What Happens When Staunch US Allies Put Their Foot Down?

The Trump administration in its second term has shown no qualms about challenging established rules and norms, both at home and abroad. Even its staunchest critics could hardly argue that President Donald Trump is lacking in ideas or has fears about rocking the boat. At the same time, though, U.S. observers – regardless of political persuasion – have thus far expected its key allies and partners ultimately to toe the line, and to work together with Washington on issues of mutual concern.

That calculus had been shaken on trade issues since 2017, when the United States, then under Trump’s first term, unilaterally withdrew from the Trans-Pacific Partnership (TPP) agreement, and the world began to reimagine a global trading order without Washington. But while appeasement to U.S. directives on the economic front is now seemingly the operative word across the world, there is a significant shift underway in an area where the United States has been the unshakeable behemoth: security.

Tension between the United States and its key allies over the cost of U.S. security guarantees is hardly new. Both the Democratic and Republican administrations have argued consistently over the years that European nations were not contributing their fair share to NATO. In contrast, in the Indo-Pacific, both Japan and South Korea have actively contributed to funding the large presence of U.S. troops in the region and have made clear that their financial support for the U.S. military is in sharp contrast to that of NATO's European member countries.

Nevertheless, the Trump administration has pushed the debate beyond its normal boundaries. At last month’s NATO summit in The Hague, Trump forced the alliance to accept a new goal of 5 percent of GDP spent on defense – more than double the old 2 percent standard. More broadly, the United States is pushing for all countries to increase their defense spending to at least 3 percent of GDP or even as high as 3.5 percent as part of the broader tariff negotiations. In doing so, the Trump administration may be pushing its allies too far.

Japan has now put its foot down. Prime Minister Ishiba Shigeru abruptly canceled plans to join the NATO summit meeting in the Netherlands, only days after Tokyo and Washington announced that there would be no 2+2 meeting of foreign and defense ministers in Washington on the sidelines of the Quad ministerial meeting in late June. Speculation is rife that the new ask of 3.5 percent of GDP as a baseline for Japan’s defense budget was simply the burden that could not be negotiated. While the United States is undoubtedly the country’s single most important ally and security guarantor, Ishiba cannot risk being pushed into a corner – especially before the July 20 upper house elections.

The fact that Japan did not support the U.S. decision to strike Iran’s nuclear facilities also highlights a growing divide between Tokyo and the United States on foreign policy interests. Differences in threat perception, risk tolerance, and of course domestic political pressure vary and are to be expected, especially on the precipice of war. It is, however, on the economic front that the gap between the United States and its partners continues to widen.

Washington leveraging its military power for economic gain has now come to be expected, and yet the U.S. allies’ tolerance for such self-serving behavior is not limitless. The unexpected rapprochement between South Korea and Japan since Lee Jae-myung was elected president is driven in part by shared concerns about the persisting tariff war and broader economic risks in the region that are looming as a result of the shifts in U.S. trade policy.

As part of this dynamic, what should have been a bright spot in Japan-U.S. economic relations has come to serve as a cautionary tale for all businesses outside of the United States. Few could have anticipated the drama surrounding Nippon Steel’s $14.9 billion bid to acquire U.S. Steel, given that the leadership of both companies were eager to move forward with the deal that injected much-needed capital in a strategic industry now dominated by China. Yet the business proposition ended up becoming a political battle, which dragged on for nearly 18 months. While the acquisition ultimately went through, businesses across the Indo-Pacific as well as Europe are assessing the lessons to be learned for investing in a United States that is redefining what partnerships mean.

Addressing political risks within the U.S. will become part and parcel of foreign direct investment into the country moving forward, even for the staunchest of established U.S. allies. At the same time, the prospect of the U.S. leveraging its economic might for political gain, and using its military might for economic advancement, is expected to increase. The response, however, may not simply be to heed to Washington’s expectations, but also to hedge against the United States and develop economic alliances to counterbalance rising risks.