Canada has selected a German consortium to build a dozen cutting-edge submarines in one of the country’s largest-ever defence contracts that will further deepen its Nato ties before a crucial summit this week.

On Monday the prime minister, Mark Carney, announced the winner of a tightly contested battle for the lucrative government contract to replace their fleet of ageing, secondhand subs, most of which are undergoing maintenance.

For months both ThyssenKrupp Marine Systems (TKMS) and the South Korean shipbuilder Hanwha Ocean have promised tech-heavy submarines and spillover economic benefits to Canada.

The winner, TKMS, is the largest manufacturer of non-nuclear submarines and a key supplier of Nato’s fleet. Canada had previously indicated that both firms’ diesel-electric offerings – the 212CD model sub from TKMS and Hanwha’s KSS-III Batch-II submarine – suited its military needs.

The order for 12 submarines marks the first time Canada has bought brand-new vessels. The Royal Canadian Navy now has four submarines that were bought second-hand from Britain in 1998. Of the four Victoria-class subs, three are undergoing maintenance.

The new subs will probably be used to help give Canada a stronger foothold in the Arctic. The TKMS vessels are designed to use modern stealth technology to operate in contested areas with minimal detection, and will be able to conduct lengthy surveillance missions in key Arctic routes, including the Northwest Passage. Hanwha’s vessels are substantially larger than the German one, and the company and industry analysts said they would have given Canada a greater ability to deploy powerful weapons and conduct lengthy patrol deep in the ocean.

The submarine order itself is estimated to be worth more than US$12bn (£9bn) but the contract also includes roughly half a century of maintenance, meaning the total bill could exceed US$70bn.

Canada’s federal government and TKMS will still have to enter into lengthy negotiations to finalise the contract, a process that could take years.

Carney took a delegation of senior cabinet ministers to visit TKMS’s building facility in Kiel, Germany last year, and toured a newly built sub at Hanwha’s facility in Geoje, South Korea.

Senior officials from both countries also made visits to Canada to sell the broader economic benefits of their respective pitches. German officials made repeated references to a broader compatibility with Nato, and it has been reported that TKMS was hoping to expand the scope of the contract to include possible investments in rare earths, mining, artificial intelligence and battery production for the automotive sector.

South Korea is not a Nato member, but Hanwha representatives said the company would use steel from Algoma’s plant in Sault Ste Marie, Ontario, to build armoured weaponised military vehicles in Canada. Hanwha also spent millions on a wide-ranging ad campaign, including a voiceover from the prominent Canadian journalist Peter Mansbridge, touting the benefits of its KSS-III.

Carney’s Liberal party has committed to dramatically increasing government defence spending, with a pledge to allocate 5% of gross domestic product by 2035. Canada recently announced it hit 2% cent of GDP, a longstanding target for Nato members.

Canada has also suggested it is open to making larger purchases from European contractors, part of a larger push to lessen its reliance on the US. It has already committed to buying 18 American-made Lockheed Martin F-35 Lighting II jets – a fighter plane long favoured by the Royal Canadian Air Force for interoperability with the North American Aerospace Defense Command, the bi-national military organisation shared between Canada and the US. Recent political tensions between the two nations, however, have pushed Ottawa look at other vendors to help modernise its air force.

Canada is weighing the purchase of 72 Saab-made Gripen war planes. The Sweden-based company has said that if Canada buys its latest-generation fight plane, in addition to six GlobalEye surveillance aircraft the country had already agreed to buy, the deal would create up to 12,600 jobs in Canada, marking another immense defence industrial project for the country.

On Monday the secretary general of Nato, Mark Rutte, told reporters that the members of the alliance were about to announce billions in new contracts, calling it the “crucial kit we need to deter and defend”.