In today’s episode of the Expert Series, Xavier Delgado, Research Director of the Washington Forum on the Canadian Economy at the Wilson Center’s Canada Institute, discusses the linkages between the Canadian-American defence and trade relationships.
Looking at the aftermath of Canada’s announcement of its intent to meet the 2% NATO defence spending benchmark at the 2024 Washington NATO Summit, Mr. Delgado discusses both the feasibility of this and the impacts failing short may have on trade and economic relations in the near-future. With the Canada-U.S.Mexico Trade Agreement up for review in 2026, it is vital Canada take steps to repair its defence capacity to avoid any possible impact on the renegotiation.
As a young leader in the Canada-US policy sphere, Mr. Delgado provides a crucial perspective on the path North American trade may take in the coming months.
Could you give your assessment on the current state of the Canada-U.S. economic relationship? Did Canada’s announcement at the 2024 NATO Summit of its intent to meet the 2% NATO defence spending benchmark by 2032 cause any positive changes in trade or other economic relations?
I think oftentimes when we talk about the Canada-U.S. relationship, there is a tendency to be a little bit alarmist about it. This is especially true on the Canadian side, where we are always thinking about the United States—what the U.S. thinks of us, what the perception is in Washington, and issues like not meeting 2% in Canadian defence spending, disagreements over the Canada-United States-Mexico Agreement (CUSMA) tend to loom large in the Canadian psyche.
The reality is the Canada-U.S. relationship is really strong right now. Outside of the irritants, there’s still a day-to-day function. We still share and operate the largest unmilitarized land border in the world. We still have about $2 billion in goods that flow across the border every single day. We’re still an icon and enshrined model of cross-border tourism and communities along the border. And we still have great exchanges at the highest levels of government talking every day. We still have great exchanges in diplomacy at the sub-national level, between provinces and states, between cities. So the Canada-U.S. relationship is coming along really well. That’s not to downplay the irritants. Of course they matter, and there are still things that we should care about. But across the board, I do not want to give the impression that Canada-U.S. relations are in a crisis right now. They are humming along perfectly fine. There are just a few things that, as friends and allies, we need to work on together.
One of those things is the 2% agreement. It is something that Canada committed to back in 2014 and it is something that they recommitted to at 2023 Vilnius NATO Summit. It was an announcement I think has been a long time coming. Allies have been pressing Canada for a while. You saw the pressure ramp up. I think in the U.S. there was this impression that Canada is a free rider, that Canada is not living up to the commitments that it made under these pledges, and you saw that pressure come out. We had a bipartisan group of senators send a letter to Justin Trudeau. I believe it was around 23 senators, so almost a quarter of the U.S. Senate. Speaker Matt Johnson, the House Republican leader, said that Canada’s inability to spend 2% of its GDP on defence was shameful. So we saw a ramp up in pressure on the U.S. side, especially amongst U.S. political leadership, not necessarily from the administration, but really from Congress. I do think it gives an impression that this is an issue that matters to the Americans.
Can you bring your analysis on the importance of cross-border relations between states and provinces into what further policy changes Canada needs to make to repair the Canada-U.S. relationship prior to the reopening of CUSMA negotiations in 2026?
It is an ongoing effort that the Canadian government has been undertaking. They have the Team Canada effort led by Ambassador Hillman, Minister of Innovation François-Philippe Champagne, and Minister of Trade Mary Ng. From what I have seen—and I am not part of the effort, so it is an outside perspective—while a lot of it is focused on coming down to Washington and selling the Canada-U.S. partnership to stakeholders at the federal level, they are also going into the districts and states. I know they visited Louisiana, Florida, a lot of the southern states that people there might think, “what relationship do I have to Canada?”
The reality is that most states have Canada as a top trading partner, even if they are not on the northern border. There is usually some greater service that is exchanged that bumps Canada to the top three of that state’s trading partners. I think a lot of it is an education mission. I think, rightly, members of Congress, members of local state legislations, don’t have time to think about the Canada-U.S. relationship. They are worried about their local constituents. They are worried about larger foreign policy issues like Russia, China, or the Middle East.
And so Canada sort of falls on the wayside. The public relations and public diplomacy effort that is going on within Canada seems to largely be focusing on highlighting the benefits that Canada brings to the table in terms of trade and cultural exchange. I think that these local missions have been really impactful and it is going to matter when the CUSMA review rolls around in 2026.
From the perspective of someone in Washington, what do you think Americans want to see most from Canadians when it comes to defence spending? What are the priority areas where Canadian engagement would be most effectively directed: the Arctic, the Indo-Pacific, cyber and intelligence capabilities, or elsewhere?
Cyber Intelligence is a big one. Given the degree of integration between the Canadian and U.S. economies, a major attack on Canadian infrastructure or on the Canadian cyber system could be a huge vulnerability. It can be a back door into the U.S. system.
I think the Arctic is also a big one. Obviously, we have a joint command in North American Aerospace Defense Command (NORAD). I believe it is the only binational military command in the world. Canada has pledged either last year or two years ago to modernize NORAD. I know that is part of the investments Canada will be making under Our North, Strong and Free.
I think one thing to note about the 2% spending, is that we had this spending plan under Our North, Strong and Free that got us from 1.76% by the end of the decade, so 2030. Then, they come out with this announcement that we are actually going to hit 2% by 2032. That is a long jump to make in a short span of two years. I do not think the government is predicting that. Defence spending is a ratio, there is a numerator and a denominator. The numerator is spending, the denominator is GDP. I do not think the government is projecting we are going to hit 2% in 2032 by a massive drop in GDP, and so obviously there will have to be a big jump in the numerator, defence spending, in just two years.
There is no plan yet that outlines how we are going to get there. I do not think there has been a clarification as to how this new goal changes, if it does at all, the spending plan in Our North, Strong and Free. We have the announcement of the Icebreaker Collaboration Effort (ICE) Pact with the United States and Finland, which is a great sign that we are looking to spend a little bit more to modernize our fleet. I think that is going to be really welcomed from the Americans as well as the rest of our NATO allies. However, I think an actual spending plan that outlines, “this is how much we are projecting to spend, and this is where we are projecting to spend,” would be welcome. Across the board, defence spending is welcome from the Americans. I think it is just something more tangible than, “we are going to be spending 2% by this date.” Showing us a plan on how they are going to get there will really matter.
Do you see any fundamental differences in how Canadians and Americans view defence spending, and how would you say that affects economic relations?
I think Americans are generally willing to accept more defence spending, although perhaps not a larger increase in defence spending at this point. If you look at how large the US defence budget looms over the Canadian one, you get a sense that Americans voters, while not a monolith, have largely been willing to stomach larger expenditures into defence than Canadians have. I do not think that is abnormal, by virtue of the U.S.’ superpower status in the world and history over the past century with the Cold War against the Soviet Union and engagements in the Middle East stemming from the 9/11 terrorist attacks in 2001, there has been generally an appetite for larger defence spending here in the States than in Canada. I do not think it is a good or bad thing per se, I think it is simply describing the nature of what the population is willing to stomach when it comes to defence spending.
The reality that Canadians have to face is that we are a smaller country. We have fewer tax dollars to play around with, and equipment, ammunition, all these things that we need to expend on to modernize our military are costly. We have a lot of other things to spend on like healthcare and education, and when you are grappling with all these things in a budget, it is hard to take away from them to spend on defence. So it is a very real issue, but I do think it’s one that Canadians have to grapple with in the upcoming budgets. It’s a really important issue.
One of the things I’ve been saying is that part of it is what our allies think, what the U.S. thinks, our international clout, and looking like a worthy ally to our security partners. However, a large part that gets [under]stated, is that defence spending is good for Canadians. We are in an increasingly unstable world. We have Russia, just across the Arctic, and in Europe, being increasingly belligerent. We have China, who is trying to make an increased play in our backyard in the Arctic. China is building a larger icebreaker; I think they have already built two and have construction underway on a third icebreaker. Canada needs to be able to assert itself, and a larger military is a way to do that, and it is something that we need to protect Canadian citizens.
In a piece for the Wilson Center, you stressed that showing Canadians why defence spending is important to them is the key to this. Are there any lessons you believe Canada can learn from the U.S. on how to create more public political will for defence spending?
I will step away from the U.S. side for a second, just focusing on the first part of that question, which is why it needs to matter to Canadians. As a quick disclaimer, I work for the Wilson Center, which is a U.S. think tank. I am born and raised in Vancouver, though, so I am Canadian by birth and nurture. It is an issue that hits near and dear to my heart—when you are spending Canadians’ tax dollars, the justification for doing so should always come back to Canadians without getting too abstract, and I think it is important. Obviously, I am a foreign policy scholar. I think it’s important that we have a strong U.S.-Canada relationship. I know that by spending more on defence, there will probably be knock-on effects on how the United States perceives Canada as an ally, their willingness to play ball, and things like CUSMA renewal and review.
Having said that, we cannot forget that all of this has to tie back to Canadians in a more direct way. The way to sell it to the Canadian public, I think, is that these investments will make them more secure. It will protect our livelihoods, whether it be from a cyber-attack that can lock up hospital systems or a missile attack that cruises over the Canadian Arctic. Again, I am not trying to be alarmist, and I am not saying that any of these things are impending.
The reality is just that we are in an unstable world where our adversaries are starting to poke and prod at our defence capabilities. We had a spy balloon that brazenly flew over U.S. and Canadian airspace that NORAD shot down. That is a pretty significant intrusion to our air sovereignty, and I do not think that the Chinese did it thinking that they would get away with it. We have Russian incursions onto government websites. At this point, it feels like it is almost weekly that there is some website being taken down, either by a lone wolf hacker, state-backed actor, or the state itself.
The threat is real, so you present it to Canadians as, look, our adversaries are out there trying to gauge how strong we are, trying to gauge our defences and our capabilities. We need to invest in our capabilities to protect you. I think that that has to be the first justification for increasing the defence budget over anything else. I am not saying that allies do not matter, but they are not the only thing that matters, and we need to present it that way to Canadians.
How successful have Team Canada’s efforts been so far to pre-emptively reach out to American stakeholders in the CUMSA renegotiation process? How has the Canadian defence and security community played a role in this?
It is difficult to gauge success, and I think success is really going to be gauged by the end goal, which is a seamless CUSMA review in 2026.
I think a lot of people are worried that it’s not going to be a review, it’s going to be a renegotiation. I think a lot of people are looking at the upcoming presidential election and are worried. To those people, I would caution that, yes, the presidential election matters, but also the congressional election matters. We have all the U.S. House of Representatives going up for election. One-third of the U.S. Senate is up for election this cycle, and a lot of the vote on trade is going to be set out of Congress. So to that end, we can look at Team Canada’s efforts of focusing on not just what’s happening in the Capitol, but across the country in local jurisdictions. They are going state to state, district to district, and trying to sell the Canada-U.S. partnership. Again, we do not know whether it is successful or not, but I do think it is the right approach because Canada-U.S. relations are so much bigger than just the federal level. That is the approach that they have tried to take.
On defence, again, the 2% is going to help. The announcement that Canada is going to reach 2% is going to help Canada’s image if the U.S. public was thinking of Canada as a freeloader on defence. If you go to a local jurisdiction in Pennsylvania, Florida, or California, and their only perception of Canada is that they’re good at hockey and they underspend on defence, then taking away one of those negative perceptions is going to help sell CUSMA at the local level down the line. It will help convince Americans that Canada is a good partner, not just in trade, but also in security and things that America really cares about outside of its economic situation.
What type of changes do you anticipate in the linkages between CUSMA renegotiations and Canadian defence spending under a potential Harris or second Trump administration? Furthermore, if the focus should equally be on state-level engagement, how should that proceed in each potential context?
I will take the first part of that question first, which is the presidential election. Obviously, everyone in Canada has eyes on the presidential election when they are growing up, despite it being in your southern neighbour. I was the same way when I was growing up in Canada. People care a lot about the presidential election. I think what people might not realize is that defence spending is a bipartisan issue and concern here in the United States. That group of 23 senators that sent a letter to Justin Trudeau and the Prime Minister’s Office was bipartisan.
The Trump administration from 2016 to 2020 leaned very publicly on allies to spend more on defence. With the Biden administration, over the past four years, they have done it more privately. However, the pressure or expectation that allies should spend more on defence has not gone away. Especially with the situation in Europe, the events of the past four years has only increased that need for allies to continue to spend more in defence. Canada is no different, regardless of the fact that it is a founding member of NATO, and outside of NATO, a very close U.S. ally.
So, no matter who wins in 2024, with either the Presidency or Congress in either chamber, I do not think that this issue is going to go away. I think that Americans to both the left and right are going to expect Canada to live up to its commitment to spend 2% on GDP, but also give them a plan, and give the Canadian public, frankly, a plan on how they are going to spend those dollars and reach that level of spending.
Do you have any final thoughts or concerns that you wanted to share with our listeners?
Defence spending is one part of a much larger picture of Canadian security. Everything in defence spending certainly matters—spending on new ammunition, defence infrastructure, systems, and on our personnel. All this matters, but I think there is also a lot that is not getting accounted for in defence spending—for example, intelligence capabilities—that also matter. For example, our military assistance to Ukraine. I forget what the exact dollar figure was, but we announced that we were topping off our prior commitments with even more funding for Ukraine. Part of that was pilot training.
Not all of that funding to Ukraine is going to be counted in defence spending. I think a lot of it is old equipment that doesn’t get counted in the calculation. All of these things matter. So does the ICE Pact that we just signed with the United States and Finland to build more icebreakers. Again, no money coming out of that directly right away. However, down the line, even this commitment and showing a willingness to the alliance that we are going to be facing our icebreaker fleet and providing a shipyard that is going to increase NATO’s general capabilities in the Arctic. It matters. Our agreement with Norway and Germany, which has not yet come to fruition in any meaningful way, but is more just a commitment to cooperate in the North Atlantic, matters as well.
So Canada is doing a lot. I do not mean to downplay Canadian actions and commitments in defence. I just think that when you set the bar at 2% of spending a decade ago, and you have not yet met it, allies are rightfully looking to Canada to do more. I think that the moment that we are in right now, geopolitically, strategically around the world, in terms of the security situation in hot spots that are now starting to re-emerge, in Europe, in Asia, and the Middle East, the moment calls for not just the United States but all its allies, including Canada, to spend more in defence. I do not think that there is full confidence that Canada has stepped up to meet that moment yet. I think they are getting there and want to be there, but they just have not gotten there yet, and they still have a little bit more to prove.
