It may seem obvious that governments should think through their policies before implementing them; if they don’t, they risk encountering the dreaded law of unintended consequences. That’s exactly what’s happening in the United States’ defense-industrial policy.
While U.S. defense stocks are slumping, European defense stocks are rising quickly because the markets have concluded that those governments will be spending lots more on defense. And every government around the world knows what happened to Ukrainian President Volodymyr Zelensky last week in the Oval Office.
The conclusion that many leaders will draw from the altercation that U.S. President Donald Trump and Vice President J.D. Vance had with Zelensky is that U.S. security guarantees—a key reason why countries tend to buy U.S. weapons—are not going to be a convincing argument anymore. So far, Trump’s efforts to “make America great again” have been miserable for that all-important U.S. power pillar: the defense industry.
Ouch. Since Trump’s inauguration, shares in the six biggest U.S. defense companies have fallen by an average of 4 percent. Meanwhile, shares of Europe’s largest defense groups—including Germany’s Rheinmetall—“have surged” by almost 40 percent in the same period, the Financial Times reported on Feb. 25.
On March 3, the first trading day after Trump’s acrimonious meeting with Zelensky on Friday and European leaders’ subsequent defense summit in London over the weekend, European defense stocks made an even bigger leap: At close of trade on Monday, Italy’s Leonardo was up by more than 17 percent and France’s Thales by almost as much; Rheinmetall rose by 15 percent, and Saab of Sweden rose by nearly 12 percent.
The market is, as those in the business like to say, always right. And crucially, the market is not ideological. In recent days and weeks, the markets have been watching the announcements from Washington and unsurprisingly concluded that the Trump administration wants to slash the defense budget. To be sure, Defense Secretary Pete Hegseth has said that he wants to grow U.S. warfighting capabilities while cutting administrative costs, but Elon Musk’s newly established Department of Government Efficiency appears to be slashing funding across the government.
European countries, meanwhile, are getting serious about growing their armed forces. To placate Trump, Britain has swiftly announced that it will grow its military budget to 2.5 percent of its GDP by 2027. Poland is on track to reach 5 percent this year. At the summit in London hosted by British Prime Minister Keir Starmer in support of Zelensky, the leaders agreed to provide more military support for Ukraine and create a “coalition of the willing” to help defend the country in its war against Russia.
All this is far more complicated than buying new weaponry—although adding weaponry is a key part of it. And because European governments can’t assume that the United States has their backs anymore, they will certainly do their best to buy European. (When foreign governments buy weapons from the United States or other Western countries, the governments of those seller countries have a say in how those weapons are used. And these days, European buyers have to consider the risk of Washington blocking use of U.S.-made arms against Russia.) It’s hardly a surprise, then, that the markets are seeing fat months and years ahead for European arms-makers.
Not everyone will be able to capitalize on this sudden government largesse, but many will.
“It remains to be seen which companies will win,” Robert Limmergard, the secretary-general of the Swedish Security and Defence Industry Association, told me. “How security policy evolves across the Western alliance matters, and so does companies’ ability to adapt weaponry to new types of war. If you can do that, you will win.”
That also means adopting knowledge from the Russia-Ukraine war. Many Ukrainian defense companies—until recently not top performers on the global arms market—possess priceless knowledge, given that Ukraine has the continent’s most battle-tested military. U.S. defense manufacturers would have that ability, too. But the markets believe that they know where things are headed: Since late January, Lockheed Martin’s share price has dropped from nearly $500 to just under $450.
Trump’s abrupt change of course away from Western allies and Ukraine has an even more fundamental unintended consequence: Washington’s security guarantees, which underpin its arms exports, have become worthless.
“I’m not going to make security guarantees beyond very much,” Trump said last week while trying to force Ukraine to sign a deal that the Kyiv Independent reported would give the United States 50 percent of revenues from Ukrainian state-owned natural resources. “We’re going to have Europe do that,” Trump added, because “Europe is the next-door neighbor.”
But security guarantees are the unbeatable sweetener that Washington has historically used to clinch most deals. Many countries, including a large number in Europe, have bought U.S. weapons precisely because they came with U.S. security guarantees. The guarantees were not just the sweetener: They were at the core of the deal.
“When countries buy weapons, they consider the equipment, and thus the manufacturer, and thus the country, because these things matter with equipment that you use for many years, up to 40 years,” Limmergard said. “And U.S. foreign military sales have depended a lot on America offering security guarantees.”
In other words, buying U.S. weapons was a way of buying the United States’ friendship and protection. After months of agonizing debate in 2021, still nonaligned Finland chose to buy U.S.-made F-35 fighter jets to replace its aging fleet of fighter jets, even though Gripens from Sweden—Finland’s close friend and neighbor—would have been cheaper. Although the F-35s have undisputed capabilities, it was lost on nobody that the Finns’ $9.4 billion deal also included U.S. benevolence and security guarantees. Indeed, the deal was managed through the U.S. government’s Foreign Military Sales program.
But with Trump now openly appearing to side with Russia and President Vladimir Putin, even the most generous buyers of U.S. weapons can no longer be sure that their money will result in Washington’s benevolence and protection.
Such uncertainty is particularly problematic because modern weapons need constant software updates. That means that buyers of these extremely pricy products need complete certainty that the seller country will remain cooperative and that the software updates will thus be made available. Even the smallest doubts that Trump could decide to harm friendly governments by blocking software updates to their military arsenals is enough to make such governments reconsider U.S. military acquisitions.
Britain and Australia, and the companies involved in the much-praised AUKUS submarine coalition with the United States, face a particularly tricky dilemma: AUKUS involves not just the construction of submarines but also the sharing of advanced technology. That could leave Australia—which is estimated to have committed roughly $230.6 billion to the project in an effort to increase its security—dependent on an ally that may decide to punish it by withholding crucial technology.
The markets—that is, the stock analysts who painstakingly follow politics and business to discern their impact on companies—have decided that the smart money is on European defense stocks (which, in a lasting part of the trans-Atlantic bond, work with countless U.S. subcontractors).
And to whom are U.S. defense manufacturers to sell their goods if the United States’ closest friends and allies are no longer available? To be sure, Saudi Arabia is a keen importer of U.S. weaponry, and so are the United Arab Emirates, Qatar, and Israel, but some of these countries, too, are likely to watch the United States’ new approach to its allies with concern. At any rate, they’re unlikely to increase arms purchases from their already high levels.
Eroding the United States’ much-feared defense-industrial complex was almost certainly not what Trump predicted. But the erosion has arrived.
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