Will tariffs disrupt the US defense industrial base?

We’re only a few weeks into President Trump’s second term but numerous manufacturers are worried after he ordered 25% tariffs on steel, aluminum, and other imports, which are set to take effect this month. The defense industry finds itself in an unusual position since many of the largest government contracts involving aircraft carriers, submarines, armored vehicles, and more require huge amounts of steel, iron, aluminum, and copper – all materials subject to the tariffs. The Trump administration has promised an increased focus on national security, so defense contracts could get to ‘jump the line’ concerning available materials in the U.S.

Most defense contractors are already regulated to buy U.S.-based materials and goods, but as the demand for U.S.-based materials drastically increases that will mean an increase in cost along with a decrease in available supply. The lack of materials and increased costs are especially worrisome for contractors already working on fixed-price defense contracts because contractors must cover any cost overruns. There are cost-reimbursable contracts which allow contractors to add the rising cost to their final bill to the Pentagon, but that would mean funds are diverted from other defense programs to cover the costs.

When President Trump signed the measure in February he said, “It’s going to mean a lot of businesses are going to be opening in the United States.”

However, materials needed to build the mills, factories, facilities, and more for those businesses all fall under the materials that will see increased demand and cost while facing a decreased supply.

The defense manufacturing sector does however export significantly compared to other large steel-consuming businesses so the impact could be decreased as noted by Jeroen Klomp in a recent study about the 2018 tariffs for PLOS ONE.

“The impact of the Trump tariffs was still rather limited for the U.S. defense industry due to their monopoly power,” Klomp says. “However, in the future this might change as many countries around the world, including the EU, have revised their strategic agenda the last few years and invest much more in their defense industrial base. In the short run, the U.S. defense industry might still reap the benefits from economies of scale and the comparative technologic advantage. However, the pursuit of strategic autonomy by many other countries may, in the long run, weaken the American defense industry.”