The principle that economic security underpins national security is well-recognized by the Trump administration. In May, Treasury Secretary Scott Bessent highlighted this at the 2026 Reagan National Economic Forum, calling it a ‘foundational principle.’ The ongoing trade conflict between the U.S. and Canada poses a significant threat to the national security of both nations. As the second largest trading partner for the U.S. after Mexico, Canada accounted for 12.6% of all American trade as of June.
Current tariffs have already had a minor inflationary effect in both countries. However, if Canada’s reciprocal tariffs take effect on September 8, followed by expanded American tariffs in January, the impact on inflation and the economies of both nations will be substantial. Inflation has already surpassed recent forecasts, affecting military budgets and programs.
Inflation predictions for 2025 were pegged at 2.3%. The Congressional Budget Office and the Office of Management and Budget anticipated 2.7% by 2026, with a decrease to 2% by 2030. However, actual inflation rates have been higher. The Federal Reserve reports a 3.6% annual rate for 2026, with a 3.3% outlook over three years. This increase will significantly affect the defense budget, requiring an additional $8 billion for the current fiscal year and approximately $9 billion for fiscal 2027, assuming the Trump administration’s budget request is approved.
The Pentagon faces challenging decisions due to increased inflation. Cutting back on military pay or pensions is unlikely, as Congress would probably reverse such measures. Operational and maintenance cuts are improbable due to the strain of ongoing conflicts, particularly with Iran. Other areas like procurement, research, and development face similar difficulties.
Historically, funds for munitions have filled budget gaps elsewhere, but the current high rate of munitions consumption due to the Iran operation has led to a critical shortage. Extending procurement programs might lead to force reductions, a risky move with already stretched U.S. forces. Cutting construction budgets would be tough due to damage repair needs from the Iran War. Research and development cuts could hinder adapting to drone warfare advancements.
The trade conflict and any further tariffs will worsen inflation and strain defense finances for both nations. After years of defense underspending, Canada aims to achieve NATO’s defense spending goals by 2035. However, expanded tariffs might force Canada to choose between fully funding social programs or meeting defense budget growth targets.
While past U.S.-Canada policy differences didn’t affect military collaboration, the current trade tensions could. This situation could undermine the trust necessary for military cooperation, risking a national security crisis. It is crucial to prevent such an outcome.
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 previously served as undersecretary of Defense (comptroller) and chief financial officer for the Department of Defense and a deputy undersecretary of Defense.
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