By Si Thu Naing

July 27, 2026

July 2026 isn’t over yet, but already, it has earned a bold-faced entry in the timeline of Canada-US relations thanks to Donald Trump’s tariff war.

Since July 1st, Trump has declined to renew the Canada-US-Mexico (CUSMA) trade agreement and imposed a new 50% tariff under the Depression-era Smoot-Hawley Act, escalating his trade war to a new level of unjustified retaliation and coercion.

Canadian premiers gathered for their summer Council of the Federation meeting in Charlottetown July 21-23, with Prime Minister Mark Carney in attendance for the last day to coordinate a national response to Trump’s economic belligerence.

The question now is, what comes next? Above all, Canada needs to start fighting this war strategically — as the unwarranted assault on both Canada’s economic and political integrity that it is — as opposed to tactically, on a tariff-attack by tariff-attack basis.

Canada should stop treating each American tariff proclamation as a new crisis and instead recognize that Washington is working through a finite legal toolkit whose economic value diminishes with use.

The provincial targeting under Section 338 fits that pattern. Reaching for a tool built to single out individual provinces is what an actor running low on easier options does, and doing it now lets Washington extract maximum value from a single move.

The exclusion of Alberta and Saskatchewan oil from the Section 338 tariffs, driven by self-interested energy needs, shows how one exemption serves three objectives at once: economic necessity, a provincial wedge, and leverage heading into the CUSMA review.

In the face of this unprecedentedly hostile combination of chaotic volatility and Machiavellian norm violation, Canada has a range of options, including and beyond conventional retaliatory tariffs.

A Finite, Decaying Toolkit

Tariffs lose coercive power over time because markets adapt. Once firms invest in new suppliers, production networks or export markets, those adjustments tend to become permanent.

While it wasn’t prompted by tariffs, Europe’s diversification away from Russian natural gas after 2022 illustrates the point. The transition imposed short-term costs, but once alternative supply chains were established, dependence did not return. Similar dynamics are emerging in global trade as a result of Trump’s disruption.

The Information Technology and Innovation Foundation has found that Trump’s 2025 tariff escalation accelerated trade negotiations among countries seeking to reduce dependence on both the United States and China. Northern Trust likewise notes that years of preparation left China increasingly resistant to tariff pressure through transshipment through third countries and strategic control of critical supply chains.

Tariff leverage rarely collapses overnight; instead, it decays; fastest against large, patient economies, more slowly against smaller ones. Crucially, the legal machinery behind Washington’s leverage is equally finite.

Since 2025, the United States has relied on six principal legal authorities to impose tariffs. While Congress could always legislate new authority, there is no known statutory authority of comparable breadth waiting in reserve.

As catalogued by the Congressional Research Service, the existing arsenal includes IEEPA, now struck down by the U.S. Supreme Court; Section 122of the Trade Act, since ruled unlawful by the U.S Court of International Trade; Section 201 safeguards, Section 232 national security tariffs, Section 301 country-specific actions and Section 338 of the Tariff Act of 1930.

With IEEPA and Section 122 gone, the remaining four carry real constraints of their own: Section 201, Section 232 and Section 301 all require some form of government investigation before they can be used. Section 338 is the exception. It lets the administration retaliate broadly without those requirements.

The significance is strategic: a country facing a finite, known toolkit of authorities should prepare for the whole toolset rather than each proclamation as its own emergency. That framing may be of little comfort to a business absorbing a 50% tariff this quarter. Strategic patience at the national level and real, immediate losses at the sectoral level are both true at the same time. Closing that gap and compensating the businesses absorbing each blow while the broader sequence plays requires a more creative approach.

Section 338 Changes the Federal Equation

Recognizing the finite nature of Washington’s tariff toolkit answers only half the problem. Canada also needs institutions capable of absorbing repeated use of that toolkit without allowing provincial interests to fragment the country’s negotiating position.

Section 338 introduces a feature absent from most other tariff authorities: it explicitly permits action against subdivisions of another country.

Policy contributor and Expert Group on Canada-US Relations member Carlo Dade has highlighted this possibility.

Recent actions targeting particular provinces demonstrate that provincial differentiation is no longer merely theoretical: the broadened July action alone covers roughly 20 billion dollars in Canadian goods, about 5%of what the U.S. imported from Canada in 2025.

Provinces that attempted unilateral accommodation were no more successful than those that maintained a common position. The alcohol provisions make the point concretely. Alberta and Saskatchewan lifted their provincial bans on American alcohol hoping for relief; Ontario and Quebec, which kept theirs in place, are the two provinces the July action specifically targets over alcohol instead. Neither approach was spared.

As Dade puts it, the U.S ambassador was drinking bourbon in Alberta the day the tariffs were announced, and that did not spare the province’s export from the 50% tariff. The provinces that lifted their bans have fared no better than the ones that did not: in a textbook example of the Churchillian aphorism against feeding the crocodile in the hope he’ll eat you last, accommodation did not purchase protection.

If Section 338 becomes a recurring feature of U.S. trade policy, Canada’s greatest vulnerability is no longer simply economic. It is political. Provincial incentives can be exploited to weaken both Canada’s national negotiating position and the country’s economic and political cohesion at a time when constitutional questions loom in Alberta and, possibly, Quebec.

Canada Already Has the Building Blocks

Canada is not beginning from zero.

Ottawa already possesses meaningful policy tools, including retaliatory surtaxes under the Customs Tariff Act and remission mechanisms that reduce costs for businesses dependent upon imported inputs.

What Canada lacks is an institutional mechanism specifically designed for repeated, provincially targeted tariff actions.

A permanent Tariff Stabilization Fund would incentivize provincial unity in the face of pressure to swing separate deals with Washington, the more reflexive, coercion-friendly choice. The fund would be retaliatory tariffs with an adaptive strategy baked in. Retaliation is what makes the fund possible: it is financed entirely from Canada’s own retaliatory surtaxes, so without retaliation, the funding model collapses before it starts.

Retaliation alone does not stop Washington from picking off provinces one at a time, which is why such a fund would matter as much as the tariffs that pay for it, especially now that the same sectors being targeted are also at the centre of the CUSMA review. How Canada handles one increasingly determines its leverage in the other.

In 2025, Ottawa committed $5 billion through the Strategic Response Fund and $1 billion through the Regional Tariff Response Initiative, both sector and firm-based rather than provincial, and both fixed envelopes that run out once spent, leaving Ottawa to renew or replace them.

That design exposes the gap rather than closing it: a firm in a 338-exempted province can draw on the same sectoral support as a firm in a targeted one, so the funding does nothing to discourage a province from breaking ranks. The proposed fund tied to a province maintaining a common negotiating position, and financed by retaliatory tariff revenue rather than a capped appropriation, would close that loophole.

The Canadian Federation of Independent Business has argued that revenues collected from Canada’s retaliatory tariffs should be returned to the businesses those tariffs are intended to protect. That principle could be expanded into a permanent event-triggered Tariff Stabilization Fund with access conditioned on provinces holding a common negotiating line rather than cutting separate deals with Washington, financed by tariff revenues.

Provinces that independently negotiate concessions with Washington should not simultaneously receive assistance from a fund established to strengthen collective bargaining and national economic unity.

Such a mechanism would transform retaliatory tariff revenue from a temporary fiscal instrument into a permanent strategic asset.

One Negotiation

Treating tariffs and CUSMA as separate files misunderstands Washington’s strategy.

The priorities identified by USTR Jamieson Greer, including rules of origin, dairy access, trade balances and digital measures, closely overlap with the sectors repeatedly appearing in tariff actions.

Trade policy specialist Barry Appleton warned earlier this year that Washington would likely replace the certainty of a long-term agreement with continuing leverage through repeated treaty reviews. The United States’ decision not to renew CUSMA has moved precisely in that direction.

Any interim CUSMA agreement that trades temporary tariff relief for future negotiations risks entrenching uncertainty rather than removing it.

Canada should therefore judge any agreement not by whether it removes today’s tariffs but by whether it materially reduces Washington’s ability to repeat the exercise.

Scarcity Is Canada’s Enduring Leverage

Diversification is often described as a defensive measure, but its greatest value is strategic. Countries possessing scarce resources create competition for their cooperation rather than dependence upon any single partner. Canada’s position is stronger than it sometimes appears.

Energy, potash, critical minerals, fisheries and several products already subject to Section 232 were excluded from recent Section 338 actions because disrupting those supply chains would impose costs on the United States as well.

Those exemptions should not be interpreted as favours. They reveal where Canada’s bargaining power already exists.

The Strategic Roadmap

Executing this posture requires holding three clear lines.

First, Canada should arm itself against Washington’s entire tariff toolkit rather than whichever authority is currently being exercised.

Second, Ottawa should establish an event-triggered Tariff Stabilization Fund financed through retaliatory tariff revenues and designed specifically for provincially targeted trade actions.

Third, Canada should treat tariff disputes and the CUSMA review as a single negotiation because Washington already does.

The governing principle is straightforward. Canada should not exchange structural concessions — whether on rules of origin, dairy access or digital sovereignty — for temporary tariff relief unless the resulting agreement provides durable protection against future coercive actions.

Otherwise, Canada will simply continue paying rent on what Appleton aptly described as a month-to-month tenancy, returning to the same negotiation one annual review at a time.

The objective is not merely to withstand the next tariff assault. It is to prevent the next assault or, failing to do so, make it strategically irrelevant.

Si Thu Naing is a public servant in the federal government and an MBA candidate in Sustainable Innovation at the University of Victoria’s Gustavson School of Business. The views expressed are his own.