A third option for Canadian defence SMEs after the Permanent Joint Board on Defence pause
For a small Canadian defence company, the Pentagon’s decision in May was clarifying. On May 18, U.S. Under Secretary of Defense for Policy Elbridge Colby announced that Washington was pausing its participation in the Permanent Joint Board on Defence, the 86-year-old advisory body that has coordinated continental defence since Franklin Roosevelt and Mackenzie King created it in 1940. He accused Canada of failing to make credible progress on its defence commitments.
The board itself is not the central concern. It is a forum for consultation, not a pipeline for contracts or technology, and Prime Minister Mark Carney was right to say he would not overplay the importance of a body that has met only seven times in the last decade. The point is what the pause reveals to small and medium-sized enterprises (SME) – the firms that make up most of Canada’s defence industrial base.
The largest defence customer on earth has shown it will suspend a long-standing instrument of cooperation, unilaterally and without warning, when the politics suit it. It did so amid Canada’s reconsideration of the F-35 and Carney’s push to diversify defence relationships toward Europe. For a Canadian SME that has built its business on access to American programs, that is not a diplomatic abstraction. It is a direct warning that the terms of its survival can change overnight, and a reason to restructure before they do.
The clearest verdict came from John McKay, the former Liberal MP who served seven years as the Canadian co-chair. He called the move short-sighted and foolish, but said he was not surprised. That is the right register: small in itself, large in what it signals.
The signal SMEs cannot ignore
The willingness to pause the board is the same willingness that governs everything else in the relationship. Export-control determinations, data-residency rules, and program eligibility can all shift on the same logic, and they cut in directions a Canadian firm cannot control.
The American market is the largest in the world, and no serious Canadian defence company can ignore it. Yet the terms of access are written and revised in Washington, and a firm tied to them holds none of the pen. This is a structural exposure Canadian defence SMEs have carried for years and rarely priced.
Why both instincts fail
The two instinctive responses both fail. The first is to walk away from the United States and build for Canada and allied markets alone. This forfeits the world’s largest defence market and leaves Canadian firms a customer base too small to sustain the research that dual-use technology demands.
The instinct to diversify away from the U.S. carries its own trap, and it is on display this month. A South Korean submarine sat in Victoria harbour, courting a multibillion-dollar Canadian contract through a web of memorandums with Canadian steelmakers, space firms, and parts manufacturers. Diversification is sensible, but a subcontract under a foreign prime is still a dependency. It only changes who holds the pen.
The second instinct is to carry on as before, treating the relationship as stable because it has been stable for eighty years. The events of May suggest stability is now a planning assumption rather than a fact.
The paired-entity model
There is a third option, and it is structural rather than rhetorical. A Canadian company and an American firm form paired entities. The Canadian company primes Canadian bids; the American company primes American bids; each is exclusive to the other in agreed jurisdictions. The agreement writes in firewalls that politics cannot override: intellectual property (IP) sovereignty so core technology stays owned where it was built, data residency so sensitive material does not migrate across the border by default, and export-control segregation so a determination affecting one partner does not strand the other. The two companies share a capability. They do not share a single point of regulatory failure.
Most Canadian defence SMEs do the opposite. They structure their U.S. relationships as subcontracts, in which the American partner holds the prime relationship, the customer, and often the IP. There, a shift in Washington’s posture transmits directly into the Canadian firm’s order book. The paired-entity model inverts that exposure. It treats sovereignty over IP and data as the asset to protect first, because it is the asset that cannot be rebuilt once surrendered.
A case study: Caseway and Valtec
The structure is not theoretical. Caseway, a Vancouver firm, runs exactly this arrangement with a U.S. partner, Valtec, on a counter-drone bid into the Canadian Army’s MINERVA initiative through the Department of National Defence’s IDEaS program. Valtec leads platform integration on the American side; Caseway provides the decision and data layer and primes the Canadian pursuit. The IP, data residency, and export-control lines are written into the agreement rather than assumed. If Washington tightens a rule, the Canadian capability does not evaporate; if Ottawa changes a priority, the American pursuit is not stranded.
That is also why the example is concrete: it is a structure built in response to precisely the risk the PJBD pause has now made plain.
What Ottawa should do
The harder question is what Canada should do about it. The answer is not a new subsidy. It is alignment. Canada already operates the instruments that could make this structure the encouraged default. IDEaS funds dual-use development. The new Defence Investment Agency, announced last October, is being built to direct procurement and industrial strategy. The Canadian Program for Cyber Security Certification, whose first level became mandatory for select contracts this year, governs which firms can handle sensitive work. None of these yet rewards a firm for building cross-border firewalls. A company that protects its IP sovereignty and data residency gains no procurement advantage, and one that gives them away pays no penalty.
That should change, and the timing is favourable. The Defence Industrial Strategy Carney launched in February already commits Canada to awarding seventy per cent of defence acquisitions to Canadian firms and recognizes that small and medium businesses make up most of the industrial base. IDEaS criteria could give weight to retained IP sovereignty in cross-border arrangements. The Defence Investment Agency could treat data residency and export-control segregation as markers of supply-chain resilience. The certification regime could recognize the paired-entity structure as defensible rather than unusual. None of this requires new money. It demands the existing levers to point in the same direction, toward firms that can survive a unilateral shift by either government.
The choice ahead
Canada has spent a decade debating whether its defence industrial base is too small, too dependent, and too slow. The pause does not settle that debate, but it sharpens the question for the firms most exposed to American policy: the small, innovative, dual-use companies the country most needs to keep. They cannot abandon the American market, and they cannot afford to depend on it blindly. The paired-entity model is the available middle path, and the instruments to encourage it already exist.
What is missing is the decision to use them. If Ottawa aligns its programs to reward firms that build cross-border firewalls, the next signal from Washington finds a sector that can absorb it. If it does not, the sector keeps learning the same lesson, one Monday at a time.
Al Vigier is the founder and CEO of Caseway. He served in the Canadian Army for seven years and sat on the board of The Last Post Fund for almost a decade.
The views expressed in this op-ed are the author’s own and do not necessarily represent those of the Institute or its staff.
