President Donald Trump’s trade and foreign policy agenda is pushing European countries to shift existing defense orders to local defense firms — and the market is responding.
Trump’s rhetoric on European defense spending is stressing the strength of partnerships with NATO countries, two European defense officials told NOTUS. As allies across the Atlantic continue to support the war in Ukraine, the looming threat of Russia and a perception of dwindling support from Washington have started to show financially.
“European defense stocks have just been on a tear at the start of this year, given all the news that’s coming out of NATO,” said Ido Caspi, a research analyst for the New York-based investment firm Global X. The firm’s defense technology exchange-traded fund passively follows the global market, and European defense companies have gained significant ground in the 87 days since Trump took office.
“A company like Rheinmetall, or a company like Thales or Leonardo, a lot of those companies have just found their way to the top of the portfolio just because their performance has been so strong,” Caspi said.
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Companies in the U.S. aren’t showing the cracks just yet. As much as 60% of European defense spending is in the U.S.
But those in the defense industry see Trump’s trade war with China as an early sign of things to come. China’s recent stop order of Boeing’s commercial jets is a casualty of the increased tariffs between the U.S. and China. Brian West, Boeing’s chief financial officer, said on the company’s last quarterly earnings call that losses were from “lower deliveries and commercial and defense program charges.” That was before China retaliated.
Between Trump’s rhetoric regarding NATO, his trade agenda and the proposed government spending cuts, the defense industry in the U.S. is feeling the uncertainty in the markets. An employee of one U.S. prime contractor described it as an “unstable contract environment” and another said that between the executive orders, Elon Musk’s search for programs to cut and Secretary of Defense Pete Hegseth’s unanticipated video announcements cancelling contracts, major U.S. companies have found the situation “hard to interpret.”
Back in January, Trump said that NATO partner countries “should have 5%” of their gross domestic product spent on defense, establishing a higher target for spending. “If you’re going to have a country and a regular military, you’re at 4%,” he said. The U.S. spent roughly 3.4% of its GDP on defense in 2023. The 2025 defense budget numbers would have the U.S. spending 3.14% of its GDP, according to the Congressional Research Service.
Since then, the Trump administration’s posture has pushed transatlantic partners more and more toward reshoring their own manufacturing, continuing a push that began in 2017. Starting with Vice President JD Vance’s rough first engagement in Munich and Trump and Vance’s eruption at the president of Ukraine, Volodymyr Zelenskyy, NATO allies have been taking Trump’s suggestions, but with possible unintended consequences.
“They’re looking to spend in-house versus buying from overseas,” Caspi said. European defense officials that NOTUS spoke to agreed, saying that even in the short term there has been an active shift away from U.S. defense firms.
“So a lot of this increase in spending will go towards EU defense companies like Rheinmetall, like BAE Systems,” Caspi told NOTUS.
There are some signs that Trump’s threats against countries to increase their defense spending is less about actual spending percentages or figures and more about relationships and access. Italian Prime Minister Giorgia Meloni’s bilateral meeting with Trump on Thursday saw the outlines of that dynamic at work. In spite of Italy still being below the 2% threshold for defense spending, Trump said Italy was “certainly one of our great allies, not just in Europe but anywhere.” He stressed that his relationship with Meloni was the reason for that.
“Only if the prime minister can stay the prime minister can it be one of our best,” Trump said.
Meloni said that the two leaders had discussed Italy’s path to a 2% GDP spend, but that they hadn’t talked about the specifics of that plan. NATO Secretary General Mark Rutte and Trump haven’t publicly settled on a new number for NATO spending, but Rutte has suggested 3.7% versus Trump’s 5% goal.
As Meloni acts as “a key force in Europe, and a voice that largely is eye-to-eye with the president,” one senior Trump administration official said, Italy will see more pressure to spend, and not just from Trump.
“To be honest, 2% is not nearly enough,” Rutte said in January in an address at NATO. “To stay safe in the years to come, allies will need to spend considerably more,” he said. The war in Ukraine, according to Rutte, provides huge pressure to increase that spending. “If you don’t do it, get your Russian-language courses or go to New Zealand, or decide now to spend more,” Rutte told the European Parliament’s Committee on Foreign Affairs.
While Rutte’s comments have fallen somewhat in line with Trump’s goals, he’s also supported a growing European defense industry with those increases.
The Trump administration’s slow-walk away from partners has added fuel to this shift. Moves by countries to purchase German Leopard tanks and shift toward the Gripen fighter airframe from Sweden mean fewer dollars going to the U.S. defense industry.
Unlike in the U.S., the defense spending increase on Leopards and the like won’t flow through the German government the same way. “Germany does not offer a Foreign Military Sales program like the U.S.,” a spokesperson for Germany’s Federal Ministry of Defence told NOTUS. Instead, the production companies themselves manage the contracts and close neighbors are ready to buy.
“It’s kind of an effort, A, to just support these companies by buying from them versus buying from the U.S.,” Caspi said. “But also to be investing in them so that in five, 10 years they can be on the same level as a lot of these U.S. powerhouses.”
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John T. Seward is a NOTUS reporter and an Allbritton Journalism Institute fellow.
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