The belief that economic security equals national security is a concept the Trump administration firmly supports. Treasury Secretary Scott Bessent emphasized this point during the Reagan National Economic Forum, calling it a ‘foundational principle’. The trade conflict brewing between the U.S. and Canada threatens national security for both nations.
Canada, ranking as America’s second-largest trading partner, accounted for 12.6% of U.S. trade by June, trailing only Mexico. Tariffs currently in effect have modestly raised inflation in both countries. However, if Canada enacts dollar-for-dollar tariffs on September 8 and the U.S. expands its tariffs on Canadian goods in January, inflation’s impact will increase significantly. This will affect both governments’ ability to control inflation and could lead to serious consequences for their economies and military programs.
Inflation surpasses predictions by the Office of Management and Budget, influencing defense budgets. Forecasts had anticipated inflation to stabilize at 2.3% in 2025. In 2026, projections by the Congressional Budget Office and the Office of Management and Budget estimated inflation at 2.7%, with a decline to 2% expected by 2030. The War Department adopted similar figures. However, real inflation exceeds expectations, with the Federal Reserve reporting annual inflation at 3.6% for 2026, and forecasting at 3.3% for the next three years.
Defense budgets must address these inflation levels. The Trump administration’s 2027 fiscal request may surpass current estimates by about $9 billion if approved. Options for budget modification are limited. Reducing military pay or pensions would likely be countered by Congress, and operational costs are critical given current tensions with Iran affecting naval, marine, and air support systems. Other targets such as procurement, research and development, military construction, and housing are unlikely candidates for cuts.
With increased munitions consumption causing shortages, funds allocated for munitions cannot balance other budget reductions. Stretching procurement programs to extend timelines risks reducing military forces, a concern due to the worldwide commitments by the U.S. Cutting military construction is impractical given damages during conflicts with Iran. Reducing research budgets hampers adaptation to drone warfare advancements, leaving few options to address inflation.
The ongoing trade war with Canada and potential new tariffs will worsen inflation, straining defense budgets on both sides. Canada aims to meet NATO defense spending targets, planning to allocate 3.5% of GDP plus an extra 1.5% for infrastructure by 2035. This raises their spending from below 1.5% to 2% earlier this year. However, inflation pressure from tariffs may impact its generous social programs. These programs could see reduced funding if defense budgets grow rapidly, making meeting NATO goals challenging.
Historically, Canada and the U.S. managed to navigate major policy discrepancies, such as during Canadian opposition to the U.S. intervention in Iraq in 2003. Intelligence and military collaboration remained stable, with North American Air Defense Command operations unharmed. Yet, the current trade war could severely damage military ties and the mutual trust critical to both nations’ security. Avoiding this disaster is paramount.
Dov S. Zakheim serves as a senior adviser at the Center for Strategic and International Studies and as vice chairman of the board for the Foreign Policy Research Institute. His experience includes roles as undersecretary of Defense (comptroller) and chief financial officer for the Department of Defense from 2001 to 2004, and deputy undersecretary of Defense from 1985 to 1987.
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