Trump's New Defense Spending Standard: '5% of GDP'... Fiscal Burden Becoming Reality [AK Radio]

NATO's 5% Defense Spending Standard
Now Applied to Asian Allies
Key Agenda Item for the South Korea-U.S. Summit

As the South Korea-U.S. summit approaches, concerns are mounting over potential fiscal pressure, with expectations that the main agenda will be the U.S. push for increased South Korean defense spending. Recently, U.S. Deputy Secretary of Defense Elbridge Colby commented that "South Korea is setting an example in terms of defense spending," a remark that is being interpreted as a direct demand from the U.S. government for a defense budget increase.

Currently, South Korea spends more than 61 trillion won on defense, which is about 2.3% of its gross domestic product (GDP). To meet the Trump administration's demand for 5% of GDP, South Korea would have to more than double its current defense spending. Given the ongoing fiscal difficulties due to tax revenue shortages, a significant increase in defense spending is expected to pose a serious financial burden.

During Donald Trump's first administration, the U.S. demanded that NATO member states spend 2% of GDP on defense. Now, however, 5% has become the new standard. Internationally, spending 5% of GDP on defense is interpreted as a sign that a country is already in a wartime state. In reality, only about nine countries worldwide spend more than 5% of GDP on defense. These include Ukraine and Russia, which are currently at war, Saudi Arabia, which is at war with Yemen, some African countries, and in Asia, only North Korea. All of these countries are either at war or operating under a wartime system.

NATO member states also maintained defense spending at about 5% of GDP in the past. In the 1940s and 1950s, when NATO was formed following World War II and the start of the Cold War, most member countries kept their defense budgets at the 5% level. However, after the Cold War ended in the 1990s and during the 30 years of peace until the outbreak of the war in Ukraine, most European countries reduced their defense spending to 2% of GDP or even below 1%.

Some countries even disbanded or consolidated their armed forces. The Benelux countries?the Netherlands, Belgium, and Luxembourg?set a minimum combined force of about 40,000 personnel for public order and defense, operating them jointly from the Netherlands. The other two countries have nearly disbanded their armies; in particular, Luxembourg's defense budget is only 0.96% of GDP, not even reaching 1%.

On June 25 (local time), U.S. President Donald Trump (center) holds a press conference after attending the North Atlantic Treaty Organization (NATO) summit. Photo by Xinhua News Agency

In this context, European countries are strongly resisting the sudden demand to raise defense spending to 5% of GDP. However, there is a clear reason why President Trump specifically set the bar at 5%. He wants to make it clear that Europe is no longer a peaceful place and that stopping Russia should be demonstrated through concrete action, not just words. The logic is that with the new Cold War underway, European countries must also show their sincerity.

Ultimately, when NATO countries accepted this demand in June, 5% became the new benchmark for allied nations. Now, the same standard is being applied to Asian allies, and not only South Korea but also Japan is under considerable pressure. In particular, South Korea is in direct confrontation with North Korea and faces issues related to the U.S. Forces Korea, making it difficult to easily reject this demand.

However, although NATO member states have agreed to increase defense spending to 5%, they have not committed to covering all of it through direct government budgets, so there is likely to be controversy over calculation methods. NATO countries have promised the U.S. government that they will raise direct government defense spending to 3.5% of GDP within the next 10 years, with the remaining 1.5% to be met through indirect investments such as defense infrastructure or investments in defense companies.

If South Korea can apply a similar approach, it may avoid the severe situation of having to immediately double its defense budget. However, even raising the defense budget to 3.5% of GDP would still require an increase of tens of trillions of won, making it difficult to avoid a substantial hike. As a result, South Korea is expected to have to purchase a large quantity of advanced U.S. weaponry, further raising concerns about tax revenue shortages.

In fact, the U.S. itself currently spends less than 5% of GDP on defense. Last year, the U.S. defense budget was about $1 trillion, roughly 3.4% of GDP, which is nearly 1,400 trillion won?an enormous amount, even larger than South Korea's total national budget for two years. For the U.S. to reach 5%, it would need to secure about $600 billion more, or about 830 trillion won.

Because of this massive amount, there is considerable opposition within the U.S. political sphere, including the Democratic Party. However, President Trump has consistently advocated for increased defense spending since his first term. There is a reason for this: in his view, the defense industry is the only sector in which the U.S. still holds a comparative advantage over other countries.

Analysts believe that even if the U.S. government were to invest more in the semiconductor or automobile industries, such investments would not translate into increased employment in the U.S., as most of the job-creating segments have already been outsourced abroad. Investments in semiconductors would benefit Taiwan's TSMC or South Korea's Samsung Electronics and SK hynix, while investments in electric vehicles or electronics would ultimately help factories in China.

Hanwha Ocean completed maintenance on the US Navy logistics support ship USS Wally Schirra and set sail on March 13. Photo by Yonhap News

In contrast, the defense industry is different. Because of military secrecy, production must take place within the U.S. regardless of labor costs, and only U.S. citizens can be employed. Moreover, not just any citizens can be hired; they must have no criminal record and no relatives from countries hostile to the U.S. Recently, even those who have spent long periods in China or have frequent travel history there are excluded.

As a result, defense spending flows directly into the U.S. defense industry, leading to the employment of American citizens. This is why President Trump insists that the defense budget must be raised. In U.S. political circles, there is less opposition to this logic itself, but there are concerns that if the increase is too large, it could lead to government bankruptcy, and criticism that President Trump is exploiting this issue for political gain.

Ultimately, the issue of increased defense spending in other countries is closely linked to the U.S. defense industry and America's economic interests. For South Korea, not only the direct increase in defense spending but also the issue of the South Korea-U.S. defense cost-sharing agreement is likely to be affected. This will inevitably create significant fiscal pressure, and it is expected that South Korea will have to make considerable concessions to the U.S., similar to previous tariff negotiations. The outcome of the upcoming South Korea-U.S. summit will likely determine the final figures, depending on how well this issue is managed.

However, South Korea is currently enjoying a boom in its defense industry, with many new contracts from the U.S. and Europe, to the point where the term "K-Defense" has emerged. There are expectations that South Korea can maximize its gains in proportion to any concessions made. Analysts suggest that, aside from direct increases in defense spending, South Korea should plan its indirect infrastructure investments to maximize support for defense companies, including expanding production capacity and related infrastructure.

In fact, one reason NATO's European members more readily accepted the 5% demand was their expectation that they could foster their own defense industries. As the U.S. significantly increases its defense budget, there are hopes that the recent shipbuilding cooperation agreement between South Korea and the U.S.?the so-called "MASGA"?will prove beneficial, as seen in recent tariff negotiations.

The U.S. government is strongly seeking cooperation with South Korea in shipbuilding, repair, and maintenance. Since South Korea is currently the only non-hostile country capable of repairing U.S. naval vessels, it is important to emphasize this point during negotiations. Despite the burden of increased defense spending, leveraging South Korea's competitiveness in shipbuilding and the growth of its defense companies will be key to achieving mutually beneficial outcomes in the negotiations.