Borderlines and Bottom Lines: How Canada and Mexico Are Spending to avoid Tariffs but this won't work for NATO

Arguably the U.S. tariff threat that worked against Canada and Mexico—pushing them to spend hundreds of millions on border security—would likely fail against NATO/EU members, who face a vastly more expensive prospect of increasing defense spending toward 4% of GDP. From a Canadian and Mexican standpoint the extra costs of border security are insignificant when compared to the potential economic damage from US imposed tariffs. If the same tactic is applied to the EU members of the NATO alliance the math doesn't work out in the same way. Assuming the US pushes NATO members to spending 4% of their GDP on defense (which would double the current commitment) by using tariff threats the numbers suggest enduring tariffs would be a preferable option for the EU NATO members. Analysis below (which help from o1pro):

1. Lessons from Canada and Mexico

Canada’s C$1.3?Billion Border Plan

• Scope: Canada unveiled a six-year, C$1.3?billion (US$900?million) package aimed at curbing fentanyl trafficking and irregular migration.
• Rationale: Responding to White House threats of a 25% tariff on Canadian exports, Canada opted to invest in the RCMP, CBSA, and advanced intelligence.
• Cost vs. Tariff: With U.S.-Canada trade reaching C$3.6?billion a day, a 25% tariff could cause hundreds of billions in damage. Paying C$1.3?billion for border enforcement was a small “insurance premium” against that risk.

Mexico’s Deployment of 10,000 Troops

• Extent of Exposure: Mexico exported about US$467?billion to the U.S. in 2024. A 25% tariff could add over US$116?billion in duties, leading to GDP and job losses.
• Response: To avoid tariffs, Mexico deployed 10,000 soldiers to its northern border. The estimated US$100?million annual maintenance cost is minuscule compared to the US$117?billion tariff threat.

Key Takeaway In both cases, the cost of compliance (spending in the hundreds of millions on border security) was trivial compared to the potential tariff cost running into tens or hundreds of billions. As a result, the U.S. tariff threat succeeded in compelling both Canada and Mexico to ramp up border enforcement.

2. Why This Won’t Work Against NATO/EU

The U.S. Demand for 4% GDP in Defense Spending

A similar “threat model” could be floated toward NATO/EU members—“spend 4% of your GDP on defense or face steep U.S. tariffs.” However, the arithmetic here is radically different:

1. Permanent vs. Temporary Costs: Increasing defense budgets to 4% of GDP is a permanent, yearly burden. Tariffs—though damaging—are often seen as short-term or at least negotiable.
2. Magnitude of Defense Increases: For major European economies, bringing defense to 4% of GDP dwarfs potential losses from a 25% tariff on exports to the U.S.

Illustrative Comparisons (Annual Figures)

• Germany:
• Additional Defense Spending to reach 4%: ~US$96?billion1
• Potential Loss from 25% U.S. Tariff: ~US$43?billion2
• France:
• Additional Defense Spending: ~US$59?billion3
• Tariff Exposure: ~US$12.5?billion4
• Italy:
• Additional Defense Spending: ~US$52.5?billion5
• Tariff Exposure: ~US$18.8?billion6
• Poland (already close to 4% GDP on defense):
• Additional Defense Spending: ~US$0.7?billion7
• Tariff Exposure: ~US$2.7?billion8
• Greece (also a higher defense spender):
• Additional Defense Spending: ~US$2.2?billion9
• Tariff Risk: ~US$0.57?billion10

For smaller economies like Belgium, Portugal, Denmark, or the Baltic States, even moderate defense spending increases represent a huge share of their budgets, often overshadowing possible tariff losses.

Comparing Tariff Losses vs. Required Defense Spending Increase to 4% GDP

3. The Core Reasoning

• Comparative Scale

For Canada and Mexico: A one-time or short-term push in border security—on the order of hundreds of millions—neutralized a tariff threat of hundreds of billions.

For NATO/EU: Raising defense spending to 4% GDP can cost tens of billions more every single year compared to a potential tariff scenario in the tens of billions total.

• Policy Perception

Border Security Spending is a targeted, quickly implemented measure that the public may support when it averts large trade losses.

Defense Spending Hikes are permanent expansions requiring major political consensus, significant budget reallocation, and extensive public debate.

• Trade vs. Security Calculus

In North America, the threat of a 25% tariff quickly compels action because of deeply integrated supply chains. Spending a fraction of potential tariff losses on border enforcement is politically and fiscally simpler.

In Europe, governments must weigh the recurring cost of boosting defense to 4% of GDP—a large, long-term commitment—against the uncertain duration of any U.S. tariff policy.

4. Conclusion

What Worked Against Canada and Mexico Won’t Work Against NATO/EU

• North American Example: Canada and Mexico calculated that spending a few hundred million dollars on border security was trivial compared to losing hundreds of billions from a 25% U.S. tariff. Hence, they complied.
• European Reality: Most EU countries face a far higher annual defense burden—tens of billions to over US$100?billion additional spending—if forced to hike defense budgets to 4% GDP. This massive, recurring cost eclipses any single-year impact from U.S. tariffs on exports. Consequently, the stick of tariffs is less compelling; European nations are unlikely to yield to that threat in the same way.

In short, the math does not add up for NATO/EU members to boost defense to 4% of GDP solely to avoid U.S. tariffs. For them, it’s cheaper to absorb—or negotiate around—tariff impacts than to permanently restructure their defense budgets on such a large scale.

Footnotes (Approximate Calculations & Sources)

Disclaimer: All defense and GDP figures are approximate and drawn from publicly available forecasts (IMF, World Bank, Eurostat, SIPRI, IISS). Tariff impact calculations assume a 25% tax rate on current export volumes without considering demand elasticity or currency adjustments.

Footnotes

1. Germany’s 2024 GDP is estimated at ~US$4.0?trillion (IMF World Economic Outlook, 2024). With defense spending at ~1.5% GDP, increasing to 4% adds ~2.5% of GDP = US$100?billion. Figure rounded to ~US$96?billion. ?
2. European Commission data (2024) valued German exports to the U.S. at ~US$172?billion. A 25% tariff implies up to US$43?billion in added costs if fully borne by exporters. ?
3. France’s 2024 GDP: ~US$2.8?trillion (IMF WEO). Defense at ~1.7% → needs +2.3% GDP to reach 4%, or ~US$64?billion. This document uses US$59?billion as a conservative estimate from combined government and think tank projections (e.g., SIPRI, IISS). ?
4. Estimated from France-U.S. trade in goods and services (~US$50?billion total), but ~US$12.5?billion for goods heavily impacted by tariffs (Eurostat, 2024). ?
5. Italy’s 2024 GDP: ~US$2.1?trillion (World Bank). Defense ~1.5%. Increasing to 4% adds ~2.5% or ~US$52.5?billion. ?
6. Italy’s exports to the U.S. were ~US$75?billion in 2024 (Eurostat). A 25% tariff adds up to ~US$18.8?billion in potential costs. ?
7. Poland’s 2024 defense spending is ~3.6% of GDP (Ministry of National Defence, Poland). Approx. US$0.7?billion more to reach 4%. ?
8. Poland’s exports to the U.S. were ~US$10.8?billion in 2024 (Trade Map). A 25% tariff equals ~US$2.7?billion in added costs. ?
9. Greece’s 2024 defense spending ~3.5% of GDP (SIPRI). Needs ~0.5% more (~US$2.2?billion) to hit 4%. ?
10. Greece’s exports to the U.S. are relatively small (~US$2.3?billion in 2024), so a 25% tariff might impose ~US$0.57?billion in direct costs (Eurostat). ?