It is every president’s nightmare. The Chinese military is massing troops in Fujian Province and an armada offshore, just across the strait from Taiwan. According to U.S. intelligence, this buildup is no mere feint—Beijing is really preparing for war. Global stock markets are crashing, as the world faces what economists estimate could be a $10 trillion shock. The White House must suddenly answer a question it has long put off: Will it use military force to defend Taiwan?
This is not an outlandish hypothetical. Chinese President Xi Jinping has made clear that retaking Taiwan is essential to what his government calls “the great rejuvenation of the Chinese nation,” and Beijing is rapidly expanding its military. It is also just one of many scenarios that would result in a war involving Washington. China is threatening the United States’ treaty allies. Russia is menacing eastern Europe’s NATO members. Iran has accelerated its nuclear program. The odds that the United States might have to fight in a great-power war are higher today than at any point this century.
The U.S. military is arguably the most powerful in the world. But it is not ready for such a conflict. Its weapons are sophisticated. Its soldiers are second to none. Yet the United States has low stockpiles of munitions, its ships and planes are older than China’s, and its industrial base lacks the capacity to regenerate these assets. The U.S. supply of precision-strike missiles, for example, would last no more than a few weeks in a high-intensity conflict and would take years to replace. In war games that simulate a conflict in the Taiwan Strait, Washington runs out of key munitions within weeks.
American officials are aware of the shortages. In response, Congress and the Department of Defense have contracted to expand existing defense production lines and, in some cases, to restart old ones. Yet these recent efforts are insufficient to compensate for more than three decades of complacency and atrophy. Washington has hiked defense spending to $825 billion—a record nominal level. But this represents under three percent of U.S. GDP, the lowest level this century and among the lowest since World War II. Of that $825 billion, just 21 percent is dedicated to procuring new munitions and equipment.
To address this failure, Washington must act now. The Trump administration, in partnership with Congress, must undertake six urgent initiatives: modernizing existing assets, broadening defense capabilities, expanding stockpiles and manufacturing capacity for munitions, increasing competition and reducing supplier vulnerabilities, changing how the Pentagon does business, and increasing funding levels and continuity of funding. To be effective, these initiatives must be implemented together. A piecemeal approach will be insufficient. Increasing the American defense budget, for instance, is essential, but it will not be enough to meet U.S. needs unless Washington increases the number of companies in the defense industrial base and adds newer capabilities such as uncrewed systems, better space-based sensors, and software that can be continuously updated. Even then, American officials might struggle to get what they need unless the armed forces can more easily buy equipment and supplies from U.S. allies. Finally, the Pentagon needs to dramatically reform its management practices and procurement processes to focus on speed and efficacy.
Increasing defense spending may be a tough sell in Washington, given that both the Trump administration and progressives in Congress want to reduce the military’s footprint. But policymakers should remember that preventing a war is much cheaper than fighting one. With increased military spending on quantity and quality, Washington can make a potential Chinese invasion more costly and risky, creating doubt in Xi’s mind about his odds of succeeding. And if a U.S. military buildup does not stop a Chinese assault on Taiwan, Washington will be even happier that it expanded its arsenal. The United States, after all, will not have the time required to ramp up production once a conflict begins.
THE QUALITY OF QUANTITY
From 1989 to 1999, the United States cut its defense budget by nearly a third. The Cold War was over, so U.S. officials no longer saw the need for an enormous military. Congress continued to spend on major defense platforms, such as the F-22 aircraft and Nimitz-class aircraft carriers. But it drastically reduced the budget for munitions and smaller weapons. The defense industrial base consolidated, and its investment in capacity and workforce declined. Suppliers focused on minimum rates of production, just-in-time inventory management, and cost reductions.
None of this worried most U.S. strategists. After the first Gulf war, in which the United States defeated the sixth-largest army in six days with very few casualties, analysts assumed that future wars would likely be short and would not require massive stockpiles of basic munitions and materiel. Military planners assumed there would be future quick victories secured by technological superiority.
For three decades, this reasoning largely held. From 2001 to 2002, the United States drove the Taliban into exile, and it rapidly defeated the Iraqi military in the second Gulf war that began in 2003. But the resulting, lengthy insurgencies in Afghanistan and Iraq proved that this vision of quick victories was a fallacy. Instead, asymmetric capabilities and sustained political will helped the insurgents outlast the U.S. military. Russia’s 2022 invasion of Ukraine was further proof that the equation had changed. Defying the predictions of defense analysts, the Ukrainians successfully ground the wealthier, better-equipped Russian military to a halt, locking the two sides in a war of attrition that has cost thousands of lives and millions of munitions. Now, militaries are relearning the lessons of both world wars: major conflicts can still turn into slugfests, and industrial capacity is decisive.
China’s annual shipbuilding capacity is 370 times the United States’.
The war in Ukraine also exposed just how bare Washington’s military cupboard is. U.S. officials have struggled to supply Kyiv with enough of the weapons it needs, and they have understandably fretted about their own defensive stocks. Although the exact number of missiles the United States has is classified, it is likely a few tens of thousands. Russia has fired almost 12,000 missiles in the last two years.
The American military suffers from munitions shortages across almost every weapons category. It lacks short- and medium-range missiles. Most important for a conflict in the Pacific, it has insufficient long-range precision missiles—such as the navy’s long-range antiship missiles, joint air-to-surface standoff missiles, and the army’s precision-strike missiles. According to war games conducted by the Center for Strategic and International Studies, the United States might use 5,000 long-range precision missiles per week and run out after three to four weeks. The United States would also not be able to replace these missiles fast enough. According to a 2021 CSIS study on mobilization, it would take two years to begin replenishing long-range antiship missiles. Such are the consequences of letting the stocks dwindle and the industrial base shrivel: American defense manufacturers lack the parts, expertise, and factory space required to churn out new munitions stocks, as well as the cash flow from new Pentagon orders to ramp up production or invest in capacity.
To understand why, consider the Stinger: a surface-to-air missile with infrared capabilities to home in on targets but that is lightweight and shoulder fired. Stingers are portable and highly effective against enemy aircraft and drones and have therefore been essential in Ukraine. As a result, the United States has sent well over 1,000 of them to Kyiv. Washington is trying to replace these weapons, but the Stinger was originally designed in the 1970s, and the military last ordered them 20 years ago. Raytheon, the defense contractor, has had to hire retired engineers to make new ones. It has had to re-create obsolete components. The resulting bottlenecks meant that Raytheon was able to make just 60 Stingers per month over the course of 2024.
Washington is also in need of new ships and planes—the average navy vessel is 19 years old, and the average air force plane is 32 years old. Some ships and planes are 50 years old. On average, major defense systems such as these take more than eight years to make. Meanwhile, 70 percent of the ships in China’s navy have been launched since 2010. China’s annual shipbuilding capacity is also 26 million tons, or a staggering 370 times the United States’ shipbuilding capacity of 70,000 tons. The United States does not even have enough industrywide capacity to make a single Ford-class aircraft carrier per year. (These carriers weigh 100,000 tons.)
Washington’s needs are particularly acute when it comes to the chemicals used in propellants and explosives, known as “energetics.” Investments in these substances and the productive capacity to make them have been especially low; the two energetics most widely used by the United States are chemical compounds from World War II, typically made in government factories from that era. Meanwhile, China and Russia have been aggressively funding more sophisticated energetics programs, leveraging U.S. research. Alarmingly, the United States relies on foreign countries, including China, for about one-third of the raw materials it uses in energetics production.
Washington lags not just when it comes to traditional military wares such as missiles, ships, and energetics. It is also behind on newer innovations, including affordable drones. These systems are absolutely integral to the future of war. Ukraine, for instance, has used swarms of cheap drones to destroy or disable a third of Russia’s Black Sea Fleet. Russia, meanwhile, has used them to knock out chunks of the Ukrainian power grid. And the Israel Defense Forces have used uncrewed systems to defeat Hamas in dense urban and subterranean complexes. But today, there are no U.S. manufacturers of low-cost drones anywhere near the size of DJI, the Chinese company and global leader, which makes a very capable $1,000 drone that has been heavily used in Ukraine. Meanwhile, until late 2024, there was only one U.S. supplier of loitering munitions (suicide drones designed to loiter in an area and locate and strike targets with precision): AeroVironment, which has a contract to make 1,000 of them.
The Defense Department has started to make larger investments in affordable drones. Its Replicator program, established in 2023, was created specifically to buy thousands of them. But since the start of Russia’s full-scale invasion, Ukraine has blown through an average of 10,000 drones a month. The American government has allocated only 0.3 percent of the defense procurement budget to this effort, about the same amount as it dedicates to the close-air-support A-10 Warthog, which the military no longer wants.
CASH FLOW
The simplest way for Washington to stimulate increased defense production is to spend more on it. The $172 billion allocated in 2024 for new equipment is wholly inadequate for modernizing aircraft squadrons, updating ship fleets, producing new munitions, and buying new technology such as uncrewed systems. Washington should appropriate at least twice as much funding. Some of this increase can be covered by cutting spending as the Department of Government Efficiency, led by the presidential adviser Elon Musk, is attempting to do. But whatever is not covered by efficiencies elsewhere should be paid for by tax increases.
Congress should also reform how it funds military purchases. Typically, the Pentagon receives just one year of funding at a time for procurement, which does not provide a signal to suppliers about how much of their products Washington might need in the future. Additionally, the military must contend with “continuing resolutions”—stopgap measures that Congress increasingly relies on to avoid government shutdowns. These both slow down military spending and recklessly speed it up. From the beginning of the government fiscal year until Congress passes a new budget, the Pentagon usually cannot start new programs and must limit spending to the previous year’s budget—or sometimes just a fraction of that budget. When an annual budget does pass, the Pentagon must suddenly rush to spend, as any unspent funds are returned to the U.S. Treasury, resulting in inefficiency and waste.
Instead, Congress should pass multiyear appropriations for military purchases and create a consistently funded defense modernization plan, one that includes a munitions buildup. Doing so would give the Pentagon greater flexibility and leeway to spend as it sees fit. It would also show defense manufacturers that there will be long-term demand, incentivizing them to make bigger investments in production by hiring and training workers, building and expanding factories, and establishing more resilient supply chains. In 2024, Congress took a small step in this direction by approving multiyear purchases for six critical munitions. But to really show suppliers that the military needs increased quantities and the ability to surge production, all military goods should be given multiyear contracts, not just half a dozen missile types.
Multiyear appropriations would reduce Congress’s ability to adjust military spending. Although that might irritate some, it would be good for the military’s readiness and help suppliers better plan production quantities and reduce costs. Under the current system, individual members of Congress can force the Pentagon to buy goods made in their districts irrespective of how useful they are. Last year, for example, Congress required the purchase of multiple items the Pentagon does not need or want, such as C-130J cargo planes, P-8 Poseidon maritime surveillance aircraft, and littoral combat ships.
Until Congress reforms how it appropriates money for defense, attempts to modernize the U.S. military will not match the speed and decisiveness of Xi’s efforts to build up the Chinese military. In fact, the situation is so dire that the White House should invoke the Defense Production Act to develop new and more powerful energetics, expand munitions production, and create strategic reserves of both. Doing so would not be a replacement for setting much higher long-term budget levels or instituting multiyear appropriations. But by placing orders to fill strategic reserves, the White House could at least incentivize the development of advanced energetics, the production of more munitions, and investments in manufacturing capacity.
REVERSING THE LAST SUPPER
Increasing and reforming appropriations will be essential to fixing the defense industry. But such changes are not enough. The government will have to expand the U.S. defense industry itself, which has become so concentrated that firms have become less cost competitive, resulting in higher prices for many weapons systems. More spending, after all, will go only so far when each new F-35 costs $80 million and each new Ford-class aircraft carrier costs $13.3 billion. At the end of the Cold War, there were more than 50 top defense suppliers. Today, a total of five firms hold significant shares in the defense market, each with annual revenue that exceeds $10 billion. Collectively, they receive about 70 percent of defense contracts (measured by contract value), with the largest supplier, Lockheed Martin, receiving 40 percent. Many of the smaller firms that supplied the Defense Department have gone out of business or pivoted away from the Pentagon: in just the last five years, the defense industrial base has lost 17,045 independent companies. The total number of small companies supplying the Defense Department declined by more than 40 percent over the last decade.
Because of this concentration, the Pentagon has woefully few options when it is looking to buy essential weapons and munitions. Before the end of the Cold War, the government could shop for tactical missiles from 13 suppliers. In 2022, it could source from just three. The number of fixed-wing aircraft suppliers declined from eight to three, and the number of satellite suppliers fell from eight to four. The number of surface ship suppliers declined from eight to two. Nearly two-thirds of major defense programs have only a single bidder.
This is a problem of Washington’s own making. At the end of the Cold War, at a meeting now known as the Last Supper, the Defense Department encouraged manufacturers to merge, figuring that the decline in defense spending meant there would no longer be enough purchases to support the industry as it existed. The companies listened, acquired one another, and gobbled up defense businesses embedded in commercial vendors. The toll has been profound. In addition to raising prices, this consolidation has allowed firms to shed manufacturing capacity with little consequence—including by switching to narrow, just-in-time supply chains that are highly vulnerable to disruption. Today, just one company supplies the turbofan engines used in most U.S. cruise missiles. Consolidation and an increasing focus on short-term shareholder value has also led to more financial engineering designed to increase share values, such as repeated rounds of stock buybacks. The result is less investment in the adoption of new technologies, output, or long-term research and development.
The military industrial base has lost thousands of independent companies.
The average R & D of defense primes (the largest defense contractors) today is one to four percent of revenue. Major technology firms, by comparison, spend between ten and 20 percent of revenue on R & D. As a result, consumer products are often more sophisticated than military ones. There is more AI in a Tesla than in any military vehicle, and there is more processing power in a four-year-old iPhone than in an F-35. The United States is the world’s leading software power—the home of Apple, Google, and Microsoft—yet these software powerhouses are not the principal designers of American major weapons platforms, and the software in these platforms is not updated nearly as continuously as it is in consumer devices. The resulting difference in functionality and the lag in updates means U.S. forces are more vulnerable than they need to be.
In theory, Washington could shore up this weakness by hiring commercial firms to make military products or at least supply the software. In some cases, it has. The Pentagon, for example, has started working with SpaceX to take advantage of its reusable rockets and boosters and with Palantir to incorporate AI into systems for better targeting. But for the most part, the U.S. tech sector does not make defense products. In fact, just 30 percent of U.S. defense firm revenue today comes from commercial customers. In China, that figure is 70 percent. The result is that the United States faces long waits for new products and higher costs, since commercial competition stimulates more efficiency and speed. On average, it can take 17 years for the Pentagon to oversee the development, testing, and adoption of a complex new system, such as a submarine. In the private sector, in which open standards, rapid product development, and fierce competition are the norm, many software innovations can be developed within a year and almost instantaneously adopted by consumers. It is unrealistic for defense manufacturers to deliver a new submarine in a year. But in the 1950s, the air force developed, tested, and put new planes into use within five years. The Defense Department and its suppliers have moved much faster in the past and can do so again with different incentives than are in place today.
Another lever for augmenting the defense industrial base is facilitating Defense Department procurement from allies. Right now, U.S. defense firms are largely protected thanks to “Buy American” provisions enacted into law for military purchases. This not only limits competition but also restricts the United States’ ability to increase stockpiles and modernize more quickly since U.S. defense firms face production and supply chain constraints. In reverse, American defense firms are limited in what they can sell to allies due to the State Department’s International Traffic in Arms Regulations process, which controls the manufacturing, sales, and distribution of U.S.-made defense products. Instead, Washington should create a system that differentiates between goods sold to close allies, more distant allies, and other types of countries. The United States could then exempt its closest friends from approvals before buying American defense products, allowing allies to purchase U.S. planes, ships, and other weapons systems much faster than they can today.
By working with its allies, the U.S. military might be able to more quickly diversify its supply chains away from China. Currently, China dominates many manufacturing sectors that are essential to the U.S. military, such as advanced battery supplies. China also makes more large cast and forged products—including landing gear, engine components, brakes, turbine disks, and fan blades—than the next nine countries combined. Furthermore, China exports large amounts of titanium, aluminum, refined rare-earth minerals, high-temperature materials, and chips. Thanks to this dominance, Beijing could deal a significant blow to the United States’ ability to fight by refusing to supply key components for defense production.
The U.S. military is trying to reduce its reliance on Chinese suppliers. From 2022 to 2023, the army and navy cut their dependence on Chinese suppliers in critical technologies by 17 percent and 40 percent, respectively. But both branches still source from more than 140 Chinese firms. Meanwhile, the air force is increasing its dependence on Chinese components such as chips and rare-earth materials. The military’s primary focus on lowering production costs rather than diversifying sources of supply does not help since it means defense suppliers have little incentive to invest in alternative or resilient supply chains. U.S. capital markets, too, have focused on short-term profits at the expense of security and capacity. If Washington values its ability to produce or replenish its stocks during times of war, it must invest in this capability during peacetime.
Spending more and inking multiyear appropriations can help overcome these challenges. The Pentagon can direct new funds to companies that agree to move their supply chains out of China. It can also use money to source technologies such as satellite imagery, uncrewed systems, and better software from new suppliers, increasing competition in the defense industrial base.
DAY LATE, DOLLAR SHORT
Many of these commercial companies, however, do not need to sell to the government to build a successful business. And they are often deterred by the Pentagon’s requirements, such as insisting that businesses have a mandatory “authority to operate” certification to sell new software. As a result, the Pentagon must rework its procurement process so that doing business with the armed forces is easier and speedier.
Over the last six decades, the Defense Department has created a labyrinth of rules, regulations, and confusing acquisition policies that encourage risk aversion and inertia. These are embodied in the 2,000-page Federal Acquisition Regulation, which makes it hard to purchase even simple equipment. The U.S. Army’s 2006 experience replacing the decades-old Beretta handgun is indicative. Rather than simply sourcing the best handgun commercially available, the army used the defense procurement system, which begins with determining requirements rather than evaluating what is currently on the market, adding years to the process. Ultimately, it took over a decade to issue a contract award. Then, a lengthy two-year testing phase cost $17 million and contributed to further delays. In the army’s initial purchases, the cost for each handgun was more expensive than buying a handgun off the shelf.
Many of these rules date back to the 1960s, when the U.S. military was competing with its centralized enemy—the Soviet Union. This centralized and hierarchical decision-making is incompatible with the desire for speed and a rapid trial-and-error approach, called agile development, as is practiced in Silicon Valley. Indeed, defense experts sometimes joke that the Pentagon is the last place on earth still using the Soviet five-year planning system.
Reforming the Pentagon’s acquisition process is not a new idea. Gallons of ink have been spilled detailing possible changes. But a simple, easy remedy is expanding the use of Other Transaction Authority for contracts. Created by Congress in 1958 as a way for NASA to move fast after the launch of Sputnik, OTA offers a better, more competitive process for purchasing goods than the Federal Acquisition Regulation. OTA purchases, for example, use fixed-price contracts rather than the cost-plus contracts the Pentagon typically signs. With cost-plus contracts, manufacturers are guaranteed profits even when they go wildly over budget and blow past deadlines.
There is more processing power in a four-year-old iPhone than in an F-35.
Today’s officials know how useful such Other Transactions can be. In 2020, Washington procured 300 million doses of COVID-19 vaccines during Operation Warp Speed using OTs. The Pentagon’s Defense Innovation Unit uses them to attract new vendors and buy high-tech systems. The Replicator initiative uses OTs, and so do many R & D contracts. Today, however, less than ten percent of all procurement spending is done through OTs.
OT adoption may be poised to accelerate with the recent directive from Secretary of Defense Pete Hegseth that all software purchases across the department use OTs. But to make a bigger, more permanent shift, the Pentagon will have to set a new tone at the top. Right now, performance incentives encourage avoiding mistakes rather than showing initiative or measuring effectiveness—in other words, employees are measured by whether they comply with the directives, regulations, and guidance for every process. Instead, performance could be based on how quickly decisions are made, how long it takes to implement those decisions, and how effective they turn out to be. Congress, for its part, could instruct the military’s inspector general to assess the Pentagon’s effectiveness and speed at making decisions, including in purchasing. The inspector general could also study why firms fall behind schedule and how Pentagon processes contribute to schedule delays and overbudget contracts. Congress could also impose penalties for spurious contract award disputes, which have become commonplace as a business strategy, as such disputes open the possibility that losing companies can compete again for the contract.
These policymakers must also move quickly themselves. The Pentagon can no longer afford to wait for the outbreak of the next conflict to enact these changes. It took the United States three years to ramp up the production of planes and missiles in World War II. The country will likely not have that much time to ramp up when the next conflict begins. The Trump administration has the opportunity to deliver on peace through strength by modernizing existing assets, broadening defense capabilities, expanding stockpiles and manufacturing capacity for munitions, increasing competition and reducing supplier vulnerabilities, changing how the Pentagon does business, and increasing funding levels and continuity of funding. Given the multiyear lead times and mutually reinforcing nature of these initiatives, the administration must undertake all of them with urgency.
Only a major drive to rebuild the arsenal of democracy can deter China from taking Taiwan through force or other countries from similarly challenging the United States. As U.S. General Douglas MacArthur prophetically proclaimed in 1940: “The history of failure in war can almost be summed up in two words: Too late.”
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