Canada is playing hardball with a $40bn submarine contract as it tries to turbocharge investment in civilian sectors ranging from steel and cars to energy and mining, and boost its economic independence from the US.
The contest to build 12 diesel-powered, 3,000-tonne subs capable of operating in Arctic conditions is pitting South Korean conglomerate Hanwha against a joint German-Norwegian team led by a subsidiary of industrial giant Thyssenkrupp, with final bids due to be submitted next month.
But as Ottawa’s trade ties with Washington have frayed over US President Donald Trump’s imposition of tariffs and threats to annex the country ahead of a high-stakes renegotiation of the US-Mexico-Canada free trade agreement (USMCA) this year, Prime Minister Mark Carney’s government is demanding to know what else Germany and South Korea are able to offer.
“Carney is capitalising on a unique moment of opportunity afforded to Canada by this bidding war,” said Xavier Delgado, a fellow at the Conference of Defence Associations Institute in Ottawa. “This is his version of the art of the deal.”
The impact of Washington’s trade policies was illustrated on Friday with official figures showing Canada’s economy shed 24,000 jobs last month, with manufacturing the hardest-hit sector. General Motors also laid off hundreds of workers from a plant in Ontario last week, with more job losses expected among the plant’s parts suppliers.
The submarine mega-project is an element of Canada’s largest defence investment drive since the second world war. As part of its plan to reduce its dependence on the US and double trade with non-US partners over the next 10 years, Ottawa is also revisiting a contract to buy 88 F-35 fighter jets from the US.
“We have to do things differently,” Stephen Fuhr, Canada’s secretary of state for defence procurement, told the FT during a visit to Hanwha facilities in South Korea this week.
“We’re still friends with the US and we’re still going to work with the US, but we’re just not going to be as reliant on them,” he added.
The new approach has included requests for investments in areas unrelated to defence. Kang Hoon-sik, chief of staff to South Korea’s left-leaning President Lee Jae Myung, last month said Canada’s foreign minister Mélanie Joly had solicited automotive investments from Korean carmaker Hyundai.
“They’re making a demand saying, ‘We’re buying weapons, and this is what we need’,” said Kang, adding Joly had intimated that Germany’s Volkswagen was willing to offer more. “They are trying to pit us against each other.”
Hyundai, whose chair Euisun Chung last week joined a Korean delegation to Canada in support of Hanwha’s bid, said “there are currently no plans for Hyundai Motor Group or Hyundai Auto Canada to establish vehicle manufacturing operations in Canada”.
But the company added it was “reviewing a range of co-operation opportunities, including potential collaboration in the hydrogen energy sector to support Canada’s clean energy transition”.
Volkswagen declined to comment.
Ottawa’s hard-nosed approach has yielded some results. Hanwha’s shipbuilding division, Hanwha Ocean, last week signed a C$345mn (US$253mn) memorandum of understanding to build a new steel beam mill with Ontario-based Algoma Steel, which recently laid off 1,000 workers because of the effect of US tariffs. The Korean conglomerate has also signed deals with Canadian companies in areas ranging from AI to satellites and software.
Peter Ward, a research fellow at the Sejong Institute think-tank in Seoul, said the Canadian submarine contract was regarded as pivotal to President Lee’s ambitions to make South Korea the world’s fourth-largest defence exporter, capitalising on a boom in exports powered by demand from Europe as a result of Russia’s full-scale invasion of Ukraine.
Along with memory chips, defence exports are a rare bright spot in South Korea’s export-oriented economy, which is under intense pressure from rising Chinese competition and the effects of US tariffs.
“They really want this a lot,” said Ward, who added that if South Korea were to secure the deal, “it would indicate that there is a real seriousness behind Canada’s claim to be more focused on the Indo-Pacific”.
The contract is also regarded as critical for TKMS, Thyssenkrupp’s shipbuilding subsidiary, which is producing highly sensitive defence technology at a time when Europe, like Canada, is seeking to reduce its dependence on the US.
Germany’s pitch is to bind Canada into an existing submarine partnership with fellow Nato member Norway, which involves the potential for joint training, logistics and operations of TKMS’s Type 212CD boats designed for Arctic conditions.
“We are not just talking about just selling a certain number of submarines,” German defence minister Boris Pistorius said during a visit to Ottawa with his Norwegian counterpart Tore Sandvik last October. “It’s about co-operation over decades.”
“We’re trying to bring Canada into this partnership, so we’ll have an Arctic and northern common fleet,” Sandvik told the FT. “Hopefully they will buy German submarines and not Korean submarines.”
Delgado said the “advantage of Germany being a Nato member is clear”. But he noted the South Koreans “have offered a compelling package that involves partnerships with multiple Canadian tech and industrial companies”.
A person familiar with Ottawa’s thinking added that as Canada and Germany were Nato partners, South Korea would need to demonstrate its willingness to upgrade its relationship with Ottawa to win the submarine contract.
This would mean “increased military co-operation, military exercises, interoperability”, they said. “It’s not just a commercial transaction — it’s a serious commitment.”
A Canadian military official noted that “any submarine is better than no submarine”, arguing that the speed of Hanwha’s production meant it could easily deliver boats more quickly than its German counterpart.
Richard Shimooka, a defence researcher at the Macdonald-Laurier Institute in Ottawa, noted “Canada’s military ranks are frustrated because these large defence tenders become more about employment and politics rather than fixing the immediate security deficit”.
But Fuhr, Canada’s defence procurement minister, stood by his government’s approach, stressing that the submarine decision “will come down to the one that presents the best economic opportunity”.
Additional reporting by Sebastien Ash in Frankfurt
