Global Defense Spending Soars Amid Rising Tensions with China and the Middle East

Global defense spending has reached a record high of $2.44 trillion as international tensions continue to escalate1. With 56 identified conflicts currently occurring—the most since World War II2—nations are racing to modernize their military capabilities, driving spending to increase at the fastest pace in a decade3. The largest increases in spending have come from Ukraine and Russia amid their ongoing war, prompting Western allies to sharply boost their military expenditures in response2. European nations, in particular, have ramped up spending as political perceptions shift due to the conflict.

Additionally, escalating tensions in Israel and a more provocative Iran have driven up military budgets across the Middle East. Hostilities are not only intensifying in the Middle East but also spreading throughout Northern Africa, Latin America, and the Caribbean. In this increasingly unstable global environment, companies providing national defense services are poised to benefit from sustained and healthy demand.

The Future of Defense Spending

In the coming years, global defense spending is projected to exceed $3 trillion annually, reflecting a rapidly evolving battlefield. After decades of military involvement in the Middle East, U.S. foreign policy is shifting its focus toward China and the broader Asia-Pacific region. Decisions like withdrawing from the Iranian nuclear deal and the hasty removal of U.S. troops from Afghanistan signal that the U.S. no longer wishes to eternally police the region, a change that has not gone unnoticed by its allies, such as Saudi Arabia and Jordan. In response, Saudi Arabia has softened its stance against Iran, even reopening its embassy in Tehran—a previously unimaginable move given its strong U.S. support4.

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China is greedily filling the void left by the U.S. with its Belt and Road Initiative, positioning itself as a key player in the Middle East5. This development is creating new tensions and leaving the region increasingly at odds with U.S. interests. As the geopolitical landscape shifts, defense strategies and spending priorities are also evolving to address new challenges and threats in this complex global environment.

U.S.-China Relations: A Growing Concern

As China plays an increasingly pivotal role on the global stage, it is increasingly butting heads with the United States. U.S.-China trade boomed following China’s acceptance into the World Trade Organization in 20016. However, as China has grown, U.S. concern over fundamental differences has intensified. Not only is China seen as a growing threat to national security, but its businesses also do not adhere to the rules of Western capitalism. State-owned enterprises (SOEs) are highly subsidized and are not held accountable for corporate espionage.

The U.S. has become particularly dependent on China for electronics and machinery. The rising importance of Taiwan’s semiconductor industry adds another layer of complexity, bringing the clashing views about Taiwan’s independence to the fore. This geopolitical tension has the potential to escalate into a military conflict, making it a top U.S. concern. The strategic significance of Taiwan’s semiconductor industry cannot be overstated, as it is crucial for both technological advancement and national security. As the U.S. navigates these challenges, its approach to China will likely continue to evolve, reflecting the dynamic and high-stakes nature of this bilateral relationship.

Implications for Defense Sector Investors

While unsettling, this increasingly contentious backdrop should serve as a tailwind for investors in the defense sector. Threats to national security are dynamic and far-reaching. While China is arguably the biggest risk facing the United States, it is by no means the only adversary. As we prepare for highly sophisticated state actors like Russia and China, we are also reminded of the dangers posed by less sophisticated attacks. For instance, Iran sent hundreds of drones laden with missiles towards Israel. Although this swarm tactic was thwarted, it was extremely costly and highlights the diversity of ongoing threats.

Beyond national military threats, the world presents many other perils. Terrorism is increasing, both abroad and at home7, while cyberattacks are exponentially rising in sophistication thanks to artificial intelligence8. The global pandemic shed light on the potential of biological threats, whether intentionally developed or due to nature. The number and diversity of threats facing the country continue to increase, potentially providing a long runway of growth for companies developing solutions in the years ahead.

 

 

1 https://www.sipri.org/media/press-release/2024/global-military-spending-surges-amid-war-rising-tensions-and-insecurity

2 https://www.visionofhumanity.org/highest-number-of-countries-engaged-in-conflict-since-world-war-ii/#:~:text=fear%20of%20violence.-,There%20are%20currently%2056%20conflicts%2C%20the%20most%20since%20World%20War,major%20conflicts%20in%20the%20future.

3 https://www.cnbc.com/2024/04/22/global-military-spending-hit-an-all-time-high-in-2023-report-says.html

4 https://www.aljazeera.com/news/2023/9/5/saudi-and-iran-exchange-ambassadors-after-rapprochement

5 https://gjia.georgetown.edu/2023/06/02/chinas-increasing-role-in-the-middle-east-implications-for-regional-and-international-dynamics/

6 https://www.cfr.org/backgrounder/contentious-us-china-trade-relationship

7 https://www.npr.org/2023/10/31/1209699057/wray-warns-of-increased-terrorist-threat-says-u-s-is-in-a-dangerous-period

8 https://insight.scmagazineuk.com/ai-is-changing-the-cyber-threat-landscape

 

For more content by Jake Bleicher, Portfolio Manager click here.

 

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