The Trump administration has long held that economic security is a pillar of national security. Treasury Secretary Scott Bessent reiterated this at the 2026 Reagan National Economic Forum, calling it a “foundational principle.” But the current trade conflict with Canada, America’s second-largest trading partner, is now threatening that principle—and the military readiness of both nations.
Canada accounts for 12.6% of all US trade, trailing only Mexico. While existing tariffs have had a modest inflationary effect, the upcoming September 8 dollar-for-dollar Canadian tariffs and expanded US tariffs in January could significantly worsen inflation. This would directly impact both governments’ ability to fund defense programs, as inflation already exceeds official forecasts.
The Defense Department’s budget assumptions are based on outdated inflation predictions. The Office of Management and Budget and the Congressional Budget Office had forecast 2026 inflation at 2.7%, falling to 2% by 2030. But the Federal Reserve now reports annual inflation at 3.6% for 2026, with a three-year outlook of 3.3%. These higher numbers translate to an additional $8 billion in costs for the current fiscal year and roughly $9 billion more if Congress approves the administration’s FY2027 defense request.
With limited options to absorb these costs, the Pentagon faces tough choices. Cutting pay or pensions is politically untenable, and operations and maintenance are already strained by the ongoing conflict with Iran. That leaves procurement, munitions, research and development, military construction, and family housing as potential targets—but each carries significant risks.
Munitions stockpiles have been depleted by the Iran operation, and slowing procurement would inevitably lead to force reductions. Cutting R&D would hamper efforts to adapt to drone warfare, and military construction cuts are difficult given the damage sustained during the Iran War. As Dov Zakheim, a former Pentagon comptroller and now senior adviser at CSIS, notes, the department faces a “menu of unpalatable choices.”
Canada, for its part, has committed to boosting defense spending to 3.5% of GDP by 2035, plus an additional 1.5% for infrastructure. Ottawa had already increased spending to 2% this year. But with generous social programs, inflation from an expanded tariff war could force Canada to slow its defense budget growth, jeopardizing its NATO commitments. This comes amid broader trade tensions, as seen in accusations of bad-faith negotiations and Ontario’s electricity threats.
Historically, US-Canada policy differences—like Canada’s opposition to the Iraq War—did not affect military-to-military relations or NORAD operations. But Zakheim warns this trade war is different in kind and degree. If it persists, it could rupture the trust that binds the two nations’ forces, a national security disaster for both. Trade collapse could also undo defense industry gains, making it imperative to resolve the dispute before it escalates further.
