The $2 Trillion Global Arms Race

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2:00Stephanie Flanders:I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaking up the global economy and what on earth is going to happen next. This week we have NATO leaders, Donald Trump among them, gathering in Turkey for what could be one of the alliance's more consequential summits. I'm recording on Tuesday morning, US time and President Donald Trump has already arrived in Ankara. He's expected to meet with the Turkish president there and other leaders. And the focus of these meetings recently, particularly under President Trump, has tended to be money.

2:41Stephanie Flanders:The constant and reasonable refrain from the US being that Europe needs to spend more on confronting the risks at their borders and shouldn't continue to rely only on the security blanket of the US. But it's not just NATO. Defense spending is ramping up all over the world in a new global arms race that could look and feel very different from the last one. For the first time since the Cold War, many countries are aiming to acquire nuclear weapons or at least look like they might want to. And the guardrails previously constraining that proliferation have more or less fallen away. We're also seeing very dramatically how drones and AI have transformed the battlefield in Ukraine and Iran.

3:25Stephanie Flanders:And that has countries trying to beat their rivals to the next generation of hypersonic weapons and other things. So all of this, I think, could raise big questions, not just about the conduct of future wars, but also given the amounts involved, shape parts of our economy. So what are the key features of this new arms race? And what's it going to mean for the global economy if governments, one after the other make military tech one of their biggest investment priorities. Becca Wasser is the defense lead for Bloomberg Economics. Previously, she led studies and war games for the U.S. Department of Defense at the Center for a New American Security and at the RAND Corporation.

4:05Stephanie Flanders:Becca's also been a staff member on a congressionally appointed committee on the National Defense Strategy. Becca, welcome back to Trumponomics. Yeah, thanks for having me. And Jerry Doyle is Global Defense Editor on the news side for Bloomberg News. Jerry, thanks for coming. Thanks for having me.

4:28Stephanie Flanders:Jerry, just tell us, what are people buying or what are governments buying and why is so much of it happening right now? Well, so much of this investment in defense technology kind of started with the Russian invasion of Ukraine. That sort of lent urgency to the whole situation, not just in Europe, but globally, as countries started to quickly realize that they might have underinvested since the end of the Cold War. So that led a lot of countries to start buying a lot of the traditional things that you expect to see on a battlefield. The tanks, the planes, missiles, artillery was a huge priority.

5:03And now we sort of moved past that and started to look at what is going to be the technology that's going to dominate the future battlefield. For decades during the Cold War, you saw that manifest itself, that arms race manifest itself in terms of nuclear weapons, not just the total stockpile sizes, but, you know, strange novel ways of delivering them, different effects that you can create with nuclear weapons. And this current arms race that we're seeing right now is not about that. It's not about, you know, being able to deliver megatons worth of death onto a city. It's sort of more subtle. It's trying to find ways to give yourself an advantage in the future, doing things like investment.

5:45Drones for different types of things, for defense, for offense, for surveillance. The militarization of space, trying to figure out ways to protect your satellites in orbit, trying to find ways to give your military an advantage with the things that you place in orbit. And then hypersonic weapons, which are sort of a more traditional means of destruction, but with a novel twist of being able to maneuver at extremely high speeds, avoid air defenses, and so on. And we've seen that, and we've seen the drones sort of in practice happening on battlefields right now. And it's about trying to figure out a way to refine that, trying to figure out ways to improve and apply these things on a large scale.

6:29I think Jerry raises something that's really interesting, and it's using all of these technologies to gain an advantage. But what does that look like? And I think here there's a few things. There's the decision advantage. Who can make decisions faster and therefore gain the initiative? And that's where things like AI-enabled technologies come in. But you also have this idea of mass. Who can put more on the battlefield at any given time to overwhelm defenses, to overwhelm your adversary? And that's where you see things like low-cost drones and lower-cost missiles come in. And then I think the last area of advantage is this idea of cost.

7:08Who can do that cheapest? And that's where some of these more traditional weapon systems, these higher-end missiles, hypersonics, space, that's all very expensive. And that's why you see a lot of governments and a lot of militaries going all in on AI and all in on drones because they think that it can get them the best effect for the cheapest bang on the buck. But just on their own, drones aren't going to be the solution to all problems. And I think sometimes we do see a lot of militaries, particularly those that either have manpower constraints, like Ukraine, or those who have fiscal constraints, like arguably some countries in Europe, going all in on drones to try and make up for those shortfalls.

7:53It's absolutely true that, you know, drones are a useful tool, right? But they don't really fully replace a lot of the high-end weapons. You talk about destroying a tank with these tiny first-person view drones that you see in Ukraine. What we see in the social media is the drone hitting the tank and the tank blowing up. We don't see, like, the previous 12 to 15 first-person drones that hit the tank and did nothing or disabled it, or the fact that the tank had already run over a mine and was stationary, right? So the effects that we get from these cheap weapons aren't necessarily replacing what's there.

8:29they become an additional tool on top of what already exists.

8:33Stephanie Flanders:We'll get into some of the sort of numbers involved in a minute. And also, I think, the way it could shape economies. But as someone who's not as fully absorbing this stuff the way you both are every day, there seem to be those sort of two things that we get told, and it feels like they can't both be true. On the one hand, at least in the early stages of the Ukraine war and people learning about drones and drones becoming a much bigger element of all of these battlefields, we got the sense that it was going to be cheap. And as, Becky, you say, you know, you think of it's going to be good, high, bang for your buck.

9:08Stephanie Flanders:But there's also this sense of the sheer amount of technology involved in getting the most out of them and also developing all these other kinds of arms suggests that, you know, none of this is getting cheaper. And if anything, it's still giving a massive advantage to the countries that have the deepest pockets. There seem to be different strands. On the one hand, you talk about it in some of your stuff about being a leveling technology, AI, and some of the other modern technology in innovation. You can have a country that's much smaller, Ukraine's a classic example, kind of punch above its weight.

9:40Stephanie Flanders:But on the other hand, it does seem that scale is still incredibly important for being able to move ahead with these cutting-edge technologies. I think it's fair to say that a country with deeper pockets, like China or the United States, would be able to do more with that. They would be able to put more resources into production, be able to put more resources into research and development and so on. But the effect that they're able to get in terms of magnifying the power of their own military is going to be diminished because they have all these other capabilities that kind of do the same thing or do it better.

10:14And so what drones and some of these other technologies, you mentioned AI is another good example, what they do is enable somebody who can't afford the high end, maybe who can't afford a bunch of six generation fighters who doesn't have massive constellations of satellites overhead, who doesn't have cruise missiles that can fly thousands of miles. they're going to be able to get something like 80 percent of the combat effectiveness, be able to do 80 percent of the things for a lot less money. And if you are a resource-constrained country or military, that's a good trade-off.

10:50Stephanie Flanders:We should sort of get a sense of some of the numbers involved. When I talk about how those countries are ramping up spending around the world, I mean, what kind of numbers are we talking about for the increase in defense spending? Well, if you want to look at just the U.S. system alone, the U.S. defense budget request this year is$1.5 trillion. That's just for this year, and that amounts to roughly 3.4 % of GDP spent on defense. For the U.S., that's actually sizably lower than what it had been spending in the Cold War, where it had a much higher percent of GDP. As a share of GDP. A lot higher than it was a few years ago.

11:30Exactly. And I mean, I think, again, if we want to pull it back to the NATO summit where defense spending is very much going to be the topic of conversation, you do see the ramp up in Europe to move toward that goal of 3.5 percent of GDP to be spent on core defense spending by 2035 and 2030. Some of the work that we've done at Bloomberg Economics show that the top countries in Europe are likely to undershoot that target and that it's going to be a very slow ramp up to get to 3.5 % of GDP. And that's also going to come at a really high amount of taking on debt.

12:09Stephanie Flanders:Jerry, I think the figure that we had for the sort of global piece of this, at least on some aspects, was$2 trillion across three continents, which is not far off the sort of some of the numbers we used to in relative terms for the Cold War nuclear buildups. One thing we know from that research that Becker mentioned is that any kind of economic dividend, you know, governments like to talk about, well, we're spending more and it's going to produce jobs and manufacturing and it all sounds great if you can get past the military spending part. But when you actually look at how much economic impact there is, it's probably less than other kinds of infrastructure spending.

12:52Stephanie Flanders:And in Europe particularly, it's going to depend a lot on whether they can grow the domestic defense sector, because otherwise they're going to just be bringing in a lot of imports from the US. So how are they looking on that? Individually, European countries are not in a great position. Like many of them have a defense champion of various size, but usually there's a focus on one thing. They make avionics or they make ships or they make air defense systems. They make tanks, artillery shells, engines, something like that. Rarely, in a case sort of like Germany or France, where you have even bigger companies or an assortment of companies that can do a lot of these things at a high level.

13:33and sort of enable them to have a very well-developed defense industry. But in order for Europe to really compete in this global arms race that we're talking about, there has to be collective action. There has to be coordination about who's building what. There has to be coordination on spending. There has to be coordination on what the priorities are, which right now we see as being, again, satellites, like space-based military infrastructure. We see air defense as being another big one. And then there's sort of more boring but high-impact stuff like transport aircraft, like strategic airlift, we call it, being able to move tanks and people all around the continent pretty easily.

14:12That's something that Europe doesn't have a lot of, and it kind of relies on the U.S. for NATO. Tanker aircraft that refuel other planes in flight and extending their range, that's another thing they lean heavily on the U.S. for. And airborne warning and control, which is something that the U.S., again, has a lot of and historically has been sort of generous about sharing through its NATO partnerships, but that Europe is very interested in doing for themselves right now. And we saw that announced with the Saab Global Eye aircraft. They're going to buy 10 of those for NATO to be airborne warning control planes that are going to replace the older American-made planes.

14:51So they're moving in that direction, and it's important for a lot of reasons. Right now, Europe, in terms of defense spending, in terms of translating that into genuine capabilities and who's producing those capabilities, it's incredibly fragmented. And you have a fragmented defense industrial base across Europe. And eventually, there's going to need to be this requirement to pick winners and losers. But that is politically unpalatable right now because of the economics. because every single country wants to see that increase in defense spend, go back to their own economy, go back to their local economies, and be able to have a conversation that's no longer sort of this like guns versus butter debate.

15:33Stephanie Flanders:But to be fair, that's always been an element of the U.S. debate as well when it comes to states. Everybody wants their own peace. And that has also meant that often defense spending in the U.S. was incredibly inefficient. Incredibly. And very much, you know, concentrated in certain pockets where you had certain members of Congress who have continually fought for specific systems to not be cut when perhaps maybe it was time for them to retire because of the benefits that they brought to their district or their state.

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17:44Stephanie Flanders:Gerry had sort of started off talking to us about the sort of tech piece of this and how that was driving some of these investments. And if we sort of combine that with the discussion we've just had, I mean, it does suggest that if governments are going to be investing more in research and development in the military space and needing to be much more connected to the companies that are developing these new technologies. That feels like even the future of AI itself, or certainly whole areas of technology, could be shaped by the fact that we're in a time of globally increasing defense spending. Yeah, I think so.

18:26And if you look at a country like China, where there's this intense interweaving of the public and the private sector and the universities and the government.

18:36Stephanie Flanders:Yeah, you talk about the civil-military fusion. Exactly, exactly. Where, you know, in some sense that gives China an advantage because any breakthrough that happens, whether it's at a private company or a research university or, you know, in some random lab in the hinterlands, it will end up in the hands of the Chinese government. or they will at least have the opportunity to evaluate it and decide whether that's going to be, you know, militarily applicable or not. That also translates into traditional defense buildouts as well. You know, if the Chinese government decides that they need more aircraft, there's not really a fight over, you know, whose congressional district it gets built in or anything like that.

19:17You know, sort of the machine starts up. And then you compare and contrast that to the way Europe is set up, where, as Becca said, there's always going to be friction about, you know, who's going to be the winner, who's going to be the loser. We saw that, you know, F-CAS program, which was supposed to, you know, have the two largest aircraft companies in Europe, like the Seoul and Airbus, were going to just combine forces and make this sixth generation plane. We saw that fall apart because the two companies couldn't get along. And that's not something really that happens in China. So to that extent, they might have an advantage in the way they move this sort of innovation forward.

19:54Stephanie Flanders:Becker, I'm sort of harking back on this point about the closer connection between the government and the tech sector. I mean, I guess we saw that most recently with that between Anthropic and the Pentagon. A lot of people will be concerned that the biggest tech firms who are right at the forefront of this and the biggest amounts of money are going into the military applications of AI rather than other things. Is that, I mean, should we be worried that that's just going to shape the future of AI? I mean, we should be worried about, you know, how AI is going to be integrated into the military more broadly.

20:28There are some very benign applications. One of the ones that I've heard the most from the US military is trying to use AI to speed up essentially its modeling for how it gets logistics from one place to another, right? To me, that's a benign way. Like, okay, let's speed up processes. Let's speed up things that take tons of hours of people just, you know, hand jamming things into a spreadsheet like it's 1999. Instead, you know, trying to think about the ways in which you can have good use cases, but you could also equally have some negative use cases. And traditionally, the Pentagon has put some guardrails.

21:07Some of those guardrails have actually been relaxed by the Trump administration. So now we've seen in places on the battlefield, specifically in the Iran war, where there's been heavy use of AI tools, particularly Palantir's Maven smart system, to try and speed up some of the targeting processes to get that decision-making advantage that so many militaries want. You know, that puts the U.S. and frankly other militaries on a potentially tricky slope. That's not to say that there are not guardrails against using AI for some of the most dangerous things. I think there's a lot of pushback, and rightfully so, on the integration of AI into nuclear command and control.

21:50So essentially whether AI can help make decisions about the use or non-use of nuclear weapons. To me, that should be very much a human decision-making process.

22:02Stephanie Flanders:Jerry, I started mentioning about the nuclear piece. Countries might have concluded from the way the world has gone recently that actually they have an interest in acquiring nuclear weapons. Supposedly, we only have nine nuclear powers currently in the world. But are we actually seeing countries developing an increase in the number of countries wanting to develop? And is there a potential and rather frightening overlap with our previous conversation about AI? In the defense world, there's always a possibility of frightening overlap. It's frightening overlap all the way down. But looking at nuclear weapons specifically, as far as we know, nobody who doesn't currently have nuclear weapons has actively spun up a program to create them.

22:45What we have seen is expression of interest from European countries about getting more deeply involved with existing nuclear programs, specifically France's. Macron has spoken, you know, sort of in very plain terms about France wanting to expand its arsenal, wanting to offer a nuclear umbrella to the rest of Europe to sort of replace what he sees as, you know, the U.S. pulling back from its commitments there. We also see in Asia sort of open conversations in Japan and South Korea about acquiring nuclear weapons. That work hasn't started yet, as far as we've known. And there hasn't been any official government decision to move that forward.