Donald Trump is dusting off his old playbook. The former president—and would-be future one—has revived his NATO pressure campaign, this time with Spain in the crosshairs, though the implied threat hangs over all of Europe: boost your military spending or face trade consequences.
It's a classic Trump move, isn't it? The markets mostly yawned. They've seen this show before.
But there's something fascinating happening beneath the surface that deserves a closer look.
The Protection Racket Goes International
I've covered Trump's negotiating tactics since 2016, and this one follows a familiar pattern. It's essentially a protection racket dressed up as foreign policy: "Nice export economy you've got there... shame if something happened to your American market access."
The thing is—and this drives foreign policy traditionalists crazy—it kinda works. At least in the short term. European NATO members have actually increased defense spending since Trump first started making these threats during his administration. Not all the way to the promised 2% of GDP target, but definitely moving in that direction.
Markets seem divided on how seriously to take this. The S&P barely registered a blip, up a measly 0.2%. But European markets? They're taking it a bit harder, with the Stoxx 50 down 0.6%. They remember the last trade skirmish all too well.
Europe's Weak Hand
Look, Europe has a problem here. They're in what my old game theory professor would call an "asymmetric vulnerability position." Their economic growth is pathetic, inflation hasn't fully retreated, and—this is the killer—they need American consumers way more than America needs European buyers.
That's why the euro weakened against the dollar after Trump's comments. Currency traders (who are sometimes the only adults in the room) are pricing in a small but real possibility of a trade showdown.
The sector-specific reaction tells an interesting story too. Defense contractors—RTX, Lockheed Martin, Northrop Grumman—all ticked up in pre-market trading. Traders are betting European countries will eventually fold and boost military spending rather than risk trade barriers.
And who makes a whole bunch of the military equipment Europeans would buy? American defense contractors! Funny how that works out, isn't it?
Heads I Win, Tails You Lose
The real cleverness of Trump's approach (if we're calling it clever rather than just blunt force trauma to the international order) is that it creates a no-lose scenario for certain American interests:
Either European countries increase military spending, likely buying American weapons systems...
...or they face trade barriers that protect American manufacturers.
It's a forced choice with no third option. Trump's framing eliminates the possibility that maybe, just maybe, the current arrangements actually work pretty well for everyone.
For investors, this creates an interesting opportunity. Defense stocks benefit in scenario one. American manufacturers with domestic production benefit in scenario two. Yet the market is pricing this option value at almost nothing, which strikes me as... optimistic.
We've Seen This Movie Before
I remember covering the first round of Trump's trade threats back in 2018. Markets tanked on the first threat, wobbled on the second, barely noticed the third. Then the actual tariffs hit and suddenly everyone was shocked—SHOCKED!—that threats sometimes materialize into policy.
We could be watching the early scenes of the sequel. Right now it seems like distant rhetoric, but these things have a way of becoming very real when political campaigns heat up.
(Trump, trailing slightly in some recent polls, might need an economic nationalist boost. Nothing like a good old-fashioned trade confrontation to rally the base.)
I'm not adjusting my portfolio yet either—that would be premature. But I've got those defense contractors on my watch list. The military-industrial complex has this weird knack for winning regardless of who's in charge. War, peace, threats, diplomacy—somehow it all translates to defense contracts.
For now, the market's collective shrug suggests we're in wait-and-see mode. We've watched this film before and the ending wasn't as catastrophic as feared. But sometimes... sometimes the sequel hits harder than the original.
