50% Tariff on Canada: What Changes with the 1930 Law

The U.S. government has found in the depths of its legislative archive a tool that no president has used in almost a century. Donald Trump invoked Section 338 of the Tariff Act of 1930 to impose a 50% tariff on $20 billion in imports from Canada. Ottawa's response was immediate: equivalent retaliation.

This move marks a new chapter in the escalation of protectionist American trade policy. However, this time, the legal instrument chosen raises doubts even among experts in commercial law. The law has never been tested in court, meaning no one knows for sure if it would survive judicial scrutiny.

Section 338 is part of the Smoot-Hawley Tariff Act, passed in 1930 at the onset of the Great Depression. The provision authorizes the president to impose tariffs of up to 50% on imports from any country that, in the Executive's assessment, has discriminated against American companies in bilateral trade.

It is a tool of broad power and practically without limits defined by precedents. As Ryan Majerus, a partner at King & Spalding and former U.S. trade authority, described, the law functions as "a blank slate" precisely because it has never been the subject of litigation. No president, from Roosevelt to Biden, has deemed it prudent or necessary to invoke it.

Part of the explanation lies in the fact that more recent trade legislations, such as Section 301 of the Trade Act of 1974, offer mechanisms with a more robust and tested legal basis. Some specialized lawyers argue that the 1930 statute has become obsolete in light of these later laws, further weakening the legal support for the measure.

The White House based its decision on claims that Canada discriminates against American exports in three specific sectors: dairy, automotive, and alcoholic beverages. These are long-standing disputes. The Canadian supply management system in the dairy sector, for example, has been criticized by the U.S. for decades, even though it was partially addressed in the USMCA agreement, the successor to NAFTA.

Canada's response came in equal measure: equivalent tariff retaliation on American products. The escalation heightens diplomatic tensions between two countries that share the world's largest land border and conduct hundreds of billions of dollars in bilateral trade each year. In 2024, trade between the U.S. and Canada surpassed $700 billion, according to data from the U.S. Census Bureau.

For those following the global investment landscape, the dynamics are concerning. Tariff wars between historically integrated trading partners tend to create ripple effects on supply chains, input costs, and ultimately, consumer inflation.

The most immediate impact falls on sectors with high productive integration between the two countries. The automotive industry is the most evident example: parts cross the U.S.-Canada border multiple times during the manufacturing process of a single vehicle. A 50% tariff on Canadian components could significantly raise production costs for American automakers.

The energy sector is also on the radar. Canada is the largest supplier of oil imported by the U.S. Although the announced tariffs do not directly cover the energy sector in this $20 billion package, the trade escalation creates the risk that new rounds could target strategic commodities.

For the global financial market, the signal is one of increased regulatory uncertainty. When a government resorts to a 95-year-old law, without judicial precedents, to circumvent the limitations of more modern mechanisms, the message is that the predictability of the business environment is deteriorating. This tends to increase risk premiums and pressure assets of countries exposed to trade with the U.S., as discussed in our coverage of the global macroeconomic scenario.

There is one element that differentiates this measure from other recent protectionist actions: the legal basis is genuinely uncertain. Unlike Section 301, which was widely used in the trade war with China and has established jurisprudence, Section 338 has never been challenged in the courts.

This opens the door for Canada, or even harmed American companies, to seek to overturn the measure judicially. If a federal court decides that the law has been tacitly repealed by later legislations, the entire tariff structure built upon it collapses. This legal risk adds a layer of volatility that the market has not yet fully priced in.

The strategy may also face obstacles at the World Trade Organization. Canada has a history of bringing trade disputes to WTO panels, and although the organization is weakened by the paralysis of its appellate body, an unfavorable decision for the U.S. would carry significant symbolic weight.

Those following American trade policy in recent years recognize a pattern. The use of unconventional legal instruments to expand the Executive's tariff power is not new to this administration, but the choice of a law from the Depression era represents a qualitative escalation.

The central point for investors and managers is to understand that the global trading environment is increasingly operating outside the institutional tracks built in the post-war period. Multilateral agreements are losing relevance. Bilateral mechanisms are activated at the discretion of the Executive. And laws forgotten for nine decades are back on the table.

For portfolios exposed to American, Canadian, or any sector with cross-border supply chains, the moment demands heightened attention to the evolution of these disputes and, above all, to the legal developments that may determine whether this 50% tariff is permanent or just another chapter in a maximum pressure negotiation.

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