Trump employs unused law in new tariff playbook

• It's hard to know which will survive challenges in the courts, and over what time horizon there may be any resolution.
• Even if individual tariffs are delayed or struck down, the administration can still use the threat of them to gain negotiating leverage while forcing companies to plan for higher costs.
• It's unfolding even as renewed conflict in the Middle East pushes up energy costs and inflation risks — a backdrop that many economists thought would discourage the White House from opening new trade war fronts.

Driving the news: The White House says the tariffs respond to what it considers Canadian discrimination against U.S. autos, dairy and alcohol.

• The administration invoked the never-before-used Section 338 of the 1930 Smoot-Hawley Tariff Act and chose the maximum penalty allowed by the law: 50% duties, applied to roughly $20 billion of Canadian imports starting in August.
• The duties would raise the average tariff rate on Canadian goods by roughly 2.3 percentage points, according to Karl Schamotta, Corpay's chief market strategist.

Between the lines: Section 338 is the latest legal authority the administration has reached for after courts earlier this year narrowed its emergency tariff powers.

• The White House quickly replaced many of those invalidated tariffs with a 10% global levy under Section 122 — another never-before-used authority that happens to expire on Friday.
• A federal trade court later struck down the Section 122 tariffs, though an appeals court allowed them to remain in effect pending appeal.
• As that authority fades, the administration is replenishing its arsenal with more traditional trade laws. Top Trump trade official Jamieson Greer told CNBC on Tuesday morning to "expect to see some action soon" from a forced-labor investigation expected to produce tariffs on dozens of countries.

What to watch: Trade lawyers suggest the latest Canadian tariffs are also likely to face legal scrutiny — that is, if they take effect.

• Peter Harrell, a visiting scholar at Georgetown Law's Institute of International Economic Law, wrote on X on Monday night that a potential challenger could argue that the administration bypassed the required procedures to impose the tariffs.
• Ilya Somin — who helped successfully challenge President Trump's International Emergency Economic Powers Act tariffs — wrote that Congress "superseded" Section 338 through later trade legislation, leaving it without independent authority to impose new tariffs.

The other side: A senior administration official argued Section 338's "terms are clear" and said Canada's retaliation and preferential treatment of third countries "fits squarely" within the statute.

The bottom line: "The toothpaste is out of the tube. ... We would not be surprised to see [Section] 338 wielded against others," TD Cowen's Chris Krueger wrote in a client note Monday night, adding that "338 is the new IEEPA."

• "Litigation [is] likely a question of when, not if, but that is likely a 2027 — or even 2028 — story. In the near term, elbows up across the board," Krueger added.

Trump stopped short of targeting some of Canada's most strategically important exports, exempting autos, lumber, semiconductors, pharmaceuticals and aircraft products from the new duties.

The intrigue: That's consistent with an administration trying to maximize negotiating leverage while limiting economic blowback, at a time when American voters are angry about inflation and the Iran war is keeping energy prices elevated.

• The administration took the same tack last week, when it targeted Brazil, but left out key consumer goods like coffee and beef.
• Still, the tariffs will apply to goods that qualify for duty-free treatment under the U.S.-Mexico-Canada Agreement, a departure from several earlier Trump tariff programs. Economists have argued that this carveout has shielded the U.S. from the worst of the Trump tariffs' potential inflationary effects.

The 30-day delay before the tariffs take effect leaves room for an off-ramp. A senior White House official stressed they remain open to negotiations, while Canadian Prime Minister Mark Carney condemned the tariffs but likewise pledged to intensify talks before August.

• A senior administration official said the measures are separate from Trump's previously threatened "wildfire tariffs," though the official said the White House is considering options on that front.
• It's unclear which legal authority such tariffs would be imposed under.