I. Introduction: Canada Responds to U.S. Tariff Escalation with Counter-Tariffs and Negotiations Suspension

Following the United States’ decision to decline renewal of the United States-Mexico-Canada Agreement (USMCA, known in Canada as CUSMA) at the July 1, 2026, sixth-year joint review, Canada has taken an increasingly assertive stance in defending its trade interests. Rather than accepting the shift to annual reviews as a mere procedural change, Canada has responded with a series of escalating countermeasures, including imposing retaliatory tariffs matching U.S. tariffs “dollar for dollar, rate for rate,” suspending bilateral trade negotiations with the United States, and mobilizing domestic support programs for affected industries. The dispute has continued to escalate as Canada’s new counter-tariffs took effect on September 8, and the United States responded that same day with proclamations under Section 338 that, among other measures, will prohibit the importation of certain Canadian products beginning Sept. 29, 2026.

This alert, a companion to our prior client alert USMCA Negotiations: U.S. Perspective, examines Canada’s response to these developments and the practical implications for U.S. businesses with cross-border operations and supply chain exposure to the Canadian market.

II. Canada’s Position at the USMCA Joint Review (July 2026)

Canada continues to treat USMCA as the governing North American trade framework. The agreement remains fully in force until 2036 regardless of the U.S. decision to decline renewal, and Canada has expressed its commitment to renewal, but only on terms that do not disproportionately disadvantage Canadian industries or undermine Canadian sovereignty over trade policy. The following sections address developments since the review.

III. Escalating Tariff Measures

The U.S.-Canada tariff dispute has produced a layered regime of duties and countermeasures over the course of 2025 and 2026. Key measures currently in effect or scheduled to take effect, include:

• Pre-Existing Canadian Surtaxes (2025)

Canada imposed a series of retaliatory surtaxes on U.S.-origin goods beginning in March 2025, in response to U.S. tariff actions on Canadian products. These surtaxes remain in force and form the first layer of Canada’s tariff countermeasures:

• Steel and Aluminum Surtax. The United States Surtax Order (Steel and Aluminum 2025) (SOR/2025-95) imposes a 25% surtax on U.S.-origin steel and aluminum products. The order became effective in March 2025 and was amended on Sept. 1, 2025.
• Motor Vehicle Surtax. The United States Surtax Order (Motor Vehicles 2025) (SOR/2025-118) imposes a 25% surtax on U.S.-origin motor vehicles, effective Apr. 9, 2025. Notably, for vehicles entitled to the United States Tariff under CUSMA, the surtax is calculated on the U.S.-content portion only (i.e., the value for duty minus the Canadian and Mexican content, subject to a 15% floor). This partial-content calculation represents an important nuance for manufacturers with significant Canadian or Mexican value content in their vehicles.
• Broad Consumer and Industrial Goods Surtax. The United States Surtax Order (2025-1) (SOR/2025-66) imposes a 25% surtax on a broad range of U.S. consumer and industrial goods, effective Mar. 4, 2025.
• U.S. Escalation: 50% Tariff on Canadian Goods (August 2026)

On July 21, 2026, the Advisory Committee on Canada-U.S. Economic Relations met to discuss the United States’ announced intention to impose a new 50% tariff on Canadian goods. The tariff, covering $27.6 billion in Canadian exports, took effect on Aug. 22, 2026, further escalating the dispute while bilateral negotiations remained unresolved.

• Canada’s Dollar-for-Dollar Counter-Tariffs (September 2026)

On Aug. 25, 2026, Minister François-Philippe Champagne confirmed that Canada would match U.S. tariffs “dollar for dollar, rate for rate.” Canada’s counter-tariffs took effect on Sept. 8, 2026. The key parameters are:

• Scope. Canada imposed 15%, 25%, and 50% counter-tariffs on C$27.6 billion in U.S. imports, with rates matched to the corresponding U.S. rate for the same goods (including both Section 338 and Section 232 tariffs). Notably, for certain steel and aluminum products already subject to a 25% Canadian counter-tariff, the rate increased to 50% effective Sept. 8, 2026 to match the applicable U.S. rate. Existing Canadian auto counter-tariffs also continue.
• Target Sectors. Steel and aluminum, dairy, appliances, agricultural equipment, pulp and paper, plastics, and electronics.
• Origin Determination. Country of origin is determined under the Determination of Country of Origin for the Purpose of Marking Goods (CUSMA Countries) Regulations.
• In-Transit Exception. The counter-tariffs did not apply to U.S. goods that were in transit to Canada on Sept. 8, 2026.

On the same day Canada’s new counter-tariffs took effect, the Trump administration issued a series of proclamations under Section 338 of the Tariff Act of 1930. The proclamations take multiple forms with different operative dates: they modify the scope of products subject to the existing 50% Section 338 duties (adding certain products and removing others) with at least some modifications effective Sept. 15, 2026, and they prohibit the importation of specified Canadian products beginning Sept. 29, 2026. The proclamations also expressly provide that Section 338 duties apply in addition to applicable Section 232 duties. According to USTR, the measures respond to Canadian treatment of U.S. alcoholic beverages, dairy products, and motor vehicles. The rapid sequence of measures illustrates the escalatory dynamic driving the dispute, though  Canada has signaled restraint rather than immediate further retaliation.

• Suspension of Bilateral Negotiations

Canada suspended bilateral trade negotiations with the United States after the U.S. proposed terms that Canada deemed “not in Canada’s best interest, basically, asking too much of Canada, and offering too little in return.” Canadian officials had stated that Canada had been negotiating “intensively and in good faith” toward a fair and comprehensive trade agreement. As of the date this article is published, there is no announced resumption of formal negotiations. The two governments offer competing characterizations of the breakdown: Canada’s government continues to describe the talks as having failed because the requested concessions were not acceptable to Canada, while USTR has publicly characterized Canada as having walked away from a near-final agreement. Although Canada has not announced a resumption of formal negotiations, Prime Minister Carney has continued to signal openness to a mutually beneficial agreement and, following the Sept. 8, 2026 U.S. measures, indicated that Canada would not necessarily respond with an immediate additional round of countermeasures.

IV. Government Support Measures

In parallel with its trade countermeasures, the Canadian government has mobilized substantial domestic support programs to assist businesses affected by the tariff escalation. Canada announced a C$7.5 billion package of new and enhanced support measures, which the government says builds on nearly C$25 billion of previously announced support. Among the components of the new package is an additional C$1.5 billion for the Regional Tariff Response Initiative, delivered through Canada’s regional development agencies (RDAs) and designed to provide liquidity supports and other assistance to small and medium-sized enterprises (SMEs) that face increased costs or reduced market access as a result of the dispute. The scale of this domestic policy response suggests Canada is preparing businesses and workers for the possibility of a prolonged period of trade disruption.

Separately, Canada’s Department of Finance has confirmed that the existing tariff-remission framework remains available for exceptional relief, including where affected inputs cannot reasonably be sourced domestically or from non-U.S. suppliers.

V. Practical Implications and Recommended Steps for U.S. Businesses

• Supply Chain and Tariff Exposure

U.S. businesses exporting to Canada should assess their exposure to the Canadian counter-tariffs effective Sept. 8, 2026, particularly in the targeted sectors of steel and aluminum, dairy, appliances, agricultural equipment, pulp and paper, plastics, and electronics. Coverage is determined at the tariff-item level, not by broad product category, so companies should review the specific tariff-item lists published by the Canada Border Services Agency rather than assume that an entire sector is uniformly affected. Businesses should quantify their current tariff exposure in dollar terms to measure the financial impact of each applicable surtax order on their qualifying goods. The layered and product-specific Canadian surtax regime, comprising the 2025 steel and aluminum surtax, the 2025 motor vehicle surtax, and the counter-tariffs effective Sept. 8, 2026, may significantly affect the economics of cross-border trade.

Businesses should pay close attention to origin determination under USMCA rules. The motor vehicle surtax, for example, provides a partial offset for Canadian and Mexican content, which may reduce the effective surtax for manufacturers with diversified North American supply chains. Businesses should model their tariff exposure under each applicable surtax order to understand the product-specific impact.

Businesses should also evaluate their exposure to the Sept. 29, 2026 import bans on specified Canadian products under the Section 338 proclamations. Companies whose products may be affected should identify alternative sourcing arrangements, assess inventory and in-transit positions ahead of the effective date and determine whether any of their goods fall within the modified scope of the 50% Section 338 duties effective Sept. 15, 2026. Because the proclamations expressly provide that Section 338 duties apply in addition to applicable Section 232 duties, businesses importing goods subject to both regimes should model the combined duty rate to understand their total landed cost.

• USMCA Compliance and Origin Planning

USMCA preferential tariff treatment remains available for qualifying goods. However, the Canadian surtaxes apply on top of or in addition to regular duties, and so goods qualifying for the United States Tariff under CUSMA may still be subject to one or more surtax orders. The CUSMA Tariff Preference Regulations (SOR/2020-157) continue to govern eligibility for the United States Tariff and Mexico Tariff in Canada.

Businesses should verify whether their goods are subject to any of the surtax orders currently in effect and plan accordingly. In particular, companies should review their certificates of origin and ensure that their origin documentation accurately reflects the North American content of their products, as the distinction between U.S.-origin and Canadian/Mexican-origin content has direct implications for surtax calculations. Companies should also consult Canada’s consolidated tariff-item lists for the most current product-level coverage and consider whether the tariff-remission process discussed in Section IV may provide relief for inputs that cannot reasonably be sourced outside the United States.

• Transaction Structuring

Professionals structuring cross-border transactions should account for the current tariff environment in risk allocation provisions. Mergers and acquisitions, joint ventures, and supply agreements involving Canadian operations or exports to Canada should incorporate provisions addressing the impact of retaliatory tariffs on deal economics, as well as the possibility of future retaliatory measures, import restrictions, and changes to tariff-remission availability. Professionals representing sellers should consider representations regarding tariff exposure and compliance with applicable surtax orders, while professionals representing buyers should evaluate the ongoing cost implications of the layered tariff regime.

Professionals should also review material adverse change and material adverse effect definitions in acquisition agreements to determine whether changes in the tariff environment are captured, excluded, or subject to disproportionate-impact carve-outs.

Businesses with existing supply agreements, distribution arrangements or long-term procurement contracts involving Canadian operations or exports to Canada should review those agreements for price adjustment mechanisms, tariff pass-through provisions, and cost-sharing arrangements that may be triggered by the current tariff environment. Where existing contracts do not address tariff escalation, businesses should consider whether force majeure, commercial impracticability or hardship provisions provide any relief. Going forward, businesses should negotiate explicit tariff-adjustment clauses that allocate the risk of future retaliatory measures, import restrictions and changes to tariff-remission availability between the parties.

• Canadian Operations and Investment Exposure

U.S. businesses with subsidiaries, joint ventures or other operations in Canada face a distinct set of considerations. Canadian operations that rely on U.S.-origin inputs may face increased costs under the Canadian surtax regime, while operations serving the Canadian domestic market may benefit from reduced competition from other U.S. exporters facing the same tariff barriers. Businesses should assess whether their Canadian operations are eligible for any of Canada’s domestic support programs, including the Regional Tariff Response Initiative and the tariff-remission framework. Investment agreements and facility leases should be reviewed to determine whether they include mechanisms to address material changes in the trade environment, and businesses should consider whether Canada’s stated goal of reducing economic dependence on the United States could affect longer-term investment planning for Canadian operations.

• Monitoring Developments

The situation remains fluid. Canada has suspended (but not terminated) bilateral trade negotiations with the United States. Canada’s Sept. 8, 2026 counter-tariffs were followed the same day by U.S. proclamations under Section 338 that will impose import bans on certain Canadian products beginning Sept. 29, 2026, underscoring the potential for further responsive measures by both governments. The near-term outlook depends primarily on whether the United States and Canada resume negotiations; the USMCA annual review process and the agreement’s continuation through 2036 provide a structural backdrop but are unlikely to drive resolution on their own. Businesses should establish processes for monitoring Canadian trade policy developments and be prepared to adjust their supply chain and contractual arrangements as the situation evolves.

Businesses should also monitor the parallel U.S.-Mexico negotiations, particularly with respect to rules of origin, automotive content, and Section 232 tariffs, because agreements reached bilaterally with Mexico may influence the positions advanced in any renewed U.S.-Canada discussions.

Canada’s response is also increasingly focused on diversifying its economic relationships beyond the United States. On Sept. 16, 2026, European Commission President Ursula von der Leyen proposed opening a path for Canada to become the European Union’s first “associate member,” a new form of partnership that would build on the existing Canada-European Union Comprehensive Economic and Trade Agreement (CETA) framework and contemplate a substantially deeper Canada-EU economic relationship. Prime Minister Carney welcomed the proposal and, in a September 17 address to the European Parliament, called for deeper integration in areas including critical minerals, energy, defense industries, artificial intelligence and compute, financial services, and digital trade. The proposal builds on an already significant commercial relationship. The EU is Canada’s second-largest global trading partner for goods and services, with approximately C$178 billion in bilateral trade in 2025. Canada and the EU are expected to continue developing the contours of the proposed relationship in advance of the next Canada-EU Summit, which Canada will host on Oct. 29–30, 2026. Although the terms of any new arrangement remain to be negotiated, the proposal reflects Canada’s broader strategy of diversifying its trade, investment, and supply chains beyond the United States and could have longer-term implications for cross-border investment and supply-chain planning.

VI. Conclusion

Canada has responded to U.S. tariff actions with targeted counter-tariffs designed to match the value and rates of specified U.S. measures. The United States, in turn, has issued proclamations under Section 338 that modify existing tariff coverage and will prohibit the importation of specified Canadian products beginning Sept. 29, 2026. The USMCA remains in effect through 2036, but the layered tariff regime (which now includes the 2025 surtaxes, the September 2026 counter-tariffs, and the Section 338 proclamations) significantly affects the economics of cross-border trade between the United States and Canada.

U.S. businesses with exposure to the Canadian market should proactively assess their tariff exposure, review their USMCA compliance posture, confirm tariff classification and remission eligibility, evaluate exposure to potential import restrictions, and implement strategies to mitigate tariff risk on both sides of the border. Transaction professionals should ensure that deal documents adequately address the evolving tariff environment, particularly with respect to risk allocation, representations, and material change provisions.

We will continue to monitor developments as the U.S.-Canada trade relationship evolves. Clients with questions about the impact of these measures on their operations or transactions should contact the authors of this alert.