There's a bit of a fallacy in that comment -- we have no proof that Iceland wouldn't be just as bad if they had the opportunity. If Iceland had the same vendor presence internationally that the US and China do, there's a fairly good chance that sooner or later someone would come into power who feels a need to abuse their position.
I'm pretty sure this is itself a fallacy. You can't just assume every country operates identically, given the same opportunity. That's just like saying every man would rape a woman given a good opportunity, just because one guy did so.
Iceland hasn't done anything to earn a bad reputation. The US government has.
What will (and in a lot of places has started to) happen is that all of the countries will just turn inwards and shut out everyone.
No, they'll erect better fences between themselves and stop sharing data they don't need to, which is a good thing. Data shouldn't be passed through untrustworthy countries. More backbones being built (as you cite with Canada) means more routes for data to move around in case some countries become bad actors. It's better that people/countries become more self-sufficient. This doesn't mean that all cross-border communications are going to cease. If I send an email from Canada to my friend in the US, that email needs to cross US backbones, and it's OK that US authorities can read it (if that's the law there, as the People there have voted for by electing pro-spying politicians). However, if I send an email from Canada to Iceland, it's not OK for US authorities to read that, so it's better if Canada has a link directly to Iceland (or at least the EU at large), without that traffic having to pass through the US first.