Introduction
Canada faces a dual strategic challenge: an emerging trade war with the United States threatens our economy and fiscal capacity, while chronic underfunding for defence has left us strategically vulnerable and increasingly unable to meet our NATO commitments. Both our prosperity and our territorial integrity are at risk.
“Guns or butter?” is the classic dilemma faced by governments as they try to balance spending between national security and support for general welfare. Now is the time to bargain for both. Canada can enhance its sovereignty and restore the tariff-free trade that is vital to both economies by committing to increased defence spending with a portion directed to US procurement. This would create leverage in both security and trade negotiations. In simple terms: to protect our butter, we’ll need to spend more on guns.
The United States is signalling to Canada that it “cares deeply” about defence and that “the ball’s in your court” to produce a “really serious proposal” on trade and security.1 A new arrangement is unlikely to take the form of a conventional trade deal or materialize at all until Canada brings something new to respond directly to what the US is saying. A credible plan to increase defence spending, particularly with a commitment to US procurement, could prove pivotal in resolving bilateral tensions. This paper demonstrates, in economic terms, how such a strategy could pave the way back to tariff-free trade, strengthen Canada’s military capability, and protect our sovereignty.
While tariff-free trade remains a negotiation objective that stands on its own merits, the current US posture suggests that a more transactional approach may be needed to reopen negotiations and create the conditions for a return to rules-based trade – particularly given long-standing US concerns about defence spending (Penney 2024).
More money for national defence linked to a renewed commitment to tariff-free trade should not be viewed as a concession from Canada. Rather, it reflects the reality that defence and trade are pillars of sovereignty and prosperity for both Canada and the United States. Canada’s credibility in both realms depends on action. Now is the time for Canada to act decisively: not as a reluctant party yielding to pressure, but as a first mover shaping the rules of engagement.
A bold, credible signal on defence, tied to a clear path back to tariff-free trade, would demonstrate leadership on issues of vital mutual interest and set a constructive precedent for allies. In an ideal world, defence and trade discussions would proceed separately, each on its own merits. But with the US administration’s position on tariffs in constant flux (Conteduca, Mancini, and Borin 2025) and Canada’s credibility diminished by decades of underperformance on defence (Agnew and Todd 2021), a pragmatic bargain – one that strengthens our military and boosts US exports – may be the only viable path to renewed negotiations. This may be the second-best option, but it is one we must seriously consider, given the stakes. A stepped-up investment in defence would respond directly to longstanding US calls for allied burden-sharing while anchoring a renewed economic partnership. Linking the two carefully and credibly offers political upside and creates fertile ground for constructive negotiations that could lead to a return to tariff-free trade and the resolution of trade irritants identified by the US (Office of the United States Trade Representative 2025, p. 40).
Defence Spending in Canada
Canada currently spends only 1.4 percent of GDP on defence (DND 2024). That is well below the 2 percent NATO target and less than half of the 5 percent that President Donald Trump has mused about demanding from NATO members.2 The US figure last year was 3.4 percent.
Military spending needs to be sufficient, committed, and efficient. In Canada, it is none of these due to low pay and critical personnel shortages; chronic procurement delays; ageing hardware, armour and aircraft; inability to operate meaningfully in the Arctic; outdated missile defence; and minimal capabilities in modern asymmetric warfare and cybersecurity (Agnew and Todd 2021; Petersen 2022). Canada has a lot to defend: it has the world’s longest coastline and the second-largest land mass (Standing Senate Committee on National Security, Defence and Veterans Affairs 2023). Canada’s Arctic is increasingly vulnerable, and the country cannot afford to skimp on its military.
Prime Minister Mark Carney’s new government committed to increasing defence spending to 2 percent of projected GDP over five years to address long-standing capability gaps, fulfill our NATO commitments and respond to US expectations that we do our part. With the 2 percent target now increasingly in question, this paper assumes that 3 percent will become the new baseline. To get there by 2030, Canada would need to spend $148 billion (US$104 billion) more over the next five years. I propose earmarking 30 percent of this amount ($44 billion/US$31 billion) for US defence procurement, conditional upon a US commitment to lift tariffs on Canadian exports and return to a stable, rules-based framework.
The Bargain: Structuring a Deal with Procurement
A packaged deal would look like this: tariffs removed; defence spending committed. As a negotiating lever, $44 billion allocated to US procurement over five years is consequential and $76 billion – the corresponding five-year US allocation if defence spending were to rise to 4 percent of GDP – is even more so. However, if the five-year defence-spending target remains at 2 percent, a 30 percent allocation to the US would be only $13 billion (US$9.2 billion), providing little or no negotiating leverage.
US-reported foreign military sales to Canada are modest: less than US$15 billion from 1950 to 2022 and averaging less than US$1 billion annually from 2018 to 2022 (DSCA 2022). While recent procurement initiatives – such as the purchases of the F-35, P-8A Poseidon aircraft, and RPAS drones – will increase the US share significantly in the years they are booked, these are outliers.3 A sustained 30 percent allocation of new defence spending to US procurement would, therefore, represent a material shift and a credible signal of commitment and strategic alignment.
The proposed approach directly responds to two stated US concerns: Canada’s underinvestment in defence and a perceived trade imbalance. Addressing both in tandem creates an opportunity to de-escalate tensions and re-anchor the relationship in shared responsibility and mutual gain. Successfully negotiated, such a bargain would protect Canada’s economy and rejuvenate its defence capabilities. The United States would gain procurement contracts, jobs in key districts, and a stronger northern ally. Together, we would modernize the North American Aerospace Defense Command (NORAD), strengthen Arctic security, and reinforce NATO interoperability and capability.
At the NATO summit in June 2025, the long-standing 2 percent spending target is expected to come under scrutiny. NATO Secretary General Mark Rutte has proposed a 5 percent commitment: 3.5 percent for military spending plus 1.5 percent for infrastructure and enabling capabilities.4 Canada would do well to ask now: is a 2 percent target sufficient?
At a time when many allies are moving away from US defence suppliers, a new Canada-US trade defence pact would support shared strategic objectives, strengthen North American supply chains, and provide the US administration with a much-desired export market.5 The US-directed share of new Canadian defence spending should prioritize systems that enhance continental security, such as early-warning infrastructure, NORAD modernization, missile defence, and interoperable Arctic surveillance platforms. US-sourced systems procurement that supports long-term, shared defence objectives substantially mitigates post-procurement risks while leaving Canada free to rebuild and strengthen its domestic defence industry and procure offshore as needed to support Canada’s strategic and operational requirements.
Procurement from the United States or elsewhere should enhance, not erode, Canada’s sovereignty and operational independence, complementing rather than displacing the rebuilding of Canada’s own defence industrial base. For too long, we have ceded decision-making and response control for missile defence to the United States.6 US procurement focused on NORAD modernization, missile defence, and other binational systems should be contingent on greater control by and involvement of Canadian personnel and infrastructure. The bulk of new defence spending should remain in Canada, directed toward domestic manufacturing, personnel training, Arctic readiness, and asymmetric warfare capabilities. The procurement deal could be revisited after five years.
Trade and Defence: Separate, with a Common Purpose
The 1940 Ogdensburg Declaration, the subsequent 1941 Hyde Park Agreement, the 1958 NORAD Agreement, and the 1959 Defence Production Sharing Agreement demonstrate that Canada and the United States can collaborate on defence in parallel with trade integration and industrial participation, even when trade flows have been asymmetrical. However, these agreements were primarily about defence, not trade. While maintaining separate tracks for trade and defence is, in principle, the ideal approach, current circumstances are such that a pragmatic and temporary convergence of the two may be the only viable strategy.
For Canada, the strategic and economic upsides of a new defence-trade pact are obvious: it could help prevent the potential economic losses from prolonged trade conflict, which could be between $574 billion and $1.459 trillion in GDP over five years.7 Further, it would preserve access to our largest export market and restore Canada’s ability to credibly defend its interests – particularly vis-à-vis self-styled “near-Arctic” states (Hughes 2024; Standing Senate Committee on National Security, Defence and Veterans Affairs 2023). Increased domestic defence procurement will drive economic growth, create high-value employment opportunities, and bolster national pride.
Most importantly, the renewal of our under-resourced military will enable Canada to deter threats, support allies, and project stability in an increasingly dangerous, multipolar world in which the largest economy is becoming increasingly isolationist as its fiscal capacity, military power, economic influence, and support for multilateralism wane. While unconventional, this approach reflects the realities of the current political moment and offers a pathway to re-engage with the United States constructively – on terms that facilitate an eventual return to more traditional, decoupled discussions of trade and defence.
Conclusion
Linking a credible defence commitment to the restoration of tariff-free trade would allow Canada to protect its prosperity, enhance security, meet NATO obligations, and rebuild trust with its largest trading partner. Policymakers should act now to initiate negotiations with US counterparts. Canada must credibly and clearly signal its readiness to invest in its own defence capabilities and in the relationship with the United States. The result will be a stronger Canada, a more secure North America, greater geopolitical relevance, and renewed confidence in Canada’s role in the world. By leading with a strong defence commitment, Canada can reshape the political context of trade negotiations and offer the United States a welcome, strategically sound path to de-escalation.
The author extends gratitude to Colin Busby, Jack Granatstein, and an anonymous referee for valuable comments and suggestions. The author retains responsibility for any errors and the views expressed.
Appendix A: Economic Impact of Tariffs and Proposed Defence Investment, FYE2026 to FYE2030
References
Agnew, Mark, and Nicolas Todd. 2021. “Rethinking Canada’s Security Strategy: How Canada Can Graduate from the Kids’ Table.” Canadian Global Affairs Institute. December. https://www.cgai.ca/rethinking_canadas_security_strategy_how_canada_can_graduate_from_the_kids_table.
Conteduca, Francesco Paolo, Michele Mancini, and Alessandro Borin. 2025. “Roaring Tariffs: The Global Impact of the 2025 US Trade War.” Centre for Economic Policy Research (CEPR). May 6. https://cepr.org/voxeu/columns/roaring-tariffs-global-impact-2025-us-trade-war.
Defense Security Cooperation Agency (DSCA). 2022. Historical Sales Book: Fiscal Year 2022 Edition. Washington, DC: US Department of Defense. https://www.esd.whs.mil/Portals/54/Documents/FOID/Reading%20Room/International_Security_Affairs/24-F-0646_Historical_Facts_Books_2022.pdf.
Department of National Defence (DND). 2024. “House Standing Committee on National Defence – Chief of the Defence Staff – Mandate and Priorities.” Ottawa: Government of Canada. September 26. https://www.canada.ca/en/department-national-defence/corporate/reports-publications/proactive-disclosure/cds-mandate-priorities-26-sept-2024/defence-spending.html.
Hughes, Thomas. 2024. “Arctic Defence in 2023: A Review.” North American and Arctic Defence and Security Network (NAADSN). January 22. https://www.naadsn.ca/wp-content/uploads/2024/01/Hughes_Arctic-Defence-in-2023-A-Review-Policy-Brief-Final.pdf.
Meltzer, Joshua P. 2025. “Trump’s 25% Tariffs on Canada and Mexico Will Be a Blow to All Three Economies.” Brookings. February 3. https://www.brookings.edu/articles/trumps-25-tariffs-on-canada-and-mexico-will-be-a-blow-to-all-3-economies/
Office of the United States Trade Representative. 2025. “National Trade Estimate Report on Foreign Trade Barriers of the President of the United States on the Trade Agreements Program.” Washington, DC. https://ustr.gov/sites/default/files/files/Press/Reports/2025NTE.pdf.
Penney, Christopher. 2024. “The Fiscal Implications of Meeting the NATO Military Spending Target.” Ottawa: Office of the Parliamentary Budget Officer. October 30. https://www.pbo-dpb.ca/en/publications/RP-2425-020-S–fiscal-implications-meeting-nato-military-spending-target–repercussions-financieres-atteinte-cible-depenses-militaires-fixee-otan.
Petersen, Cole F. 2022. “The Asymmetric Army.” Canadian Army Journal 19(1): 48-65. April 14.
https://www.canada.ca/en/army/services/line-sight/articles/2022/04/the-asymmetric-army.html.
Standing Senate Committee on National Security, Defence and Veterans Affairs. 2023. “Arctic Security Under Threat: Urgent Needs in a Changing Geopolitical and Environmental Landscape.” Senate of Canada. https://sencanada.ca/en/newsroom/secd-as-global-powers-watch-canadas-north-grows-more-vulnerable/.
