Podcast - Defense Dynamics: Navigating the Post-Election Landscape for the National Security Sector, Part 2

Misha Lehrer: Hello and welcome back to Holland & Knight's "Eyes on Washington" podcast. In today's episode, we'll be discussing the impact of defense policy after the 2024 elections. Specifically, we'll be discussing what a second Trump Administration and Republican-controlled Congress could mean for defense policy, funding and programing at the DOD, with Republicans now holding both the White House and Congress. This shift in leadership and trifecta of control is bound to have significant implications for the defense sector, from funding priorities to support of the defense industrial base, and other strategic initiatives. So we'll discuss the new administration's likely policy focus, how a Republican-controlled government could shape the defense budget and what this means for defense industry stakeholders, whether it's new funding streams, shifts and acquisition priorities, or emphasis on competing with China in modernizing military capabilities. There's a lot to impact. I'm here with my colleagues Dan Sennott and Simon Coon, all of us part of the defense and national security practice at Holland & Knight's Washington, D.C., office. So before diving in, let's give a brief introduction, or a re-introduction, if you listen to our pre-election podcast published in September. Dan.

Dan Sennott: I'm Dan Sennott. I'm a partner here at Holland & Knight, and I co-lead the defense and national security team within public policy and regulation. And I'll turn it over to Simon.

Simon Coon: Hello I'm Simon Coon, a senior policy advisor here at Holland & Knight. And I also work on the national security and policy team.

Misha Lehrer: Misha Lehrer, moderating this great conversation with you guys. I focus on traditional and nontraditional defense clients, helping navigate through defense, congressional committees and the Department of Defense. So when we last recorded prior to the election, we talked about what a potential Trump or a potential Harris Administration might mean for defense policy, how either candidate will cause ripples through the Department of Defense, what it will mean for the defense industrial base and what a Republican- or Democrat-led House or Senate might mean in relation to either administration. Well, now we know. So let's set the stage. Donald Trump won a second term for presidency, and Republicans will control both chambers of Congress, though the margins are slim. Republicans in the House will have a 219 to 213 majority, with two of those Republican-held seats being left vacant for national security roles, given President-elect Trump's nomination of Congresswoman Elise Stefanik of New York to be ambassador to the United Nations and Congressman Mike Waltz of Florida, his appointment to be national security advisor to the president. In the upper chamber, Senate Republicans will have a 53 to 47 majority, though their majority is not filibuster-proof. Nonetheless, with Republicans now holding both the White House and Congress, the shift in leadership is bound to have significant implications.

So let's start off with the impact of a second Trump Administration on defense policy and spending. The chance for a governing trifecta, which would repeat the first two years of Trump's term in 2017 and 2018, already have some in Congress, the Pentagon and outside stakeholders wondering what it means for the defense budget. While it may be too early to forecast with confidence, the return of a Trump presidency will likely augur a larger defense budget, though less security aid for U.S. partners abroad, such as Ukraine. Traditionally, defense spending has significantly increased under Republican administrations. With defense hawks in both parties, we could see an increase of the defense budget. Though Democrats may want to see parity with non-defense spending, however, we have seen some fissures in the House Republican caucus whereby some, such as the Freedom Caucus, are concerned with an inflated government spending. We've also seen an America first wing who have argued that the U.S. military maintains too many missions abroad and thus needs to be reined in and take a step back from supporting historic allies. So Dan, where are the key priorities we can expect from the Trump Administration and defense policy, and how does it differ from a first term? And how might President Trump's America first approach influence defense spending and foreign military engagements?

Dan Sennott: Thanks very much, Misha. I think there is going to be continuity between the first Trump Administration's philosophies and the second Trump Administration in a couple of different areas. The first one would be the philosophy towards NATO. In the past few weeks we have seen a lot more discussion about what that looks like. And I think that the first Trump Administration put an emphasis on NATO countries getting to 2 percent of GDP spent on defense. And that was really a shortcut, that initiative was really a shortcut towards getting NATO countries to be in the mindset of defending themselves and being responsible for their own defense. Now we've got currently about 24 countries that have actually attained that 2 percent or greater of GDP in defense spending. So I think the next goal will likely be focused on NATO countries being able to broadly defend themselves. So rather than it tied to 2 percent, that may in some cases actually exceed 2 percent and that goal may be reset in the more than a 3 to 5 percent range. I think also the Pentagon, one of the America First Policy Institute policies focused on recentering the Pentagon on military missions rather than other missions that they saw as sort of peripheral to the Department of Defense. One of them is spreading democracy around the world. Another one focuses on some of the social policies that have been advanced. And then a third one was climate change initiatives within the department. So I think we'll see potential shifts there. And then, of course, ending the war in Ukraine. There are a lot of resources currently being sent over by the Biden Administration in the waning days of the Biden Administration. There's about $9 billion remaining that they can actually spend. They have, as you know, authorized strikes deep into Russian territory. They're looking to strengthen essentially Ukraine's position ahead of the change in administrations, anticipating that the Trump Administration would look to end that war in some way. Now that strength actually could be used as a bargaining chip by future President Trump, as he seeks to end the war through a negotiated settlement. So we'll see how that all plays out. And then, of course, something that was repeated on the campaign trail quite a bit, tough on China and using tariffs in conjunction with the military buildup in the Indo-Pacific region in order to deter Chinese aggression. And I'll turn it over to Simon and see if he has any thoughts on that.

Simon Coon: So I think Dan did a great job of hitting the broad strokes of the top Trump priorities for this incoming administration. I think two things to really keep in mind as you look at how the Trump 2.0 Administration approaches these priorities is, one, they're going to be a much more practiced entity than Trump 1.0. So as you've already seen the speed of their nominations, they're going to hit the ground running in a way that you probably didn't see as much in the first Trump Administration. And then conversely, you know, speaking to what you introed with Misha, the majorities that the Republicans hold in the Senate in the House are narrower than they were last time, which is going to have a slowing effect. So what that mix produces in reality is going to be something that we're all going to kind of learn together. And I would also want to highlight that, you know, as Dan talked about, tough on China policies and the tariffs, I think you're going to see a lot of trickle down from Trump's economic policies into how the DOD is going to be looking at executing his policy priorities. The tariffs that we saw under Trump 1.0, we saw similar tariffs actually under the Biden Administration as well. There's a, there's a good continuity there between the sort of tough on China policies. But I imagine you're going to see an even greater emphasis on Trump, during Trump 2.0. And so you're going to see a DOD that is reacting to those tariffs as it is building its own sort of policy objectives. Right.

Misha Lehrer: I think you're totally right about the economic policies bleeding into the Trump Administration's military policy. Particularly in terms of tariffs, I think tariffs will be an interesting economic tool that we will see bleed into the U.S. military's or the Department of Defense's engagement. I sort of also want to pivot towards the defense budget, which this year is sort of still being negotiated. The house had their NDAA and House appropriations have their budget at just under $900 billion. In the Senate NDAA it was at about $925 [billion]. Regardless of how it shakes out, it's approaching that $1 trillion mark. Do you think we'll see a mindset change as the defense budget continues to increase? And are there any historic parallels that can guide our expectations for this budget cycle and perhaps the budget cycle after this?

Dan Sennott: I think what we will likely see and what the Trump Administration, the incoming administration has talked quite a bit about is harvesting funding from certain initiatives that were important to the Biden Administration and instead redirecting that funding. So as an example, I mentioned previously that climate change and sustainability initiatives, we think that that money would be taken and redirected towards some of his more priority issues, including ICBM modernization, hypersonics, AI. I think there's also been a lot of discussion about the cost of civilian personnel. The Department of Government Efficiency, which is purely an advisory board that will be held up by Elon Musk and Vivek Ramaswamy, they have talked a lot about civilian personnel within the federal government and right sizing that in a couple of different ways. One of the methods that they talked about is ordering everyone to return to work. So if you're in a hybrid, or if you are working from home fully remotely, that those individuals would be required to come back to work. The second one is to decentralize where those civilian employees are actually employed. So moving away from a D.C./Northern Virginia-centric federal government and distributing those jobs throughout the United States. In both of those cases, one of the underlying motivations is there are people who will opt not to move, there will be people who opt not to come back into the office, and that those positions would then be eliminated and that you could realize some efficiencies in that way. And then I think as far as the overall budget and increasing the overall budget, I think we will see — I mean, the initiatives they're talking about are pretty expensive programs. And so you really need to be able to increase the budget in order to pay for some of that. So I do think that there's going to be a movement to increase the budget overall. But once we get towards, as you mentioned, Misha, once you get towards that $1 trillion mark, there's sort of a psychological barrier for a lot of members, and not just Freedom Caucus, they're going to want to stay shy of that for a while. Now, let's see if Simon has any thoughts or disagreements on any of that.

Simon Coon: So no disagreements. But I think there are some things that we should keep in mind and consider based on historical precedent. And then also, you know, some of the signals we're seeing from the transition team as we move forward. And what I mean by that is you look at Trump 1.0 and the wall, one of the famous things that sort of happened there in their interaction with Congress was the first billion dollars that was spent on the wall came out of personnel accounts. It was a reprograming that came down due to the recruiting shortfalls that we saw. So there was an excess of money in the personnel accounts. I think you're going to see more attempts at sort of creative accounting practices like that as the Trump Administration really starts to dig in to what efficiency looks like and what changing the shape of the federal government looks like. There's been, you know, no shortage of reporting on, you know, the amount of authority that the executive branch has to withhold funds that are appropriated by Congress, right. Can you make a federal agency smaller if Congress has appropriated it to be a certain size? So I don't think these answers are fully fleshed out. And this might be things that go all the way up to the Supreme Court, depending on how the Trump Administration approaches these challenges and these policy goals. But I think Trump 1.0 is a good indicator that they are going to try to get creative. And we saw similar attempts, but not quite at this whole of government scale, under Secretary Esper. The kind of trend back what they call the fourth estate, right, is these civilian positions in the DOD that are more on the bureaucratic side. But at the same time, as Dan alluded to, there is likely going to be an effort to increase the defense budget because that deterrence through strength requires a modernized military. It requires a strong military, and Misha, as you alluded to, there's challenges and parity. You can't grow the defense budget under a very slim majority while simultaneously cutting domestic costs. You're not going to have enough support to move those kinds of appropriations bills. And you're also going to run into deficit challenges. So I think we all expect to see a reconciliation process early on in this Trump Administration to extend the tax cuts that was for under Trump 1.0. So they're headed for a pretty sticky situation as far as growing the defense budget and keeping the deficit from spiraling out of and further out of control, really. And it's going to be a tough one to navigate.

Misha Lehrer: And you brought up a good point. And I think we should pivot into, into what Congress will look like in this after these elections. In addition to a Trump presidency, there'll be a Republican majority in both chambers, while Republicans and Democrats will have different priorities. The last time we spoke before the election, we touched upon a lot of what the commonalities between each parties are and sort of what that will look like in delivering a more resilient U.S. national security. So the major themes that that we touched on last time were China as a pacing threat, the support for the defense industrial base and the need to more readily innovate and modernize our military. I think we touched on tariffs in trade as a way to strengthen our military. While we probably would have seen a continuity with trade policies established during the Biden Administration, including labor and environmentally focused trade agenda, Trump will approach trade for industries with the more protectionist, unilateral and aggressive stance compared to the Biden Administration's sort of multilateral approach. So the focus will be on reshoring manufacturing in the defense industrial base and reducing the dependance on foreign supply chains particularly. I think we'll see a parallel in approaching China as a pacing threat with the House Select Committee on Chinese Competition likely to be reauthorized. So, Simon, I'd like to ask you, what do you think the priorities will be for Democrats now that they'll be the minority in both chambers? And do you think these, do you think these commonalities that we spoke on last time have changed or will change?

Simon Coon: Well, I think the role of the minority in the House versus the minority in the Senate is very different, right. A Senate minority has, has a much greater stopping power than a House minority has as far as agendas are concerned. Conversely, with the House majority being so slim that math changes a little bit as well. I think largely the minorities are going to do what congressional minorities traditionally do. They're going to play defense. I just outlined, right, the way that growing a defense budget and controlling deficit spending are at odds with each other, particularly in an environment where we're going to extend tax cuts. So don't expect revenues to go up. But there is a desire to see more spending in the specific area of the government. That's typically going to come at expense of the other side of domestic spending, the other side, discretionary spending, which is domestic. So I think you'll see the Democratic minority really focused on defending that in a lot of ways. It'll be interesting to see from a policy perspective how they approach that. I think there's continuity across Republicans and Democrats, both in the executive and legislative branches, on a desire to be a tough on China and a desire to reinvigorate American manufacturing. There is, however, a much greater difficulty in putting that into practice as it relates to the industrial base. Oftentimes you see this desire to infuse cash and capital into the defense industrial base of the industrial base writ large. But the long-term health of that industrial base requires purchases. The government must be nimble enough to buy the goods that are being produced there, they must be able to respond to that supply. And that's the real challenge for onshoring back in America is, yes, you can invest all this money and we can start making things here again. But if the government is not ready to purchase those things and purchase them in quantity, and over a long enough time, can you sustain those businesses in the long term? And I think that will be a much larger part of the conversation now that you've seen some pretty significant investments over the last two administrations into the domestic industrial base, both military focus and, you know, we look at things like the CHIPS Act of semiconductors and all these different critical components in critical supply chains. You're also going to see Chinese responses that are, that are going to turn the volume up on this conversation as China looks to restrict even more of its exports as a way of responding to tariffs. It's likely going to restrict exports on things. It knows that we don't have the infrastructure to produce quickly rare earths, critical minerals. But I imagine from a minority perspective, the Democrats are largely going to be focused on protecting the policy goals and objectives they had when they had control of the government, right. So I see them playing more towards the domestic side of the House and trying to protect those gains that they made under the Biden Administration.

Dan Sennott: Look, I'll just add on to that. I think there is a lot of common ground, particularly when it comes to the approach in China. And I think that that's going to be an area of continued emphasis regardless of who's in charge. I think, though, from China's perspective, whether it's the Biden Administration or the Trump Administration, the strategic emphasis on combating Chinese aggression continues, I think is more how do you implement that deterrence, right? Whether it be through ramping up tariffs versus, you know, the uncertainty of potential actions that could be taken by an administration, those types of things may change. But the overarching emphasis, I think there is quite a bit of continuity, actually, and that goes as far as Congress is concerned as well. I think we talked in our last podcast about how the Chinese aggression was an issue that originally came up in one party, Republican Party, but it very rapidly became a bipartisan issue and continues to this day. That's evidenced also by the fact that the House China Select Committee has done quite a bit of work in this area in proposing legislation. And I think we will see some of that included in this year's National Defense Authorization Act. And we've also been told that that select committee is going to continue into the new Congress. One other thing I just want to pick up the thread on, and Simon mentioned about, the defense industrial base. Sustaining the defense industrial base with solely Department of Defense orders is something that the Department of Defense and the defense industrial base has been struggling with for a long time. And I think the solution from the Department of Defense's perspective is we need to start and continue to identify technology that is both applicable in the commercial sector as well as in the Department of Defense. And so as a result, companies that are specifically reliant on defense contracts only for their business, those companies are not going to be as sustainable as companies that have already a marketplace demand within the commercial sector. And the Department of Defense can also participate and purchase from them. I think that, you know, has been something that's been in the works for the last decade or more. And I think the Department of Defense, and Congress, is starting to see the wisdom of that and making sure that there are diverse customers that among these companies, and that's the way you keep them in business.

Misha Lehrer: And I think that that demand signal from Congress is certainly there. They say that the House Armed Services Committee and the defense committees are sort of the last bastion of bipartisanship within the Congress. Earlier in the summer, there was a hearing in Silicon Valley held by the House Armed Services Committee, looking at how Congress can change the Department of Defense's procurement and acquisition systems to be more nimble and have the ability to tap to purchase these types of technologies, Dan, that you mentioned whereby there already was a market for these applications in the civilian sector. So knowing that the House and Senate Armed Services Committees sort of work with calamity, knowing that the NDAA has passed for the past 63 consecutive years, is sort of on glide path to pass again later this year, moving forward into the next two to four years, two meaning at least having Republican majority in both chambers in the White House, what do you think the effects on the NDAA will be? One with a Republican-controlled House and Senate and Trump presidency and sort of two, moving past the midterm elections sort of sight unseen?

Dan Sennott: I think one of the things is we're going to probably see a renewed focus on strategic weapons systems. And I think I mentioned this before, the vision of the Trump Administration is that the role that we would play in Europe is that of sort of a strategic backstop. So NATO countries taking responsibility for their defense and then the United States serving as a nuclear deterrent, a strategic backstop to aggression in Europe, and then a focus obviously, on the Indo-Pacific. So I think there are a few different areas. One would be ICBM modernization. That is something that has continued under the Biden Administration that the discussions and the emphasis on that. And I would expect that that's going to continue and ramp up. And then hypersonics, there has been a large commitment regarding hypersonic testing that we would anticipate will continue in this administration and hypersonic weapons development will continue. And then I think it's interesting, getting back to that Department of Government Efficiency, Elon Musk and his interest in AI, I think that is going to nest very nicely with a lot of the initiatives that the Department of Defense is also looking at. And so focusing and it    making long-term investments in AI, I think, will be a major point. The last thing I'll mention on Department of Government Efficiency, this was announced, I think, last week, that there will be a complementary committee, a subcommittee, within the House Oversight Government Reform Committee that will be called the Subcommittee on Government Efficiency, and that will be chaired by Marjorie Taylor Greene. And so, whereas, you know, there are other advisory panels that make their recommendations and those recommendations are then considered by folks in key positions, now, you will have a subcommittee on the oversight committee that will actually be able to move on some of these recommendations and explore these recommendations a little bit more. So that'll be interesting to see what comes out of that.

Misha Lehrer: Simon, if you have anything to add to that.

Simon Coon: You know, I'll add a little bit of follow up to that in that particularly with Dan's point on strategic weapons systems. I think you're likely going to see some renewed conversation about the F-35. Elon Musk has already sort of made some comments in the public space around the F-35. I think that program has had a lot of conversation, obviously, over its life cycle, and there are several large strategic programs that are in the works, like next generation air dominance and future vertical lift that are seen by the DOD as, you know, essential to future force posture and future force design, particularly as it relates to the Pacific. So it's an interesting time to watch how, you know, a Department of Government Efficiency affects those programs. And in particular, you saw a future vertical lift. There was a cancellation of the reconnaissance aircraft that they were developing, but they're still on track with their assault aircraft. So those conversations are certainly not set in stone. And an executive branch agency looking at efficiency backed by a congressional committee certainly is ripe to crack open some of those programs

Misha Lehrer: And both of you guys, Dan and Simon, both mentioned sort of a change or a renewed strategy in the Indo-Pacific. Can you tell us what exactly that means? And sort of what if you are in industry, sort of what that looks like from the outside?

Simon Coon: So interestingly on that one, I don't know that it looks a lot different from what we've seen the past couple of years. You saw a very quick rush by industry both to support our efforts to support   Ukrainians in their war with Russia. You saw some downstream effects on our industrial base as we were sort of grappling with what it means to use a large number of munitions and to send Bradleys overseas. And I don't think that the Pacific looks a lot different from that. We're going to benefit from that experience of, you know, if we're actually supporting a war that looks more like a near-peer conflict. This is the kind of, you know, resource strains that we're going to see. So I think you're already seeing the industrial base kind of pivoting to be prepared for those kinds of strains. And I think you're going to see more of that as these downstream effects from Trump economic policies hit again, i.e. greater tariffs. So you're going to see a greater reliance on U.S. supply chains. So I think it's going to be more of the same in a lot of ways. The resources, the material may end up in different places. But I think that you're going to continue to see an industrial base that is challenged in keeping up with what the DOD wants to do.

Dan Sennott: And I would just add one additional piece to that, which is what we are starting to see now. And what I think we will continue to see is China ramping up sanctions against U.S. companies and trying to influence or undermine their supply chains. So as we know, there is a lot of work done by Congress and by both administrations, both the Trump 1.0 and Biden Administration, to root out Chinese vulnerabilities in U.S. supply chains, particular related to anything that transmits data. Now we're starting to see Chinese sanctions against U.S. companies where they will cut off those companies from potential supplies. So I think what we will start to see is targeting U.S. supply chain vulnerabilities through sanctions against those companies and then just cutting them off from those supplies. I think what that will also result in is diversity amongst the defense industrial base in the United States and increased reliance on small and medium-sized companies in order to make up for some of those shortfalls as we are looking to ensure and reshore production capability.

Misha Lehrer: And I just have one more question before, before we wrap up that we haven't really touched on that I think will be a major point for the for the DOD, as well as for a lot of civilian applications. That's artificial intelligence. In October of this year, the Biden White House published a memorandum encouraging the US military to deploy AI in national security and defense operations. It advocated for the adoption of AI-enabled technology for U.S. military officials to work more closely with AI developers. And I think this sort of goes along with the Biden Administration's earlier executive order supporting the use and procurement of AI in sort of everyday situations. Sort of reports indicate that the Trump White House will revoke that executive order and begin working on its new AI in national security operations EO. But sort of curious what you guys think will be the effects moving forward of AI in our national security endeavors. Simon, you mentioned the Bradleys, which have begun integration of some AI stacks. So sort of before we wrap, want to ask that question really quickly.

Simon Coon: I'd love to take a first stab here because I think that AI is a significant competitive advantage for the United States right now. And I think you're going to see a real bipartisan effort to capitalize on that and to try and grow and support this ecosystem. And this is a real deep question. This is a whole podcast all by itself with a bunch of efforts because you're going to see it in American energy policy, you're going to see it in American economic policy, you're going to see it in the way we interact internationally. And you have an AI task force in the House, you have the gang of four for AI in the Senate. All of those senators, you know, Schumer, Rounds, Heinrich, Young, they're all going to be around for this Congress as well. So sort of the, the big players in the thought leadership space are going to continue to be in the government. And I think this is one of those few areas where you're going to see some pretty aggressive agreement on the need to develop and support these technologies for defense and other applications in order to maintain that American competitive advantage. I think that's where this is headed.

Dan Sennott: The only thing I would add to that is it's important to remember that AI is a means to an end and not an end in itself, right. So AI will help to enhance our existing weapons systems and future weapons systems, making things more efficient, making things more effective. But it's not an entity of its own, right. And so I think as we look at how that's incorporated in the Department of Defense, I think it's going to incorporate in every facet and probably of the functions that the Department of Defense performs every day. But I think what we need to resist is siloing it as this monolith of AI and how do we advance AI without looking broader at how it's actually going to impact our existing technology, our existing weapons systems and make them better. And I think that's what the department is focused on, and I'm sure that the future Trump Administration will be focused on as well.

Misha Lehrer: Well, you guys sort of set the stage for our next podcast, which is going to be on AI, so really forward to discussing that with you guys soon. And as the Trump Administration continues to roll out policies and after inauguration in January. With that, I really appreciate both Dan and Simon for being here chatting about what the elections mean and bring to defense and national security. If you're still listening, I appreciate you tuning in and making it this far into the podcast. If you have any further questions, we're always happy to have a conversation. We also publish a monthly newsletter on defense and national security issues called the Defense Sit Rep. So if you'd like to receive that in your inboxes or again want to have a deeper conversation, we are more than happy to do so. With that, thanks again.