In line with the increasing global tensions, defense budgets have risen as well. In this edition of the Horizons, we take a closer look at the indirect effects of the rise of defense budgets, and what role strategic assets might play in the future.
In reaction to rising tensions globally, many countries are increasing their defense budgets. China recently announced an increase of 7.2% this year to reach a funding total of $225bn. Japan, Germany, France, Poland, and the UK have all ramped up their military budgets. The U.S. surpassed them all with a budget of $842bn for 2024, roughly as much as the next 10 countries combined. Still most NATO members fall short of the common goal of spending 2% of economic output on defense and will likely face more difficulty on reaching that goal. With government debts already at a historic high following the pandemic, the growing defense budgets in combination with rising interest rates will push debt to an even higher level threatening both economic growth and credit worthiness. In such an environment, it will become more difficult to defend larger budgets, especially if this comes at a cost for other needs, such as healthcare or education. As discussions in the US and Germany show, governments can expect more push-back on their defensive plans.
The semiconductor industry is essential in powering both the American economy and military, and it lies at the very heart of U.S.-China competition over technological supremacy. For these reasons, semis have been categorized as “strategic assets” to limit the access to this technology. Amidst rising geopolitical tension, governments are likely to classify more assets as strategic to protect their economy, national security or competitive position. In the case of semiconductors, companies have been confronted with export restrictions and higher costs for local production displaying the potential disrupting effect on the global economy. Determining what assets are strategic is difficult and up to debate, but common denominators include sectors with high entry barriers, positive spillovers to other sectors, and/or concentration power. It shows that governments have a lot of room in determining their strategic assets. A broad spectrum of companies, sectors and technologies can potentially be affected, ranging from technology for producing sustainable energy, artificial intelligence, foodstuffs, critical materials (e.g. lithium or oil), to nanotechnology, biotech or machine tools.
