After a boom in defense sales in 2024, the United States and countries around the world face a new and changing environment with a renewed debate over defense budgets in the United States, Europe debating the future of its own defense, ongoing defense spending and innovation in the Middle East, and countries in the Indo-Pacific continuing to respond to the China threat, with some growing their own defense industrial base.
For the past three years, countries around the world have increased their defense budgets, as well as their purchases of weapons. The war in Ukraine, the conflicts and instability in the Middle East, as well as the China threat have driven a demand for weapons unseen in generations. As countries look to replenish depleted stocks, deter future wars and protect against looming threats, many will continue to increase demand for defense articles.
The debate about defense spending and weapons purchases is ongoing and we expect the situation to remain fluid both in the United States and abroad.
United States
Defense Spending
The United States is in the midst of a debate about changes to defense spending. In Congress, members are reviewing a “reconciliation” bill that could provide significant additional defense spending, possibly as high as an additional $150 billion, as well as still working on fiscal year 2025 appropriations with the House supporting $833 billion for the Department of Defense (DOD) and the Senate supporting $851.7 billion. However, in the executive branch, the Department of Government Efficiency (DOGE) is working to reduce government spending and is expected to begin its review of the DOD. Secretary of Defense Pete Hegseth also just directed DOD agencies and the military to reprogram their budgets by 8% and address Trump administration priorities. Meanwhile, President Trump is in the process of developing the annual presidential budget request for DOD for fiscal year 2026, which could include additional changes both in the topline defense request, as well as specific programs.
Arms Sales
U.S. arms sales hit a new high in 2024, with foreign military sales growing by 46% year to year to $117.9 billion, according to the State Department, the “highest ever annual total.” These government-to-government sales went to partners and allies around the world including F-16s to Turkey ($23 billion), F-15s to Israel ($18.8 billion), F-35s to Romania ($7.2 billion), KC-46A Aerial Refueling Aircraft to Japan ($4 billion), Apache Helicopters to South Korea ($3.5 billion), and Abrams Main Battle Tanks to Bahrain ($2.2 billion). U.S. commercial sales also increased by 27.5% for a total of $200.8 billion in direct commercial sales.
Europe
Defense Spending
Europe increased its defense spending over the last three years, after the start of the Ukraine war, with countries providing weapons and security assistance to Ukraine and bolstering their own defense capabilities. However, Europe’s current decision-making on defense spending is also shaped by President Trump’s pressure for NATO countries to increase the amount they are spending on defense, the outcome of negotiations on ending the war in Ukraine, U.S. tariffs, as well as Europe’s own push to become more self-sufficient on defense. European countries recently held an emergency meeting to discuss an increase in defense spending, their own defense and Ukraine.
On the Eastern Flank, countries like Poland and Lithuania, have supported increased funding for defense. Lithuania pledged it would raise its defense spending to 5%–6% of its GDP to finance a new army division. Poland has consistently been a leader in European defense spending, with 4.7% of its GDP allocated to defense this year. Romania will also raise its spending to 2.24% of its GDP this year.
Belgium, which has been near the bottom of the list for NATO defense spending with 1.3% of GDP last year, now plans to increase its defense spending to meet NATO targets by 2029. It also pledged to invest more in air defense systems, particularly F-35s and a third frigate. Belgian Minister of Defense Theo Francken said the country’s new focus on defense will be the end of “a period of national disgrace” and provide an opportunity to address its vulnerability to threats from the air and sea.
Greek Prime Minister Kyriakos Mitsotakis called for roughly $102 billion in common EU spending for its defense industry to create a “unified and credible deterrence capability” against Russia. His support for this funding fits into his advocacy for a common European defense strategy to upgrade European defense. He has also joined with Poland’s President Tusk to call for a European defense shield. Lithuania, Estonia, Latvia and Poland are also interested in using these funds to increase production of defense articles.
Defense Sales
European defense companies are also seeing a rise in defense sales. Sweden’s Saab, Finland’s Patria and Norway’s Kongsberg posted another year of record sales and orders in 2024. Saab reported an increase of 24% in orders for Gripen fighter jets, radar systems, air defense, GlobalEye surveillance planes and the Carl-Gustaf recoilless rifle. It reported a total of $8.9 billion in earnings as a result of the increase. Kongsberg saw an increase of 44% (roughly $4.85 billion) in 2024 due to orders of air defense systems, missiles and air defense batteries. Patria reported an increase of 33% due to demand for its 6-wheeled armored vehicles.
Turkey defense exports hit record levels in 2024, with a high of $7.1 billion. The Turkish defense industry saw a rise in interest in drones, warships and electronic warfare systems. Turkish companies Baykar, TUSAŞ Aviation, ASFAT, MKE and others saw large profits from foreign sales to the United States, Czechia, Romania, Poland, Slovakia and Bulgaria.
Middle East
The Middle East’s rise in defense production and spending is largely influenced by the conflict between Israel and Hamas, as well as to deter Iranian aggression.
Israel
Israeli defense companies, Israel Aerospace Industries (IAI), Elbit Systems and Rafael Advanced Defense Systems revenues increased following the Oct. 7 attack. Between 2022 and 2023, IAI’s revenues increased by 15.4%, and IAI is working with Greece and Germany to export Arrow 3 air defenses and build multilayered air defense systems to counter jets and low-level drones. IAI is also collaborating with India on the development of emerging technology.
Elbit Systems increased arms sales by 14.2% between 2022 and 2023. Germany recently approved the purchase of Elbit Systems’ PULS rocket launchers, and the Israeli government holds a contract with Elbit to boost Israel’s self-sufficiency in defense production.
Rafael Advance Defense Systems increased its arms sales by 16.2% between 2022 and 2023. Rafael manufactures the Iron Dome system, which has attracted significant international interest.
Saudi Arabia
Saudi Arabia has increased defense spending over the last few years. The Kingdom of Saudi Arabia recently announced its plans to increase its defense spending to $78 billion in 2025, which would be 21% of total government spending and 7.1% of its GDP. Since 1960, Saudi Arabia investments in defense grew by 4.5% annually, and it is the fifth-largest defense spender worldwide. Saudi Arabia’s defense industry primarily imports its defense articles to meet its Vision 2030 goals.
Indo-Pacific
The defense industry in the Indo-Pacific is primarily focused on responding to Chinese aggression, supporting deterrence and providing defense articles to Taiwan.
Taiwan
Taiwanese officials said that the island has boosted defense spending by 80% in the past eight years, hitting a record $19 billion in 2024. Taiwan is one of the largest purchasers of U.S.-made defense equipment through the foreign military sales (FMS) process. The Taiwan Enhanced Resilience Act, which was included in the Fiscal Year 2023 National Defense Authorization Act, was the first authorized provision for Foreign Military Financing (FMF) for Taiwan. The Further Consolidated Appropriations Act, 2024 made not less than $300 million of FMF for Taiwan available, and emergency supplemental appropriations allocated $2 billion in FMF for the Indo-Pacific, which is also available for Taiwan. Taiwan’s increased defense spending has recently focused on increasing its production of drones, with hopes to be a drone hub for the international community.
South Korea
South Korea’s leading defense companies, Hanwha Aerospace, Korea Aerospace Industries, Hyundai Rotem and LIG Nex1, recorded peak gains in 2024 with estimates that arms exports exceeded $20 billion in 2024. Countries importing South Korean defense articles also continues to increase, with numbers jumping from four to 12 between 2022 and 2023 partially driven by South Korea’s reputation that their defense articles are cheaper, better and produced quickly. According to SIPRI, Hanwha Group saw a 52.7% increase in change in arms revenues between 2022 and 2023, Korea Aerospace Industries saw a 44.9% increase, Hyundai Rotem saw a 44% increase and LIG Nex1 saw a 0.6% increase. South Korea was one of the top 10 main exporters and importers of major arms between 2019 and 2023. Poland, in particular, is a large importer of South Korean defense products, placing orders for tanks and fighter aircraft, among other defense articles.
Japan
Japan recently passed a record defense budget for the 13th year in a row, which comes as Japan’s annual defense white paper notes that Japan is facing its most severe and complex security environment since the end of World War II with threats from China, Russia and North Korea. The upcoming defense budget is a record of 8.7 trillion yen, which is the equivalent of $55.1 billion. The funding will prioritize stand-off weapons, with 939 billion yen allocated for ground- and sea-launched Type 12 anti-ship missiles, hyper-velocity gliding projectiles for island defense, and development of submarine-launched missiles. Japan is also planning to import Kongsberg’s Joint Strike Missile for Japan’s F-35A fighters, Tomahawk cruise missiles, and extended-range Joint Air-to-Surface Stand-off Missiles (JASSM-ER) for F-15 fighters.
India
India has increased its defense budget by nearly 10% to improve its ability to respond to security challenges from Pakistan and China. India will allocate 26.4% of the increase to new acquisitions, 45.8% to its armed forces and 4.2% to its defense organizations. India is also very focused on modernizing its defense industry and acquiring drones, additional fighter aircraft and next-generation submarines and warships. India is also pushing to increase its self-reliance in defense production.
AUKUS
AUKUS, the tripartite agreement between the United States, Australia and the United Kingdom is designed to increase defense cooperation between the three countries and includes Pillar 1—the commitment to provide Australia with nuclear-powered submarines and Pillar 2—which was designed to create a defense trade ecosystem between and among the three countries to work on the weapons of the future including cyber, artificial intelligence and hypersonics. We expect support for AUKUS to continue since multiple Trump administration members expressed early support in calls and meetings with senior foreign officials. Secretary Rubio, during his Senate confirmation hearing, said that the second Trump administration would see “strong support” for AUKUS and expressed support for AUKUS during his call with UK Foreign Secretary Lammy. Secretary Rubio also met with Australian Minister for Foreign Affairs Penny Wong and discussed efforts to continue security cooperation through AUKUS and bilateral defense initiatives. Secretary of Defense Hegseth spoke to Australian Deputy Prime Minister of Defence to discuss AUKUS, as well as the U.S.-Australia Alliance.
Next Steps
As discussed above, the United States and other countries are in the midst of a debate about how much to increase spending, as well as weapons purchases. Over the next few months, Trump administration priorities, U.S. congressional funding debates, the ongoing debate about the future of European defense, NATO and Ukraine, as well as threats from China in the Indo-Pacific will shape the future of defense spending and procurement.
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