In a matter of months, the Trump administration has rewritten the rules of U.S. trade policy. It has imposed blanket tariffs on nearly every country, starting at ten percent and rising as high as 50 percent. Levies on a host of products, such as steel, aluminum, cars, and car parts, have raised these trade barriers even further. At an average effective rate of around 18 percent, U.S. import taxes are now the highest they have been in nearly a century.
“China beats you with trade, Russia beats you with war,” U.S. President Donald Trump mused in August, quoting Hungarian Prime Minister Viktor Orban. Protectionism is Trump’s answer to both challenges. He sees the revenue from tariffs as a way to win at the cash register; he sees the boost to the domestic production of military equipment and the minerals, materials, and technology that go into it as a path to dominating on the battlefield.
The administration’s levies will likely have some of their desired effects. They will fundamentally change the United States’ position in the world economy, untangling the country, at least in part, from global supply chains. Consumer goods companies will make more of their products in the United States to capture a slice of its consumer market, which is still the largest in the world. Suppliers of steel, aluminum, minerals, and other strategic materials will expand their U.S.-based operations to take advantage of rising domestic prices.
But the damage that tariffs will inflict will be far greater than the benefits they bring. Over the last 50 years, the United States’ integration into global supply chains has fueled economic growth. Detaching from these supply chains will raise costs and reduce quality, limiting growth and competitiveness. The U.S. defense industry will not be spared the effects of higher prices, lost suppliers, and dwindling foreign markets. Producing weapons and military equipment—and building new factories—in the United States will become more expensive. U.S. allies, eager to strengthen their own defense industries and mistrustful of trade with the United States, could choose to spend less on American weapons. Worryingly, U.S. companies face these threats to their business models just as Washington, contemplating a future of drone- and AI-driven warfare, needs their innovation more than ever.
There is no replacing the advantages of supply chain cooperation with reliable partners. The more Washington tries to go it alone, the easier it will be for friends and foes alike to prevail over the United States—today in trade and tomorrow, perhaps, in war.
CEDING THE ADVANTAGE
In an August New York Times op-ed, U.S. Trade Representative Jamieson Greer described the Trump administration’s aim in imposing tariffs and seeking foreign investment deals as no less than to lay “the foundation for a new global trading order.” In the administration’s theory of the case, tariffs will ignite domestic reindustrialization, create jobs, turn trade deficits into surpluses, and reduce U.S. dependence on adversaries for strategic and mainstream goods alike. This, the administration believes, will reverse the trends of manufacturing job losses, rising deficits, and growing dependence that it ascribes to decades of “unfair” liberal trade policies.
Early numbers show the tariffs are having effects, but not promising ones. According to the nonprofit Institute for Supply Management’s Purchasing Managers’ Index, U.S. manufacturing has been contracting for the past six months. Jobs in manufacturing have fallen by 78,000 this year.
Meanwhile, inflation is ticking up. Both July and August saw spikes, as imported goods, now subject to tariffs, hit shelves with higher price tags. American-made goods have also become more expensive to produce, as manufacturers pay more for foreign inputs; roughly 45 percent of imports are materials used in U.S. production. In response to high prices and general economic uncertainty, spending by low-income consumers has flatlined over the past few months. The U.S. goods trade deficit did shrink from the first to the second quarter of this year, largely because of a downturn in imports, particularly from China. Exports, meanwhile, mostly leveled off, which is likely one of several reasons employment numbers softened.
The rest of the world has responded by trading even more. Foreign companies are beginning to reroute their goods and supply chains to bypass the United States. Trade negotiators are traveling not just to Washington but to other capitals, too, in pursuit of new deals. The EU is seeking agreements with India and Indonesia, pushing forward another with the South American trade bloc Mercosur, holding trade talks with China, and considering joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, a free-trade agreement signed in 2018 that now includes a dozen countries together representing nearly 15 percent of global GDP. Brazil, China, India, and the United Kingdom are all negotiating new trade accords with a variety of partners.
Where this activity will leave the U.S. economy will not be clear for some time. Investment may pick up as tariff rates settle, removing uncertainty, and as Japan, South Korea, and the EU follow through on the pledges included in the trade deals they signed with the Trump administration. Many companies could find the increased prices in a highly protected U.S. market attractive, encouraging them to expand their operations in the United States.
The world will remain wary of trade with the United States.
Yet tariffs also create significant obstacles to U.S. economic growth. Levies on steel, aluminum, lumber, copper tubing, and other construction materials and machinery increase the startup costs for companies that might consider reshoring manufacturing. These costs make it more expensive for firms to build new factories and assembly lines in the United States and for local governments to expand electric grids to supply them. Such costs could keep some foreign investors away and limit the impact of the money that does arrive. Because the prices of American-made goods will rise, they will become less competitive beyond U.S. shores, where billions of consumers reside.
U.S.-based suppliers will also be at a disadvantage. Of the $2 trillion or so in goods that American companies export every year, nearly two-thirds are inputs that feed into global supply chains and products made in other countries. As these goods become more expensive, foreign manufacturers will seek alternatives.
Even if few countries retaliate tit for tat to U.S. tariffs and many agree to deals that lower trade barriers for American exporters, the world will remain wary of trade with the United States. Other countries will not wholly abandon the voracious American consumer, whose roughly $20 trillion in annual spending drives some 70 percent of the U.S. economy. But they could choose to treat the U.S. market differently from the way they treat the rest of the world. For years, companies have treated the Chinese market differently, manufacturing goods for Chinese consumers in China while maintaining separate, diversified operations for other markets. They could now follow the same playbook in the United States, supplying U.S. consumers from within but locating production for clients in the rest of the world elsewhere, limiting the economic benefits the United States reaps from protection.
The Trump administration’s tariffs exclude the United States from the overall economic boost global supply chains provide. Over the last 50 years, cross-border production has vastly expanded, powering prosperity in emerging and advanced economies even as it widened inequalities in the United States and elsewhere. Global trade in goods grew from $2 trillion in 1980 to $24 trillion today, roughly 55 percent of which represents inputs for making other things. The trade historian Douglas Irwin surveyed nearly a dozen studies and found that the economies that opened up during this period grew much faster than those that did not, in good part because they linked into supply chains.
International supply chains supercharge production by providing scale and stimulate innovation by enabling specialization. Even the United States, with its vast, dynamic economy, cannot reproduce those advantages. Unless American companies can buy parts from foreign firms at a reasonable cost and locate some of their operations in other countries, they will struggle to make products as well, as cheaply, and as quickly as competitors abroad that are still deeply connected to global supply chains.
GLOBALIZED DEFENSE
The U.S. defense industry will not be immune to these effects. Throughout the postwar period, American companies have been the largest exporters of defense equipment, accounting for more than a third of the global market. They are the best-known providers of cutting-edge military technologies such as guided missiles, stealth aircraft, reconnaissance systems, and nuclear-powered vessels. For decades, Europe has bought roughly 40 percent of its military kit from the United States. Israel and Saudi Arabia have turned to the United States for an even greater percentage of their arms purchases. Japan and South Korea rely on American producers for their missile systems, fighter jets, and other military hardware. When a government buys new equipment from a U.S. company, it is also committing to pay that company for maintenance, replacement parts, and system upgrades for the next several years. American defense companies have secured these lucrative deals not just because of the quality and sophistication of their products but also because the U.S. government approves the sales as part of its security alliances and agreements.
The U.S. defense industrial base has never had to go it alone. Defense companies and the American military itself have always had global sources, especially in times of war. During World War II, the United States imported significant portions of the nickel, copper, tungsten, manganese, and other minerals and materials that drove its victorious war machine. During the Korean War, Japan-based manufacturers supplied U.S. troops across the Sea of Japan with refurbished tanks, bomber jets, and artillery. In conflict after conflict, U.S. military strength has come from the country’s ability to access and marshal supplies from around the world.
The expansion of international supply chains has increased the speed of innovation and lowered the costs of production in the defense industry. Decades of work go into collecting these benefits—building a supply chain is not as simple as signing a contract. Legal agreements ensure compatibility, reliability, and quality. But supply chains for sophisticated defense products typically resemble long-term partnerships, with American companies and foreign firms engaged in joint ventures and shared research and development. Suppliers and manufacturers form strong working relationships as they navigate regulations, security protocols, and geopolitics together.
The U.S. government has played a key role in building such supply chains. The Pentagon oversees approval processes for suppliers of crucial components, as it does, for example, in the U.S. defense firm Northrop Grumman’s partnership with Japan’s Mitsubishi Heavy Industries to design hypersonic missile defense systems. Diplomatic agreements and treaties establish joint defense projects, such as the 2021 AUKUS agreement among Australia, the United Kingdom, and the United States, which includes plans to design and manufacture a new class of nuclear-powered attack submarines. Technical agreements that set joint standards and facilitate interoperability and technology sharing enable companies from multiple countries to make parts, components, and systems for one another. After years of the U.S. government constructing such partnerships, American defense companies rely on foreign providers for basic materials and, often, sophisticated components of military equipment.
Cross-border sourcing makes the defense industry more resilient. When U.S. companies work with multiple international suppliers, they limit their exposure to problems that may arise in any given geographic location. Concentrated domestic production, meanwhile, creates vulnerability, as the United States has experienced firsthand. When Hurricane Maria shut down factoriesin Puerto Rico in 2017, for instance, the U.S. mainland faced an acute shortage of medical supplies. Manufacturing 155-millimeter artillery shells in just one plant in Scranton, Pennsylvania, led to dangerous gaps in U.S. defenses in 2022, when the U.S. Army raced to supply Ukraine after Russia’s invasion while also replenishing U.S. arsenals at home. (It has since placed orders with multiple sites in the United States and Canada.)
The proliferation of dual-use technologies has meant that companies producing crucial defense components are operating on a scale that small-batch manufacturers could never achieve. Today, the same semiconductors power smartphones and missiles, the batteries in laptops and electric cars also drive drones, artificial intelligence used for school assignments also directs uncrewed weapons, and satellites navigate both civilian traffic and troop movements. The companies that produce these goods are massive, their growth enabled by the purchases of everyday customers alongside defense clients. And they make enormous profits from commercial applications—profits that fund the research and development that accelerates defense innovation, which in turn benefits the U.S. Department of Defense.
GOING IT ALONE
Crafting international supply chains does create economic dependencies on foreign countries, and sometimes those dependencies can be dangerous. Because of this, the United States has a strong case to cut its foes out of supply chains critical to national security. A rival power can weaponize Washington’s reliance on the goods its companies provide. China, which controls a host of critical defense inputs, has done just that. In the trade war with the United States, it has limited exports of gallium, tungsten, germanium, antimony, graphite, and other minerals used to produce drones, bullets, F-35 fighter jets, Tomahawk missiles, and night-vision goggles, as well as exports of rare-earth magnets critical to electric vehicles and advanced weapons systems. Beijing has also banned the sale of components to California-based drone maker Skydio, ostensibly because the company signed a contract with the government of Taiwan but also to undermine an emerging competitor to Chinese firms.
But cutting friends out of supply chains, as well, as Trump’s blanket tariffs do, weakens Washington’s ability to project power rather than strengthening it. Tariffs, for one, will make defense production more expensive. Many final products are already made in the United States to meet stringent legal requirements regarding the sourcing of certain specialty components. But these contractors will now have to pay higher local prices for domestically made steel, aluminum, copper, and semiconductors because tariff protections allow U.S. producers to charge more.
Tariffs will also make it more difficult to expand domestic industries. Take shipbuilding. Less than one percent of all vessels in the world are manufactured in the United States since it is already more expensive to build there than in China, Japan, or South Korea. Tariffs make investment in this industry even less attractive because U.S. shipyards will have to pay 50 percent more than their global competitors for the tons of steel and aluminum that go into constructing each vessel.
For U.S. defense companies to be economically viable, they must be assured of customers. Making weapons and military hardware is highly capital-intensive. The firms producing sophisticated equipment and systems need huge research and development budgets, specialized manufacturing facilities, and advanced machinery. Long production timelines mean that filling an order takes years, and these companies produce only a small number of units. Traditionally, U.S. defense contractors have been able to defray these enormous upfront costs because they have a loyal customer base built into the U.S. alliance structure. In 2024, foreign allies purchased over $300 billion in arms and defense equipment from U.S. makers through U.S. government–approved contracts, compared with roughly $445 billion these companies received from Pentagon contracts. International customers account for roughly ten to 40 percent of total sales for the top U.S. defense contractors, including Lockheed Martin, Northrop Grumman, and RTX.
The U.S. defense industrial base has never had to go it alone.
But this previously reliable source of demand for American defense products could now be in jeopardy. Trump has long insisted that U.S. allies should depend less on the United States, and his tariff announcements have only reinforced that message. The U.S. president has railed against fellow NATO members for free-riding on American defense spending and demanded that Japan and South Korea pay more to host U.S. troops and bases in their countries.
Australia, Japan, South Korea, and NATO allies have announced meaningful increases to their defense budgets, and many of them have committed to spending some of this money on purchases from U.S. firms. But it is not assured that they will all follow through on the latter pledge. Many have ambitions to expand their own defense industrial bases—and have sold increased defense outlays to their publics on the basis that the money will boost domestic industry. Seeing their exports slapped with U.S. tariffs, moreover, feeds their growing hesitancy about relying too much on a volatile, transactional United States. French President Emmanuel Macron, long an advocate of “buy European” practices, has called on EU members to trade U.S.-made Patriots and F-35s for French-Italian SAMP/T missiles and French Rafale fighter jets. Some are now doing so. Denmark recently chose Europe’s models over American ones for its $9 billion air defense system upgrade. Spain has nixed plans to buy American F-35s with its $7 billion earmarked budget and is looking into European alternatives. Purchases using the EU’s new $176 billion defense fund, furthermore, are restricted to European companies and companies from countries that have formal security deals with the EU—a list that does not include the United States.
British Prime Minister Keir Starmer, meanwhile, has vowed to seize a “once in a generation” dividend by channeling defense investment into domestic jobs and industrial growth. Japan is intent on boosting domestic producers of hypersonic missiles, drones, and fighter planes with its own spending surge and is negotiating an agreement to share classified information with the EU and a formal defense dialogue to connect Japanese industry with European defense supply chains. And South Korean President Lee Jae-myung has expressed his hope that the defense industry “becomes one of Korea’s future growth engines.”
Frustration with American tariff policies among foreign publics may also make it harder for allies to continue spending big on U.S. defense products. A Pew Research Center poll conducted between January and April saw favorable views of the United States plummet by eight to 32 percentage points across 15 of the 24 countries surveyed. The sense of betrayal after Trump announced tariffs has already led to boycotts of U.S. goods in Canada, India, and Europe. With their constituents refusing to buy Kentucky bourbon or Levi’s jeans, governments may redouble their search for alternatives to Patriot and Tomahawk missiles, F-35 fighter jets, and Black Hawk helicopters.
There is already evidence that U.S. allies and partners are distancing themselves from the United States. German Chancellor Friedrich Merz has made it a defense priority to “achieve independence” from the United States, and talk in Europe has increasingly focused on the continent’s “strategic autonomy.” India, facing particularly high U.S. tariffs, paused its purchase of American weapons rather than meet Trump’s demand to give up its imports of Russian oil. Brazil, another country whose exports face 50 percent tariffs, declined to join military exercises with the United States in September but has stepped up military representation in its Beijing embassy this year to match that in Washington. Beijing, indeed, has benefited from the world’s discontent with Trump’s hard-nosed tactics. A year ago, China was facing a global backlash for its own coercive trade practices and aggressive diplomacy. Yet in the past few months, officials from Brazil, India, Japan, South Korea, and the European Union, feeling spurned or neglected by Washington, have all taken steps, with varying success, to mend their frayed ties with China.
THAT’S WHAT FRIENDS ARE FOR
This is a particularly dangerous time for the U.S. defense industry to lose favored access to global suppliers and, potentially, buyers. As the fights taking place on the battlefields of Ukraine and in the shipping lanes of the Red Sea have demonstrated, the future of war is one not of aircraft carriers, tanks, and artillery but of drones, robots, and AI. The United States does not yet produce this equipment domestically in sufficient amounts or have the flexible procurement processes to acquire it quickly. Instead, the country depends on China, its most significant adversary, for the basic material inputs and the physical components of drones, robots, and next-generation radar systems. On the technological side, Washington is locked in a competition for dominance—a competition that it could lose to Beijing.
With tariffs raising the costs of production and making investment in U.S. industries less attractive, it will be more difficult for the United States to gain the same edge in the new warfare that it had in the old. American defense companies cannot simply bring their entire supply chains home; even those with government contracts need the scale and profits that international trade enables to make their businesses viable. They will also need access to cutting-edge innovation, much of which comes from abroad. China has already become a peer competitor to the United States in hypersonic weapons, integrated air defense systems, cybertools, and space capabilities. The United States alone cannot match the pace and scale that China has achieved. That will be possible only if U.S. efforts incorporate the innovation and production know-how of allies including Japan, South Korea, and countries in Europe.
There is a place for ramping up domestic production to ensure that the United States has the equipment it needs to defend itself and good reason to purge U.S. adversaries from critical defense supply chains. Yet blanket tariffs make those tasks harder, not easier. If Washington were to pivot to targeted tariffs, focusing only on strategic industries and inputs, it would encourage the manufacturing that matters most for national security without incurring unnecessary costs. And by scaling back or eliminating tariffs on countries it trusts, giving “friend shoring” a real chance as part of a wider strategy to revitalize key industries, Washington could reap gains from geographic diversification and access to new markets and innovations.
Part of that strategy must involve U.S. subsidies. This will be especially important in industries in which markets have failed, such as the battery industry; Chinese subsidies have built up battery manufacturing capacity to the point that it far outstrips total global demand. Subsidies will also be critical in industries that are vulnerable to manipulation, such as mineral refining and processing. China is so dominant in these fields that it can create global shortages or flood markets to drive foreign companies into bankruptcy. The U.S. government has already found success using subsidies to draw in private investment. Billions of dollars in loans and grants to semiconductor makers in recent years have expanded U.S. production capacity, which will reduce the country’s reliance on manufacturing concentrated in Taiwan. In a deal signed in July with the American rare-earths firm MP Materials, the U.S. government set a price floor for U.S.-mined rare earths, and the company committed to building a factory to produce magnets from them, which should reduce U.S. dependence on China when the plant comes online in 2028.
Future outlays should focus on jump-starting vital production and creating commercially viable businesses over the long term. And potential subsidy recipients should not be limited to U.S. companies or U.S.-based operations. Instead, Washington should use subsidies to diversify the suppliers in critical industries and the regions they come from and to boost access to technologies and innovations from friendly countries. Strengthening international supply chains for critical minerals should start with an effort to revive and put real money behind the Minerals Security Partnership, set up in 2022, which brings together more than a dozen U.S. allies and partners to facilitate cross-border minerals projects. Congress should also pass the Critical Minerals Security Act, which would direct the U.S. government to work with allies on the mining, refining, processing, and recycling of vital defense inputs. Likewise, the United States should protect existing agreements with allies, such as AUKUS, to jointly produce weaponry and defense equipment and pursue new deals along similar lines.
Opening funding to others does not have to come at the expense of American companies and contractors. Diplomacy is key. Negotiating a formal security agreement with the EU would make U.S. contractors eligible to bid for public contracts offered as part of Europe’s new defense fund. Agreements with other allies could deliver similar opportunities to U.S. defense contractors, and technical accords that ensure interoperability could open the door to U.S. providers securing maintenance contracts with militaries abroad and supplying future platform additions. Building the U.S. defense industrial base and allied defense industrial bases together, so that they complement rather than compete with each other, will not only help the United States and its allies better coordinate their militaries—it will also yield commercial benefits.
The United States needs secure supply chains, and for that it needs to encourage cross-border manufacturing with countries it can count on, not blanket tariffs that drive domestic prices up and foreign partners away. Separating the country from global commerce is a path to increased inflation and slowing innovation and growth that will result in U.S. manufacturers struggling to compete for global consumers. Such a path will ultimately leave the United States less wealthy. The security costs of protectionism are just as dire. U.S. defense suppliers will lose many of their current market advantages as foreign contracts unravel and competitors abroad begin to look like safer geopolitical bets. A shrinking American defense industry is not just an economic blow; it also undermines the United States’ ability to field and equip a world-class military. In the Trump administration’s wishful thinking, building a “Fortress America” may seem like a way to protect the country’s wealth and raise its defenses. But in reality, dismissing the United States’ partners degrades its sources of strength.
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