By Maj Gen (Dr) Rambir Singh Mann (Retd)
The resurgence of protectionist trade policies and the ensuing tariff wars between major economies pose a significant threat to the stability and efficiency of the global defense industry. Unlike many commercial sectors, the arms industry is characterized by unique sensitivities, intricate supply chains, and strong geopolitical linkages, making it particularly vulnerable to the disruptions caused by trade conflicts. The global defense industry, valued at approximately $2 trillion annually (including military spending and arms trade), is facing unprecedented challenges due to escalating tariff wars. The U.S.’s 2025 imposition of a 10% universal tariff on all trading partners, 25% on Canada and Mexico, up to 145% on China, and retaliatory tariffs ranging from 20% to 49% from over 60 countries, including the EU, Japan, South Korea, and India, have reshaped the arms trade. The industry’s reliance on global supply chains, rare earth elements (REEs), and semiconductors makes it particularly susceptible to tariffs and export restrictions. This article explores why the arms industry is uniquely impacted, details the effects on major arms-producing nations, and proposes mitigation strategies, with a focus on India.
Why the Arms Industry Is Especially Impacted
Several factors contribute to the defense industry’s heightened susceptibility to tariff wars:
- Complex Global Supply Chains: Modern defense systems, from advanced fighter jets to sophisticated missile systems, rely on a network of specialized suppliers spread across the globe. Components like semiconductors, high-grade steel, aluminum alloys, and rare earth elements are often sourced from different countries. Tariff barriers disrupt these intricate supply chains, leading to delays, increased costs, and production bottlenecks. For example, tariffs on steel from Canada (25%) delay production of Virginia-class submarines, which rely on cross-border supply chains.
- Technological Intensity: The defense sector is at the forefront of technological innovation, heavily dependent on cutting-edge electronics, precision engineering, and specialized materials. Tariffs on these critical inputs can significantly inflate production costs and hinder the development and deployment of advanced defense capabilities.
- Geopolitical Sensitivity: Arms sales are rarely purely commercial transactions. They are deeply intertwined with geopolitical considerations, strategic alliances, and foreign policy objectives. Tariff wars can strain relationships between nations, creating uncertainty and hindering defense cooperation, joint ventures, and arms transfers.
- Long Procurement Cycles: Defense procurement typically involves long lead times, from initial design and development to manufacturing and delivery. Tariff-induced disruptions can further extend these cycles, delaying the acquisition of essential defense equipment and potentially compromising national security.
- Critical Material Dependence: REEs, controlled by China (90% of global processing), are essential for radar systems, jet engines, and missile guidance. China’s April 2025 ban on seven REEs (e.g., dysprosium, gadolinium) and restrictions on semiconductors threaten production across major exporters.
- High Economic Stakes: The arms trade supports millions of jobs and national security. Tariff-induced cost increases and retaliatory tariffs reduce competitiveness and demand.
- Innovation Risks: Tariffs on critical inputs like semiconductors could reduce funds available for R&D by increasing production costs, impacting next-generation systems.
These factors make the arms industry a flashpoint for tariff-related disruptions, with ripple effects across major producers and emerging exporters like India. The present import tariffs levied by various nations, particularly those imposed by the United States and the retaliatory measures from other countries, are likely to impact several important international defense programs. These tariffs disrupt global supply chains, increase costs for defense manufacturers, and affect procurement budgets. Key programs likely to be adversely affected include the F-35 joint program between the U.S. and its allies, the AUKUS nuclear submarine deal, NATO defense procurement, USMCA defense cooperation, Indo-Pacific security programs, and cyber-related aspects of the Five Eyes Defence Initiative, among others.
Impact on Major Arms-Producing Countries
United States
The world’s largest arms exporter, with a 41.7% market share and $37.9 billion in 2023 exports, supplies weapon systems to over 100 countries. Tariffs on steel, aluminum, and components can raise production costs for firms like Lockheed Martin, Boeing, Northrop Grumman etc. The F-35 program, reliant on global suppliers, can face delays due to 20% EU and 25% Canada tariffs. China’s REE bans and U.S. chip export controls can disrupt radar and avionics production. The U.S. imports over 60% of its REEs from China, despite efforts to diversify. China’s 125% tariffs, Canada’s measures and EU’s countermeasures can lead to significant revenue losses from reduced demand in markets like the EU and Canada due to retaliatory tariffs.
China
Holds a 5.8% market share, exporting drones, frigates and jets to Pakistan and Africa, with approximately $3 billion in 2023 exports (per SIPRI). The 145% U.S. tariff raises costs for U.S. buyers of Chinese dual-use electronics, reducing demand in joint ventures. China’s REE bans and mineral restrictions (e.g., tungsten) target U.S. and allied defense industries, raising costs for missile systems. U.S. export controls and potential Taiwanese tariffs (32%) limit China’s access to advanced semiconductors for military AI.
European Union (Germany, France, Italy)
Germany (5.6% global market share at $4.9 billion), France (10.9%, $11 billion in 2022 per SIPRI) and Italy (4.6%, $2-3 billion) provide submarines, Rafale jets and helicopters to NATO, the Middle East and India. The 20% tariff on EU imports raises costs for U.S.-EU collaborations, like Airbus components for U.S. helicopters. EU countermeasures on U.S. exports increases costs and are likely to reduce U.S. arms purchases, prompting increased EU self-reliance. Dependence on Chinese REEs and chips threatens production; for example, tariffs on Chinese REEs threaten Germany’s Leopard tank electronics, while U.S. chip controls can delay France’s Rafale upgrades.
Canada
Exports approximately $1-2 billion in armored vehicles and F-35 components, with the defense sector closely integrated with U.S. supply chains. The 25% US tariff disrupts Canada’s defense exports, which form 77.6% of its U.S. trade. Canada’s tariffs on U.S. goods increase costs for joint projects, such as the U.S. Army’s Stryker vehicles, produced by General Dynamics. Tariffs also disrupt United States-Mexico-Canada Agreement (USMCA)-based component flows, raising overall costs.
Israel
A global leader in defense technology, exporting drones, missile defense, and cybersecurity solutions, has the U.S. as a critical partner. The U.S. has introduced a 17% reciprocal tariff on Israel as part of its 2025 tariff policies. While this could increase the price of Israeli exports to the U.S., Israel’s deep defense ties—evidenced by joint projects like the Iron Dome—may mitigate the impact. Israel relies on imported REEs, with no significant domestic reserves. Tariffs on these inputs could raise costs, though Israel’s focus on premium cybersecurity and drones could sustain demand despite tariff hikes.
South Korea
A rising player with a 2.0% market share and approximately $3.2 billion in 2022 exports (per SIPRI), it saw rapid growth in 2023. Its defense industry excels in cost-effective systems like the K9 howitzer and T-50 trainer aircraft. The 25% U.S. tariff could increase costs for K9 components, risking competitiveness in Poland’s $6 billion deal. However, South Korea’s strategy of offering offsets—such as local production in Poland—may help maintain its edge. South Korea leverages its domestic semiconductor industry (e.g., Samsung) to mitigate some supply chain risks.
Turkey
Turkey’s arms industry emphasizes self-sufficiency, with notable projects like the Altay tank and Bayraktar TB2 drone. It faces the U.S.’s 10% universal tariff, lower than China’s 145%, aiding its drone exports. Its drone exports, already successful in Ukraine and Azerbaijan, could see increased demand if tariffs make rival systems more expensive. Tariffs on imported components could still raise costs and delay production, though Turkey’s lower tariff rate enhances its export potential.
General Strategies for All Nations
To address tariff challenges, nations can adopt the following strategies:
- Diversify Supply Chains: Source REEs and chips from non-Chinese suppliers like Australia (13% of global REE reserves) or Vietnam (19%). Collaborate on joint REE processing, as Japan did post-2010.
- Invest in Domestic Production: Accelerate domestic REE mining and chip fabrication. The U.S. aims for a domestic REE supply chain by 2027, is a model others can follow.
- Enhance R&D: Increase R&D spending to develop REE substitutes and chip alternatives. Israel’s 4.9% GDP R&D investment drives innovation, mitigating supply risks.
- Offer Offsets: Provide co-production and technology transfers to maintain buyer interest despite higher costs, as South Korea does with Poland’s K9 deal.
- Strengthen Alliances: Negotiate tariff exemptions within alliances (e.g., USMCA, Quad) to preserve supply chain integration.
Implications for India
India ranks 23rd with $2.5 billion worth of exports in FY 2023-24 (Indian Ministry of Defence). The 26% tariff levied by the U.S. on Indian imports could raise costs for U.S. buyers of Indian components (50% of Indian exports), adversely affecting exports. As a major importer from the U.S., India faces key challenges:
- India has procured over $20 billion in U.S. defense equipment, including Apache helicopters, C-130J transports, and P-8I maritime patrol aircraft. Besides component supply for these systems, major procurement programs like India’s $3 billion deal for 31 MQ-9B drones might face delays due to tariff-induced supply chain disruptions.
- India’s indigenous projects, such as the Tejas fighter jet and Arjun tank, rely on imported components like steel, aluminum, REEs, and chips. Tariffs on Chinese REEs and U.S. chips could raise Tejas costs by 10-15%, delaying production by 6-12 months. The imports of the GE engine could also be adversely affected.
The Way Forward for India
To mitigate these challenges, India can:
- Establish Strategic Partnerships: Pursue joint ventures, technology sharing, and co-production agreements with nations like Japan (advanced electronics), South Korea (artillery systems), Australia (critical minerals), the EU (aerospace and naval systems), and Israel (drones and cybersecurity).
- Invest in Domestic Capabilities: Develop REE processing (India holds 6% of global REE unprocessed resources) and chip fabrication via the India Semiconductor Mission.
- Pursue an Indo-U.S. Defence Trade Deal: An Indo-U.S. Defence Trade Deal could eliminate tariffs on Apache components and lower production costs for indigenous systems.
- Diversify Bilateral Agreements: Secure critical inputs through deals with nations like Japan, South Korea, and Australia to reduce vulnerability to U.S. tariffs.
Conclusion
The 2025 tariff wars, compounded by REE and semiconductor restrictions, profoundly impact the global defense industry due to its reliance on interconnected supply chains and critical materials. Major arms producers like the U.S., China, EU, Canada, South Korea, Turkey, and India face higher costs, supply disruptions, and reduced competitiveness. The U.S. faces export declines, while India could gain by diversifying from Chinese REEs. Mitigation requires diversifying supply chains, boosting R&D, offering offsets, and strengthening alliances. By scaling financing, investing in domestic capabilities, and refining marketing, India can navigate these disruptions to sustain its defense industrial sector.
