Prospective sales of U.S. military equipment to foreign governments, which have surged nearly 50 percent this year, may dwindle amid retaliation for President Trump’s tariffs on some of America’s closest allies.
Duties of 25 percent on steel imports and 10 percent on aluminum from Canada, Mexico, and Europe may force those countries “to spurn U.S. defense manufacturers for hardware,” said Roman Schweizer, an analyst with Cowen Washington Research Group. While no specific defense penalties have been imposed so far, he said, “we find it difficult to imagine that it would not have an impact with major allies.”
Such risk heightens Corporate America’s worries about Trump’s protectionist trade policies, which the president says are designed to protect U.S. industry but have spurred harsh criticism from trading partners, economists, and even lawmakers from his own party.
“We have concerns about tariffs for a number of reasons: the impact on the global supply chain; what that could mean to our companies; certainly, what escalation might mean in terms of retaliation,” said Eric Fanning, head of the Aerospace Industries Association.
[Related: Bob Corker: Trump tariffs ‘an abuse of authority’]
Since the federal budget year began in October, the Defense Security Cooperation Agency – which oversees sales of Defense Department equipment as well as products from major contractors to U.S. partners – has notified Congress of $59 billion in possible sales to countries from Bahrain to Germany and Canada.
That’s up from $40 billion in the 12 months through September 2017, though not all potential deals are necessarily completed, Schweizer noted.
Among the types of sales that might be affected are the potential German purchase of six military transport and refueling tankers from Lockheed Martin for $1.4 billion, disclosed in May, he said. The German Air Force planned to use the planes to support a German-French allied squadron based in Evreux, France, according to the military.
The two countries have relied on Lockheed’s C-130 transport as a stopgap amid delays in European aircraft-maker Airbus’s A-400M, Schweizer noted, and Germany is considering a number of other U.S. weapons purchases.
While comparable European substitutes may not exist for all of them, Germany might now decide to work with other countries to develop them, creating competitors for U.S. companies in sectors where they haven’t existed previously, Schweizer said.
Closer to home, Canada – which is considering $15 billion in fighter jets to replace its aging F/A-18s developed by McDonnell-Douglas – might opt to buy them from Europe rather than Boeing, he noted.
“Picking a European fighter would be a huge shift for Canada and could be a lasting one that would have multi-decade implications,” Schweizer said.
While the country hasn’t announced a decision on the matter, Prime Minister Justin Trudeau, who plans to impose retaliatory dollar-for-dollar tariffs on $16.6 billion of steel and aluminum imports, dwelt heavily on the country’s history of military cooperation with the U.S. when announcing the measures.
[Canada hits back at U.S. with threat of $12.8 billion in tariffs]
The U.S. levies “are an affront to the long-standing security partnership between Canada and the United States, and in particular, to the thousands of Canadians who have fought and died alongside American comrades-in-arms,” Trudeau said.
Lockheed Martin’s F-35 fighter jet, the most expensive weapons program in U.S. history with a price tag of $406 billion, may face unique risks if “allies choose to use their defense dollars as leverage,” said Robert Spingarn, an analyst with Credit Suisse.
The fighter depends on international partners as sources of funding and demand, he noted, and European Union members account for about 292 orders, while Canada has booked another 65. Together, those account for about 62 percent of international sales.
Jobs at U.S. companies represented by the aerospace association, which employ 2.4 million people earning almost double the national average, might ultimately be imperiled, Fanning said, since the firms rely heavily on exports.
“We have communicated those concerns to the White House,” Fanning said. “I think we can find ways to focus on fair trade and free trade – I don’t think it has to be an either/or.”
Lockheed Martin, based in Bethesda, Md., has fallen 0.9 percent to $318.11 in New York trading since Trump’s action against Canada, Mexico and the European Union, while contractors Boeing, Northrop Grumman and Raytheon have each gained less than 1 percent.
