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3 January 2017 · 4 min read

Trump wants to defeat ISIS and eliminate budget caps

Leaked memo outlines the President Elect’s defence priorities

A leaked Pentagon memo has given us a fascinating insight into President Elect Trump’s approach to US Foreign Policy. It suggests that Mr Trump is going to take a very different approach to handling Russia compared the current administration. His top four priorities are reported to be; defeating ISIS, eliminating budget caps, developing a new cyber strategy and finding greater efficiencies in the US Department of Defense (DoD). You will note that controversially Russia does not feature in this list. In today’s blog we examine what this new approach could mean for the defence industry.

Firstly it is important to note that the memo’s provenance seems credible. It was discovered by the US website ‘Foreign Policy’ and is dated 1 December 2016. It was purportedly written by acting Undersecretary of Defense for Policy, Brian McKeon, to employees in his office, and McKeon said the four-point list was given to him by Mira Ricardel, the co-leader of Trump’s transition team. It has not been that widely reported in the press yet, with only a few US websites catching onto the story.

I have compared Trump’s priorities to those published by the DoD in its FY17 Oversight Plan. The notable omission is that Trump fails to mention Russia at all whereas the DoD puts it as its number one threat with terrorism second, effective acquisition and contract management third and developing cyber capabilities fourth.

So how should we interpret Trump’s lack of focus on Russia? I would argue Russia probably is still Mr Trump’s number one priority, but that this signals it is seen as a diplomatic problem rather than a military one. His National Security Advisor, General (Rtf) Michael Flynn is known to believe that the USA should work more closely with Moscow and he has made a number of appearances on Russian state television. It seems Mr Trump may well agree with this approach and therefore is going to adopt the approach of “keeping your friends close but your enemies closer” with Mr Putin. It is important to note though that a soft solution to Russian posturing in Eastern Europe would not remove the imperative for the US defence industry to ensure it continues to have technological superiority. In fact quite the opposite. When trying to exert soft power, it is all the more important that the threat of using hard power is meaningful. It means that NATO must be a credible stick, while Mr Trump tries to tempt President Putin with diplomatic carrots.

Trump’s explicit statement about developing a strategy to defeat / destroy ISIS suggest that he does not believe in the Obama administration’s strategy which has been a ‘hands off’ approach to warfare. It has seen the US working with allies and partners to establish control over ungoverned territories through mentoring or training, and directly striking the most dangerous groups and individuals when necessary. It therefore seems likely that we will see more prolific deployments of US troops in the Middle East which would push the levels of Overseas Contingency Operations (OCO) funding up again which would be beneficial for the defence industry. For context, in FY17 the US will spend $57bn on OCO compared to the peak of $174bn in FY12 during operations in Afghanistan and Iraq. His commitment to eradicate the budget caps imposed by Sequestration is also heartening and implies we could see a higher base budget than is currently projected in the chart below.

US Base and OCO defence spending FY01 – FY21E (US $m) (Source: DoD Green Book)

The other deduction from Trump’s priorities is that he will stand by his campaign rhetoric about getting tough on the defence industry. He wants tighter contract terms, contractor liability for cost over runs, genuinely competitive bid processes which should all result in cost savings for the DoD.

On balance I think the operating environment for the defence industry under Trump looks to be a favourable one in terms of a growing addressable market. However, it is not going to be an easy ride and we are likely to see pressure on margins which have been maintained, and in some cases improved whilst the defence budget has been shrinking.


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