Ongoing tariff wars and a dependence on China are two of the top emerging risks for the global defence sector, according to a report released this week by the UK-based consultancy WTW (Willis Towers Watson).
The defence sector is facing several new challenges in an increasingly volatile geopolitical environment, framed by the industry’s dependence on China’s materials and ongoing uncertainty amid a tariff dispute between Beijing and Washington.
“The defence sector’s reliance on Chinese materials and components, particularly rare earths and electronics, is presenting significant supply chain vulnerability amid geopolitical risks,” the consultancy said.
The report, which was based on interviews with an international panel of five industry executives from Australia, Europe and North America, found the tariff war between China and the United States is disrupting supply chains and raising costs, making it a key concern for the defence industry going forward.
“Managing the new economic risks in the defence sector” was released on Wednesday by Oxford Analytica and Willis, an arm of WTW. The names of the panellists were not featured in it, but their interviews serve as a base for the identified risks.
The findings raised concerns that China could feel targeted by geopolitical lockdown measures in other tariff deals, such as export control alignment and transshipment restrictions. And that they have the option of retaliating by withholding critical minerals and other key supplies, which would have huge implications for the defence industry.
“Defence manufacturing depends on specialised inputs like rare earths, chips, electronic components,” a European defence executive on the panel said.
“The combination of higher costs and tighter restrictions on access, especially because of US-China competition, creates a lot of uncertainty for the defence sector.”
The tariff tit-for-tat between the US, Europe and China “puts pressure on our cost base and will squeeze our economics in what is already a highly competitive market”, a UK member of the panel said.
Acknowledging that most defence equipment is exempt from the tariffs themselves, a European defence manufacturer executive argued they could cause problems by dramatically pushing up the cost of systems.
“This trade war could slow growth, which would reduce governments’ fiscal capacity,” another panellist said.
The Ukraine war has led to a major surge in defence procurement in recent years. In 2024, Ukraine’s own US$40 billion defence budget included a massive US$6 billion for arms procurement.
The war has highlighted a heavy reliance on both China and Russia for raw materials such as titanium and rare earths. Of these materials, a UK panellist said, “we were heavily dependent on both countries, and that’s now becoming a significant problem”.
Citing the drone industry as an example, a European panellist touted significant dependence on Chinese components, including electric motors, windings and control boards.
“Even now, in Ukraine, we’re seeing that most fibre-optic cable (used to control jamming-resistant Ukrainian drones) still comes from China,” the European panellist said, adding that if relations deteriorate or in the event of conflict in the Asia region, then that reliance becomes real vulnerability.
An Australian panel member added that, “if China becomes more assertive in the South China Sea, that could disrupt trade routes”.
“I find it hard to single out any (global) region as having greater economic risk.”
The most mentioned risk by experts was a scale-sovereignty trade-off, where nations are weighing up between “pooling defence resources for efficiency and preserving national control”.
Phantom spending was another key risk; this refers to the gap between defence budgets to increase spending and actual investment.
The other identified risk was failure to reindustrialise, which is about how Western nations need industrial capacity but are facing hurdles in rebuilding it. -- SOUTH CHINA MORNING POST
