U.S. Defense Industry Gains Strength for Potential Major War

The United States' defense industrial base is showing signs of resilience and preparedness to support a large-scale conflict, according to a new study released by the Center for Strategic and International Studies (CSIS). The report highlights improvements in manufacturing capabilities and supply chain security since November 2025 when Secretary of Defense Pete Hegseth vowed to transform the acquisition system into one that operates on a wartime footing. Despite these advancements, significant challenges remain, particularly concerning rapid production scaling and supply chain vulnerabilities.

Jerry McGinn, co-author of the CSIS study, noted that while trends are moving in the right direction, there is still much work to be done. One key area of improvement has been the influx of new companies entering the defense market, with approximately 10,000 firms joining over the past two years and nontraditional companies receiving over $120 billion in contract obligations during fiscal year (FY) 2025. This surge in competition and innovation is bolstering the sector's ability to meet growing demand for munitions.

The Pentagon has responded to depleted stockpiles of guided weapons by allocating a larger portion of its budget towards low-cost munitions. In the upcoming FY 2027, 49% of the budget request for munitions will be directed toward these less expensive options, rising to 70% by 2031. This shift aims to address the rapid consumption of weapons in ongoing conflicts such as those involving Iran and Ukraine.

Moreover, the U.S. government is taking steps to strengthen its defense supply chain through various initiatives, including multiyear procurement agreements and direct investments in key companies like L3Harris Missile Solutions. These measures are designed to enhance production capacity and ensure a steady flow of critical materials during wartime conditions. However, these efforts also pose challenges for competitive dynamics within the industry as both new entrants and established suppliers vie for contracts.

Federal investment in rare earth elements (REEs) has seen significant growth, with production increasing from 95 tons in 2022 to 8,900 tons by 2025. Despite this progress, it is acknowledged that rebuilding domestic REE manufacturing capacity will take years of sustained effort due to the long-term erosion caused by Chinese dominance in the market.

The expansion of U.S. arms exports and cooperative multinational projects also plays a crucial role in bolstering the defense industry's resilience. Foreign Military Sales have more than tripled from less than $20 billion in 2015 to over $80 billion in 2025, indicating a growing reliance on international partnerships for economic support and production capacity expansion.

The Trump administration’s “America First Arms Transfer Strategy,” launched earlier this year, aims to leverage foreign purchases and capital to foster domestic reindustrialization and improve the defense industrial base's resilience. This strategy underscores the government's role in shaping market dynamics through procurement policies and financial incentives.

Ultimately, the federal government wields considerable influence over the defense industry through its purchasing power and regulatory authority. As McGinn emphasized, "Government sets the market," highlighting the pivotal role of governmental decisions in driving industry outcomes.