The Trump administration embraces the concept that economic security equates to national security. Treasury Secretary Scott Bessent highlighted it as a key principle in his address at the 2026 Reagan National Economic Forum. The current trade conflict between the U.S. and Canada threatens the national security of both nations.
Canada ranks as America’s second-largest trading partner, accounting for 12.6% of all U.S. trade by June, trailing only Mexico. Existing tariffs have had a minor inflationary effect. However, Canada’s planned dollar-for-dollar tariffs set for September 8, coupled with broader U.S. tariffs on Canadian products in January, could significantly impact inflation control for both governments. This could adversely affect their economic and military strategies.
Inflation rates have already surpassed projections from the Office of Management and Budget, which guided the Department of War’s financial plans. In 2023, forecasts predicted inflation to stabilize at 2.3% from 2025. Last year, estimates showed 2.7% inflation for 2026, decreasing to 2% by 2030. However, recent Federal Reserve data indicates 3.6% inflation for 2026, with a 3.3% outlook over three years. This hike will strain the defense budget, adding $8 billion this fiscal year and approximately $9 billion more if Congress approves the Trump defense budget for fiscal 2027.
The Pentagon faces limited strategies to manage rising inflation. Reducing military pay or pensions would likely prompt Congressional intervention to restore funds. Operations and maintenance cuts seem implausible due to current conflicts stressing naval, marine, and air force systems. Options for procurement and research cuts are also constrained.
Munitions funds, historically used to balance budgets, are now crucial due to shortages from the ongoing Iran operations. Extending procurement timelines could result in force reductions, which might embolden adversaries given U.S. global commitments. Military construction funding reductions are challenging due to damage from the Iran War. Cutting research and development could hinder adjustments for advancing drone warfare.
The trade war’s continuation and potential new tariffs on Canada will exacerbate inflation, heightening defense funding pressures. After inadequate defense investment, Canada aims to meet the NATO defense spending goal of 3.5%, plus 1.5% for infrastructure by 2035. Spending rose from below 1.5% to 2% recently. Yet, inflation could strain Canada’s social programs, requiring slowed defense budget growth and complicating NATO commitments.
Despite past policy differences, like Canada’s opposition to the U.S. 2003 Iraq intervention, intelligence and military collaborations remained unaffected, notably within NORAD operations. However, an enduring trade war might severely damage military ties and trust, which would constitute a national security crisis for both countries. Preventing this outcome is vital.
Dov S. Zakheim, a senior adviser at the Center for Strategic and International Studies and vice chairman of the Foreign Policy Research Institute board, served as Department of Defense undersecretary (comptroller) and CFO from 2001 to 2004 and deputy undersecretary from 1985 to 1987.