Economic Security and National Defense: The Impact of U.S.-Canada Trade Disputes

Economic security is a cornerstone of national security, a principle embraced by the Trump administration. In May, Treasury Secretary Scott Bessent emphasized its importance at the 2026 Reagan National Economic Forum. The ongoing trade war between the U.S. and Canada threatens the national security of both nations. Canada, America’s second-largest trading partner, was responsible for 12.6% of U.S. trade as of June, only trailing Mexico.

Tariffs already in place have had limited inflationary effects on both sides. However, significant inflation could arise if Canada’s dollar-for-dollar tariffs begin on September 8, along with expanded U.S. tariffs on Canadian goods in January. These actions could significantly affect both countries’ ability to manage inflation, impacting their economies and military operations.

Inflation predictions exceed estimates made by the Office of Management and Budget, affecting defense planning. In 2023, inflation was expected to stabilize at 2.3% by 2025. Updated forecasts projected inflation at 2.7% by 2026, decreasing to 2% by 2030. The War Department’s projections matched these figures. However, recent data from the Federal Reserve indicate a higher annual inflation rate of 3.6% for 2026, with a three-year outlook at 3.3%. This change translates to an additional $8 billion for the current fiscal year and around $9 billion above current estimates if Congress approves the administration’s defense budget request for 2027.

The Pentagon faces limited options to address inflation increases. Reducing military pay or pensions could lead Congress to restore cuts. Cuts to operations and maintenance are unlikely, given the toll of ongoing conflicts with Iran on Navy, Marine, and Air Force systems. Procurement, research and development, military construction, and family housing remain potential areas for budget reduction. However, cutting munitions funds is challenging due to shortages exacerbated by the Iran operation.

The department could slow spending on new procurement by extending program timelines, resulting in force reductions. Given the U.S.’s stretched military posture, such cuts could encourage adversarial nations to further aggressive policies. Military construction budgets face difficulty in cuts due to damage from the Iran War. Reducing research and development could hinder adapting to increased drone warfare.

The trade conflict with Canada, along with possible new tariffs, will compound inflationary pressure and further strain both countries’ defense budgets. Historically, Canada has underfunded defense but now aims to meet NATO’s 3.5% GDP goal, plus an additional 1.5% for infrastructure by 2035. Canada increased its defense spending to 2% earlier this year from previous levels under 1.5%. Inflation due to tariffs could impact Canada’s social programs unless Ottawa slows defense budget growth, complicating its NATO obligations.

Canada and the U.S. have navigated policy disagreements, notably when Canada opposed U.S. actions in Iraq in 2003. These differences did not impact intelligence or military relations, particularly the operations of the joint North American Air Defense Command. The ongoing trade war poses a unique challenge that could disrupt military ties and erode trust, potentially leading to national security setbacks for both countries. It is crucial to prevent such a scenario.

Dov S. Zakheim, the article’s author, offers insight based on his experience as a senior adviser at the Center for Strategic and International Studies and vice chairman at the Foreign Policy Research Institute. His prior roles include serving as undersecretary of Defense and chief financial officer for the Department of Defense from 2001 to 2004, and deputy undersecretary of Defense from 1985 to 1987.