Economic security is linked closely to national security according to the Trump administration. Treasury Secretary Scott Bessent emphasized this principle in a May address to the Reagan National Economic Forum. The ongoing trade war between the U.S. and Canada is seen as a national security threat to both nations.
Canada ranks as America’s second largest trading partner. It accounted for 12.6% of U.S. trade as of June, trailing only Mexico. The tariffs in place have had a modest inflationary impact on both countries so far. However, if Canada’s dollar-for-dollar tariffs are enforced on September 8, followed by expanded American tariffs in January, inflation control by both governments could face significant challenges. This situation could affect their economies and military programs.
Inflation projections have already surpassed predictions by the Office of Management and Budget, on which the Department of War bases its defense planning. In 2023, inflation was forecast to stabilize at 2.3% beginning in 2025.
The Congressional Budget Office forecasted inflation for 2026 at 2.7%, decreasing to 2% by 2030. However, recent Federal Reserve data reports a current annual inflation rate of 3.6% for 2026, with a three-year outlook at 3.3%. This increase impacts the defense budget, adding $8 billion for the current fiscal year, and potentially $9 billion more for fiscal 2027.
The Pentagon’s options for addressing increased inflation are limited. Military pay or pension cuts would likely be reversed by Congress. Operations and maintenance may not see cuts due to the strain from the ongoing conflict with Iran. Procurement, research, and development also remain unlikely targets for budget cuts due to their importance.
Funds for munitions, often used to balance budget cuts, aren’t viable anymore. High munitions consumption in Iran has worsened shortages. Reducing new procurement could delay programs, historically leading to force reductions. In the current stretched military posture, this could embolden adversaries to escalate aggressive policies.
Inflationary pressures from tariffs strain both countries’ defense budgets. Canada has pledged to reach NATO’s defense spending goal of 3.5% GDP plus 1.5% for infrastructure by 2035. However, inflation from a tariff war could affect Canada’s generous social programs unless defense budget growth slows. This situation complicates Canada’s ability to meet NATO commitments.
Past policy differences, like Canada’s opposition to the 2003 Iraq intervention, didn’t impact intelligence or military collaboration. However, the ongoing trade war is different and could damage military ties and trust. Preventing such a rupture is essential.
Dov S. Zakheim, a senior adviser at the Center for Strategic and International Studies, warns of these potential consequences. He served as undersecretary of Defense and chief financial officer for the Department of Defense from 2001 to 2004, and as deputy undersecretary of Defense from 1985 to 1987.
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