This article originally appeared in The Hub.
By Richard Shimooka, April 14, 2025
Over the past several weeks, the belligerent attitude of the Trump administration towards Canada has prompted a strategic reassessment among many Canadian policymakers and commentators. In particular, fears over sovereign control of Canada’s military capabilities and worry over the need to diversify the country’s supply chains to avoid American tariffs have percolated.
They are not alone. The international unrest and bilateral breakdown have caused Canadians to take a rare interest in defence and foreign policy, and they are concerned. Abacus Data records that a majority of the population (51 percent) support loosening budget restrictions and increasing defence spending, and nearly two-thirds (64 percent) support an immediate stop to buying military equipment from the U.S.
Responding to these sentiments, Prime Minister Mark Carney spoke of negotiations on a military-industrial trade agreement that would enable Canadian firms to provide equipment for a European loan program for defence goods and give Ottawa preferential access to EU defence goods during his recent European visit.
Canadians should not get their hopes up. The potential for the European defence market to replace the United States in any substantial way is a mirage.
The problem is with the assumption that the European defence market works interchangeably with the American one, particularly with obtaining industrial opportunities for Canadian companies. Quite the opposite—there are significant differences between the two systems that in some respects reflect deeper, fundamental political and economic philosophies concerning state intervention and control of an economy.
How defence contracting works
To start, it is important to note that defence industries do not operate in a normal or “ideal” free market. The most significant difference is that instead of a market of thousands to millions of consumers, at best, the number of government purchasers for major defence systems is in the single digits. These governments can only choose from a small pool of very large, specialized manufacturers—in some cases, there’s only one provider and one purchaser. There are also extensive barriers for new firms to enter this tight market, given it is, quite understandably, highly regulated and tends to require much higher levels of capital investment than other sectors, whether it be for R&D or production capacity.
As a military superpower, the American defence industry had the luxury of large acquisition budgets and enough work to sustain multiple prime contractors. A key component to keeping a vibrant defence market is the mandated use of competitions, wherever feasible, so that companies may win a specific contract and then build a supply chain with a different mix of subcontractors based on their value proposition.
Overall, the U.S. government’s focus is tightly defined on providing the military with the best capabilities possible, at a reasonable price. Using defence spending to support broader economic activity is not a priority, though in recent years, industrial planning to ensure capacity exists during a protracted conflict has emerged as a major policy consideration.
In addition, the rapidly changing technological environment has pushed the Department of Defense to include non-traditional or upstart defence firms with new and innovative solutions on bids. This has led to the rise of firms like Palantir and Andruil, which are dislocating the defence market. It has helped the U.S. military to remain far ahead in military technology developments over any Western ally today.
The European defence industry and market have been highly fragmented along national lines for much of the past 80 years, even as the EU and its precursors sought to break down trade barriers. It is best described as a closed, highly protectionist system, where the dirigiste approach prevails—heavy state involvement in the industry, including significant direct or indirect ownership stakes. Fincantieri and Naval Group, among the largest naval shipbuilders in Europe, are majority owned by the Italian and French government, respectively, for instance.
Many of these prime contractors have established, national supply chains that support their work. The rationale for this structure is frequently a policy nexus between developing strategic autonomy, as well as ensuring domestic employment. Consequently, they de-prioritize providing the best defence product for the best price, and there’s usually no interest whatsoever in integrating foreign firms, which stifles innovation. Rather than embracing and harnessing the innovative IP and energy of new market entrants, European companies tend to simply direct their national champions to develop simulacrums of foreign developments.
Multinational collaboration between states has become an increasingly common approach, as the cost of weapon systems has become unaffordable by any individual state. Instead of determining who is responsible for what part of the program based on efficiency, “workshare,” as it is known, is divvied up through political negotiation among the partners based on their financial contribution. This is evident in the next-generation European tank and Future Combat Air System programs, which may lead to the latter being scrapped. As one might imagine, this approach is often inflexible and inefficient, driving up costs and creating delays, meaning that, ultimately, militaries can buy fewer units.
Over the past fifteen years, there has been some effort to undertake market liberalization, but success in this area has been limited, and these broader market dynamics still remain. The market itself remains largely closed to firms from outside the EU; however, foreign countries can obtain access by signing a military cooperation agreement, like the one Ottawa is contemplating signing. The recently announced loan instrument called Security Action for Europe, with €150 billion, is primarily aimed at national governments and will likely only help to reinforce the current defence market structure, according to Emma Salisbury from the Royal Navy’s Strategic Studies Centre.
Should Canada shift to the EU defence market?
Ironically, Canadian firms are poorly optimized for the European market’s dynamics because they have adapted to operate within the North American market. Canada currently enjoys near-unfettered market access to the U.S. defence market due to a series of agreements signed with the U.S. government over the past 70 years. Canadian firms have largely joined the American supply chain as subcontractors, providing innovative, high-quality technologies and services to the U.S. prime contractors.
The raw numbers belie the importance of the bilateral relationship for Canadian firms. Sixty-three percent of Canada’s military exports go to the United States, while non-U.K. Europe accounts for 11 percent. In many cases, DoD is Canadian firms’ primary source for development funding, their most steady customer, and provides an invaluable avenue for innovation.
For example, Bombardier provides its Global 6000 aircraft for the U.S. Army’s HADES program, a cutting-edge intelligence gathering aircraft. Canada does not intend to buy these aircraft, yet they are a major source of revenue and experience for the company. This experience is widespread among Canadian defence industries.
The palpable fear among many Canadian firms is that efforts to shift the domestic defence industrial base away from the U.S. to Europe will be tantamount to economic disaster. While the EU has become increasingly involved in defence investments, it is highly unlikely that it can provide the same opportunity as what the U.S. currently offers. Currently, the European defence fund only disburses €1.5 billion over two years—the vast majority of which will go to their member states, a dynamic that will likely remain unchanged for the foreseeable future.
Importantly, the preferred approach of the Government of Canada to procure military equipment will likely not gain much out of any agreement with the EU, given that Canada will need to join large defence projects early in their development and commit to purchasing relatively large numbers. Yet Canada tends not to be so forward-leaning in how it becomes involved in programs.
As my colleagues Christian Leuprecht and Joel Sokolsky have argued, Canada takes a Walmart approach to defence procurement—it looks for “deals on name brands” goods. The government prefers to acquire systems after they have completed development, in part to reduce the programmatic risks taken on by the government.
However, a program’s supply chains are largely established for mature programs, resulting in few industrial opportunities available for domestic European industry to participate. Canada could join future programs, like the sixth-generation Franco-German Future Combat Air System, as hinted in Carney’s recent platform announcement, but this will likely result in a significant lag between now and when industrial opportunities start to appear for Canadian firms. This could be particularly devastating if the U.S. curtails Canadian firms’ access to the American supply chain and market. Further complicating matters, many Canadian firms’ ability to transition from one market to the other may be limited due to U.S. government export controls on sensitive technologies that they have funded in Canada.
It would also entail significant early investments into foreign-run programs as well as Canadian industries at the same time, to the scale that hitherto has not been seen in Canada. For tangible benefits to emerge that rival the current Canada-US defence industrial relationship, Ottawa could be required to spend double on capital projects, and heavily invest in firms directly. This would still not guarantee the return on investment that the country currently enjoys, and certainly would not deliver a defence capability close to what it needs.
These are but a few of the myriad seen and unforeseen complications.
In the end, transitioning from the U.S. to the European defence market might be possible, but it will be challenging and will come at a steep cost, likely resulting in a massive permanent dislocation within the Canadian defence industry. And it would tie the country to a system that has thus far been fairly middling in its performance and not dynamic or innovative, aspects that Canadian industries, with relatively little funding, excel in.
While the Trump administration’s odious policies certainly invite a reassessment of Canada’s strategic situation, the hard truth is that a clean break with the U.S. will almost certainly devastate Canada’s defence industry and offer a much, much poorer alternative.
