Looking beyond Europe: Nato defence spending hike could impact exporters

Last week, the member countries of the military alliance North Atlantic Treaty Organisation (Nato) decided to hike their defence related spending gradually to 5 per cent of their gross domestic product (GDP) in the next few years. It has implications for global trade and for India.

 

The Nato decision is a response to fears of security threats from Russia, which is enhancing its war capabilities and apprehensions that the US cannot be relied upon to defend Europe. Russia has said that it is not against Nato  but only against its expansion to its neighbouring countries. China has always held that rearming Europe would have a destabilising influence. The US has said that it will honour its commitment to defend Europe. 

Questions like how many of the Nato member countries will actually raise their defence spending and if at all in what time frame, how they will raise their resources, how the money will be spent and how they will coordinate their procurements are all in the realm of speculation.   

The Baltic States and Poland that border Russia are closer to achieving the 5 per cent target whereas Spain and Portugal that are far away from Russia appear reluctant to get there. Germany, with a debt of only 60 per cent of its GDP looks ready to borrow more and raise its military capabilities. Others may be able to borrow less and so, might raise their taxes or cut their allocations for welfare schemes. That will not be easy in a socialist Europe, as the government in the UK found out last week.

 

The Russia-Ukraine war has shown that conventional military capabilities have limited utility in an era where technology plays a bigger role. So, Europe may strive to build a military-tech-industrial complex that will not only meet its own security needs but also access the market for defence equipment around the world. That may mean more global trade in hi-tech military hardware and technology transfer and consequently, less trade in other items. 

Whether the increased defence spending will act as an economic stimulus in an ageing and sluggish Europe is an open question but opportunities can open up for other countries, as Europe may reduce its reliance for military hardware on the US and diversify its sources by collaborating with more tech-savvy countries in Asia and Latin America, besides incentivising its own industries to meet its security needs.   

India has ramped up its defence production capabilities in the last decade. The possibility of a two-front war with China and Pakistan has increased the threat perceptions. India has the technological capabilities to collaborate with Europe. 

Last week, the Bengaluru-based Axiscades, a leading end-to-end engineering and technology solutions provider, catering to sectors like aerospace, defence, heavy engineering, automotive and energy, among others announced that it has signed an agreement with European missile systems major MBDA to set up a defence production facility in Karnataka. 

Diversion of nearly 800 billion Euros every year for its security needs may lead to fall in consumption levels in Europe and consequent demand for imported items. Europe’s rearmament can trigger an arms race leaving less money for other purposes. Any fall in global demand can hurt India, despite trade deals. About 17 per cent of India’s exports go to Europe. So, the exporters should try to exploit other markets, especially in Africa, where the population is growing.

 

tncrajagopalan@gmail.com