Canada–US: The dispute has moved beyond tariffs

US customs officials began refusing several categories of Canadian goods on 29 September. Most alcoholic beverages packaged in Canada can no longer enter the country. The same applies to selected whey products, molasses, non-alcoholic beer and motorcycles with engines larger than 800cc.

The products covered by the bans had already been subject to 50% tariffs since 22 August. Washington then modified the wider tariff lists in September before excluding 68 tariff entries from the US market altogether on 29 September.

According to the Congressional Research Service, the excluded goods were worth approximately USD 967m in 2025. Alcohol accounted for about USD 850m.

That is a small figure beside the USD 872bn in goods and services traded between Canada and the United States last year. The measures will not, on their own, determine Canada’s economic outlook. Their effects will fall heavily on particular producers, distributors and communities. More important for the wider relationship, Washington has now used a legal tool that could be applied to much larger areas of trade.

The United States imposed the bans under Section 338 of the Tariff Act of 1930. No previous administration had used the provision in this way. Unlike many of the tariffs introduced during the present dispute, the new measures offer no exemption for products that meet USMCA rules of origin.

The bans grew out of three longstanding disputes

The measures followed more than a year of retaliation and unsuccessful negotiations.

Several Canadian provincial liquor boards stopped selling American alcohol during the earlier confrontation over US tariffs. Washington regarded those restrictions as discrimination against US producers. The two countries were already divided over Canada’s dairy import quotas, which the United States argues restrict access promised under USMCA. Canadian duties on American vehicles and parts added a third dispute.

On 8 September, Ottawa imposed tariffs of between 15% and 50% on C$27.6bn of US goods. The list included food, machinery, chemicals and consumer products. Canada described the measures as a response to previous US tariffs and provided a process through which businesses could seek relief when they could not source suitable alternatives.

The White House announced its own package on the same day. It applied 50% tariffs to 659 Canadian product lines with a 2025 trade value of approximately USD 20.3bn, according to Global Trade Alert. It then selected 68 tariff entries for exclusion from the US market.

The bans are much broader in some sectors than others. The alcohol ban covers most of the trade targeted in that sector. The food restrictions are much narrower than the accompanying rhetoric about Canadian dairy policy. The motorcycle ban applies only above a specified engine size and excludes several of BRP’s best-known three-wheeled and adventure models.

Taken together, the measures do not target one consistent trade practice. They put pressure on several politically sensitive Canadian industries at once. Canadian alcohol accounts for 87% of the trade now excluded. Dairy remains one of the most sensitive issues in Canadian trade policy, while powersports manufacturing has a strong presence in Quebec.

USMCA still governs most trade, but it no longer protects every qualifying product

USMCA continues to govern most trade between the two countries. Trucks have not stopped crossing the border, and most qualifying Canadian exports still receive preferential treatment.

The agreement’s future nevertheless became less certain on 1 July, when the United States declined to renew it in its current form at the first joint review. That decision did not terminate USMCA. The parties will instead meet annually, while the agreement remains in force until 2036 unless they resolve the outstanding issues or one government withdraws.

Annual reviews give Washington repeated opportunities to seek concessions. They also leave manufacturers considering long-term investment without the assurance that a successful review would have provided.

Section 338 adds a separate problem. The US proclamations state explicitly that USMCA origin does not protect goods covered by the new tariffs and bans. A Canadian product can satisfy the agreement’s rules and still be denied entry under another US law.

The provision allows the president to impose tariffs of up to 50% when another country discriminates against US commerce. If that treatment continues or increases, the statute also permits the exclusion of imports. Congress enacted the law during the Great Depression, but it had not previously been tested through a comparable presidential action.

A legal challenge may eventually clarify the limits of that authority. Until then, importers have to treat the restrictions as enforceable regardless of whether Ottawa considers them incompatible with USMCA.

The immediate losses are concentrated in a few industries

Canadian drinks producers face the clearest immediate loss. The United States is an important market for Canadian whisky, beer, wine and ready-to-drink beverages, and the ban covers goods already packaged for sale rather than only bulk shipments. Producers can seek other markets, but replacing established distribution contracts and shelf space will take time.

The food ban will affect a smaller group of processors dealing in the specified whey products, molasses and non-alcoholic beer. Its narrow scope matters: the United States has not prohibited all Canadian dairy imports, despite presenting dairy policy as one of the reasons for acting.

The effect on motorcycles may also take longer to emerge. BRP told the Associated Press that it had already completed most shipments intended for the 2026 US season. Some of its principal road models fall outside the ban. The company and its suppliers will have less room to adapt if the restriction remains in place when the next production and shipping cycle begins.

The wider tariff package will carry more economic weight than the bans themselves. Canadian products worth about USD 20bn now face 50% duties, in some cases added to existing sectoral tariffs. Ottawa’s countermeasures will also raise costs for Canadian businesses that rely on American inputs and cannot obtain timely remission.

A September EIU forecast, prepared after the measures were announced but before the bans took effect, projected Canadian growth of 0.9% in 2026 and 1.6% in 2027. It assumed that USMCA would eventually be renewed during the forecast period, while identifying protracted negotiations and further US tariffs among the most serious risks.

That remains a plausible baseline if the two governments contain the dispute. It becomes harder to sustain if the restrictions spread to industries with deeper cross-border supply chains.

The Bank of Canada estimates that products affected by the latest US measures represent approximately 5% of Canada’s goods exports to the United States. Governor Tiff Macklem has said that weaker exports and business caution could reduce annualised growth in the fourth quarter to below 1%.

The direct trade loss is only part of the calculation. Firms may also defer hiring, investment and orders while they wait to see what Washington targets next.

Canada has found new buyers, but not for everything

Non-US destinations received 32.8% of Canadian goods and services exports in 2025, the highest proportion in more than four decades. Their value increased by 11.1%, according to the government’s latest State of Trade report.

Those figures require qualification. Gold and energy contributed heavily to the increase. Both can be redirected through global markets more readily than products made within North American manufacturing networks. Canada’s services exports are also less dependent on the United States than its goods trade.

Automotive components, specialist machinery and processed food present a different problem. Producers have built plants, specifications and delivery schedules around US customers. Finding a buyer elsewhere may require regulatory approval, product changes and new distribution arrangements. Some goods also cost more to transport over longer distances, reducing the number of commercially realistic alternatives.

More than two-thirds of Canadian exporters surveyed by the Bank of Canada said they planned to expand into new markets. That effort can reduce dependence over several years. It cannot replace the US market quickly for industries whose production systems cross the border several times before a finished product reaches the customer.

Autos will determine how far the confrontation goes

The next important deadline is 1 January. Washington has threatened to raise automotive tariffs to 50% if the negotiations do not produce an agreement.

That measure would operate on a different scale from the September bans. Automotive manufacturing links plants and suppliers across Ontario, Quebec, Michigan and other US states. Parts routinely cross the border during production, while manufacturers allocate models and investment across the region rather than treating Canada and the United States as separate markets.

A 50% tariff would threaten production volumes, supplier contracts and future investment on both sides of the border. It would also test whether the White House is prepared to accept disruption in US factories to obtain concessions from Ottawa.

A limited agreement before January remains possible. The two governments continue to have reasons to settle specific disputes, and the cost of escalation rises sharply once automotive supply chains are involved. The September bans could be modified or withdrawn as part of such an agreement.

The route to a broader settlement is less clear. Washington has tied together provincial alcohol restrictions, dairy access, automotive policy, public procurement and the USMCA review. Ottawa would have to decide which concessions it can make without weakening its position in the annual negotiations or provoking opposition from provinces and protected industries.

The progress of talks before January will provide the clearest indication of whether the bans were intended principally as bargaining pressure. Changes to provincial sales restrictions, any narrowing of the US product lists and the treatment of American firms in Canadian public procurement will also matter. So will the first legal challenge to Section 338, should an affected importer or producer bring one.

Most trade across the border continued after 29 September. The immediate disruption is confined to a small number of products, and neither government has withdrawn from USMCA.

For affected producers whose goods qualify under USMCA, however, the US market has closed despite that preferential status. The automotive decision will show whether this remains a dispute over selected products or becomes a much deeper challenge to the integrated North American market.