Navigating Geopolitical Crosscurrents: Defense Contractors and Tariff Risks in 2025

The U.S.-Ukraine military aid saga and escalating global trade tariffs have created a high-stakes environment for investors in defense and materials sectors. As geopolitical tensions fuel demand for advanced weaponry, companies like Lockheed Martin (LMT) and Raytheon Technologies (RTX) stand to benefit—but not without navigating a labyrinth of production bottlenecks, trade barriers, and shifting alliances. Meanwhile, tariffs on critical minerals and steel threaten supply chains, creating both risks and opportunities for investors.

The Patriot Missile Deal: A Geopolitical Tightrope

The U.S. decision to resume Patriot missile transfers to Ukraine, despite critically low stockpiles, underscores the strategic imperative to counter Russian aggression. Yet the Pentagon's stockpile of Patriot interceptors has dwindled to 25% of required levels due to deployments in the Middle East and prior aid to Kyiv. This has forced defense contractors like Lockheed Martin—the sole producer of the advanced PAC-3 MSE missile—to ramp up production.

Lockheed's Camden, Arkansas facility, which produces 600 PAC-3 MSE interceptors annually, aims to boost output to 650/year by 2027. Investors should monitor its progress, as delays could strain NATO's ability to replenish stocks. The company's recent $1 billion contract modification for the Conventional Prompt Strike (CPS) hypersonic program further highlights its dominance in next-gen defense tech.

Global Tariffs: A Double-Edged Sword for Defense Materials

While the U.S. has imposed 25–50% tariffs on steel and aluminum imports from most countries (excluding the UK's aerospace exception), these measures threaten to disrupt defense supply chains. For instance:
- Critical minerals: Investigations into tariffs on processed rare earth elements (e.g., neodymium for magnets in missiles) could raise costs for companies reliant on foreign suppliers.
- Semiconductors: Proposed 25%+ tariffs on imports threaten electronics-heavy defense systems.

However, NATO allies like Germany and the UK are leveraging exemptions. The UK's WTO Agreement on Trade in Civil Aircraft shields its aerospace exports, enabling firms like BAE Systems to avoid tariffs on defense-related components. Investors should prioritize companies with geographically diversified supply chains or exemptions, such as Raytheon, which partners with European firms to produce PAC-2 GEM-T missiles under a “Buy European” framework.

Winners and Losers in the Defense Supply Chain

The clearest beneficiaries are PAC-3 MSE monopolist Lockheed Martin and Raytheon, which capitalizes on European partnerships. Smaller players, like Allegheny Technologies (ATI) (a titanium producer for aerospace), also gain if tariffs shield U.S. metalmakers from cheaper imports.

Conversely, firms exposed to tariff-sensitive materials face headwinds. Nucor (NUE), a U.S. steelmaker, may see demand rise as tariffs limit imports—but only if production can meet both defense and civilian needs. Meanwhile, Chinese firms like Wuhan Iron & Steel face steep barriers to exporting to NATO allies.

Investment Implications: Position for Defense and Exemptions

Investors should:
1. Buy Lockheed Martin (LMT): Its PAC-3 MSE monopoly and hypersonic contracts (e.g., CPS program) make it a “must-own” in this sector.
2. Diversify into tariff-exempt allies: BAE Systems (BAESY) and Safran (SAFR.PA) benefit from EU-U.S. exemptions and NATO modernization.
3. Avoid overexposure to tariff-sensitive metals: Investors in steel (e.g., AK Steel (AKS)) should hedge against fluctuating trade policies.
4. Monitor geopolitical triggers: A Russian escalation or NATO's 5% defense spending targets could accelerate demand for arms.

Conclusion: The Geopolitical Premium

In this era of U.S.-Ukraine military aid and tariff wars, the defense sector offers asymmetric returns for investors willing to parse geopolitical risks. Companies with monopoly positions (e.g., PAC-3 MSE), exempt supply chains, or strategic NATO partnerships will thrive. The path forward is clear: prioritize contractors insulated from tariffs and positioned to meet the rising demand for air defense, hypersonic tech, and resilient supply chains.

Stay vigilant—the next move in this high-stakes game will be shaped by Moscow, Washington, and Brussels.