US-Canada tariff war is a national security disaster for both countries

It is a widely accepted truism, to which the Trump administration subscribes , that economic security is national security. Indeed, in his May address to the 2026 Reagan National Economic Forum, Treasury Secretary Scott Bessent termed it “a foundational principle.”

The current trade war between the U.S. and Canada, therefore, poses nothing less than a threat to the national security of both countries.

Canada is America’s second largest trading partner. As of June it trailed only Mexico, accounting for 12.6 per cent of all American trade. Until now, tariffs already in force have had a modest inflationary impact in both countries. But should Canada’s dollar-for-dollar tariffs come into effect September 8, followed in January by expanded American tariffs on Canadian goods, their impact on both governments’ ability to control inflation will be far greater, with serious consequences not only for their economies but also their military programs.

Inflation already exceeds recent Office of Management and Budget predictions, upon which the Department of War has predicated its defense programs and budgets. In 2023, the forecast was for inflation to stabilize at 2.3 percent beginning in 2025. Last year, both the Congressional Budget Office and the Office of Management and Budget forecast inflation for 2026 at 2.7 percent, with the number falling toward 2 percent in the years that follow. by 2030. The War Department has mirrored that estimate.

Actual inflation has been considerably higher. The Federal Reserve’s latest figures show annual inflation at 3.6 percent for 2026, with the three-year outlook at 3.3 percent. These increases will have a significant impact on the defense budget. They translate to an additional $8 billion for the current fiscal year and approximately $9 billion above current estimates if Congress approves the Trump administration’s defense budget request for fiscal 2027.

The Pentagon has limited options for addressing increased inflation levels. Were it to cut back on projected pay or tables pensions for the military, Congress would almost certainly restore the cuts. It is unlikely to cut operations and maintenance, given the wear and tear that the current conflict with Iran is imposing on Navy, Marine and Air Force systems in particular.

Procurement of major systems, munitions procurement, research and development, military construction and family housing are the remaining targets for cuts to offset inflation. In the current environment, however, none of these accounts are promising targets for budget cutters, either.

Funds set aside for munitions have often served as a piggy bank to make up for budget cuts elsewhere, but not this time. The rate of munitions consumption in the Iran operation has exacerbated existing and serious munitions shortages, to the point that it is now a problem making headlines.

The department could reduce spending on new procurement by stretching programs over a longer time period. In the past, such moves have invariably resulted in force reductions. With current U.S. military posture already stretched thin, given the country’s worldwide commitments, such cuts could incentivize America’s enemies to ramp up their already aggressive policies. Because of the extensive damage to American facilities during the Iran War, it would be exceedingly difficult to cut the military construction budget.

Finally, cutting research and development budgets could hamper the department’s efforts to reorient force development and posture to account for the geometric expansion of drone warfare. The department thus faces a menu of unpalatable choices to compensate for the additional inflationary pressures it confronts.

The current trade war with Canada and any additional tariffs the administration might impose on Ottawa between now and January will further exacerbate inflation and will create even more strain on the defense budgets of both countries.

After years of underfunding defense, Canada has committed itself to reach the agreed NATO goal of allocating 3.5 percent of GDP, plus an additional 1.5 percent, for defense-related infrastructure by 2035. Ottawa had already increased spending from less than 1.5 per cent in past years to two percent earlier this year.

Nevertheless, because of Canada’s historic policy of generous social programs , inflation resulting from an expanded tariff war will eat into those programs. They likely be fully funded only if Ottawa slows the pace of the defense budget’s projected growth. Canada would then find it exceedingly difficult to meet its NATO commitments.

Canada and the U.S. have had major policy differences in the past. For example, the Chretien government strongly opposed the American intervention in Iraq in 2003. Canada’s political posture did not affect intelligence or military-to-military relationships, however. In particular, policy differences between the two governments had no impact on the joint Canadian-American North American Air Defense Command’s operations.

The current trade war, should it persist, is different in both kind and degree and could prompt a real rupture in the two countries’ military ties and the trust that binds their forces. That would be a national security disaster for both. Every effort should be made to ensure that it never takes place.

Dov S. Zakheim is a senior adviser at the Center for Strategic and International Studies and vice chairman of the board for the Foreign Policy Research Institute. He was undersecretary of Defense (comptroller) and chief financial officer for the Department of Defense from 2001 to 2004 and a deputy undersecretary of Defense from 1985 to 1987 .