end-2026. Talks have stalled, and neither side appears willing to compromise quickly. Risks to this view include a renewed deal before retaliation begins, US political pressure ahead of the midterms, or successful legal challenges, given that Section 338 has never previously been used to impose tariffs.
• Conversely, if negotiations fail and legal challenges are unsuccessful, the tariffs could remain beyond our base case. This would further strain US-Canada relations and raise the risk that the administration uses Section 338 more broadly.
• The agency does not expect the proposed January 1 increase in US tariffs on Canadian autos and steel to 50% to be implemented. We view the threat as negotiating leverage and expect it to be shelved as part of a deal that removes the August tariffs and Canada’s retaliation before year-end, though failed talks could still see it materialise.
• BMI’s US economic forecasts remain unchanged. The limited rise in the global ETR means the tariffs do not materially affect our 2026 inflation or growth forecasts, at 3.3% and 2.0% respectively. The fiscal forecast is also unchanged, with the budget deficit at 5.8% of GDP in 2026, as BMI do not expect the tariffs to generate meaningful additional revenue.

(Source: BMI, A Fitch Solutions Company)