NATO’S Hidden Dividend and the Avoidable Cost of U.S. Withdrawal

Figure Note: NATO enlargement is associated with higher trade, and the gains tend to grow over time. The figure shows estimated changes in trade following NATO enlargement. Points show the estimated effect, and vertical lines show the uncertainty range around each estimate. Overall, the results suggest that NATO enlargement was followed by rising trade among member countries, with effects that build gradually rather than appearing all at once.

A companion paper, “Political Alliances and Trade: Europe in a Polarized World,” extends the analysis to scenario modelling. It shows that NATO expansion generates trade and welfare gains large enough to offset the cost of additional defense spending, and that U.S. withdrawal or broader NATO disintegration imposes meaningful economic losses on all members, including the United States itself.

Why NATO Raises Trade: Three Mechanisms

The trade premium is not simply a correlation with Western prosperity. Three mutually reinforcing mechanisms explain why the institutional architecture of the alliance generates real economic returns.

1. Uncertainty Reduction and Institutional Trust: Alliance membership lowers political risk for firms. When businesses expect fewer political shocks, more credible contract enforcement, and stable long-term cooperation, they trade more—and they do so in more complex, relationship-specific goods. The broader political economy literature (e.g., Mansfield and Bronson and Gowa and Mansfield) establishes that security alliances systematically raise bilateral trade through exactly this channel. As former Governor of the Bank of England Mark Carney has stressed, institutional trust is a form of economic capital that takes years to build but can be destroyed in seconds—a principle that applies with full force to alliance economics.
2. Interoperability and Standardization: NATO’s more than 1,300 standardization agreements contain ultra-specific requirements such as fuel nozzle diameters, ammunition calibers, and data-link protocols. This granularity is the reason a Danish F-35 can be maintained at a Polish airfield using American components. These standards don’t just govern weapons systems—they cascade into civilian manufacturing, creating an entire supplier ecosystem of dual-use technologies, International Traffic in Arms Regulations–controlled components, and military specification–certified firms that would not exist at current scale without alliance procurement. The premium in weapons systems thus extends to trade in computers and electronics.
3. Long-Term Credible Commitment Signaling: Membership signals that a country is locked into the Western security and regulatory orbit for the long run. That signal supports supplier relationships, inward investment, and deeper production integration. Once a country’s industrial base is organized around U.S. platforms and standards, which NATO members have adopted as their own standards, switching is technically expensive—requiring personnel retraining, maintenance infrastructure replacement, and supply chain rebuilding. This cost of recentering industrial linkages is a durable competitive moat for U.S. industry. When U.S. reliability becomes uncertain, allies begin paying the switching cost anyway. The moat drains.

The research also identifies an anticipation effect: Trade begins rising approximately three years before formal accession, as candidate countries realign institutions and standards. This means that the benefits of membership are more than a signature on a piece of paper. Even if the United States does not formally withdraw, signaling potential withdrawal from or renunciation of the core obligations of the agreement likely imposes costs well before any formal exit.

The Sectors Most at Risk Are the Ones That Matter Most

This is not a diffuse story about marginally more trade across the board. The NATO premium is concentrated precisely in the sectors that define technological leadership and strategic competitiveness for the twenty-first century. Table 1 shows the estimated trade premium by sector, converted into approximate percentage terms for readability.

Computers, sensors, aerospace, and electronics sit at the intersection of military capability, advanced manufacturing, and the next generation of great power technological competition. If NATO weakens, the economic damage falls disproportionately on the very sectors Washington most wants to lead in, and on which U.S. technology has historically set the global standard.

The United States Is the Hub, Not a Spoke—and Has the Most to Lose

The burden-sharing critique runs as follows: The United States contributes a disproportionate share of NATO’s defense costs, therefore it is subsidizing European security. The economics run the other way.

The United States, as the alliance’s central industrial node, has the most to lose economically from a dissolution of the alliance. As mentioned, U.S. platforms—including F-35s, Patriot systems, and command, control, communications, computers, intelligence, surveillance and reconnaissance architecture—provide the standards around which allied procurement, supply chains, and interoperability are organized. Allied defense spending, when directed at U.S. systems, generates demand for U.S. aerospace, electronics, and materials firms. The F-35 program illustrates the logic: A distributed manufacturing ecosystem spanning allied nations, centered on U.S. platforms, feeding components and capabilities back into U.S. production. Allied procurement augments demand for U.S. goods, produces jobs for American workers, and in many cases provides the scale necessary for some of the most advanced weapon systems in the world.

The scenario modelling in “Political Alliances and Trade: Europe in a Polarized World” explicitly spells out the cost of exit. A U.S. exit from NATO is predicted to generate a 16.1 percent fall in U.S. exports and a 0.41 percent decline in U.S. GDP, roughly $100 billion in lost annual output at current levels. These are model-based counterfactuals, not forecasts. But the inference is hard to avoid: if building into the alliance's institutional trust architecture takes 5–20 years to generate full trade benefits, then disrupting that architecture means losing those benefits, and rebuilding them would likely take a generation.

The Real-World Preview Is Already Running

While formally leaving NATO would require an act of Congress, the trust necessary to support the alliance is already fraying and partners are responding in real time. The European Union’s €800 billion ReArm Europe plan explicitly prioritizes procurement from European manufacturers.

Denmark may provide the sharpest example. In 2025, facing the largest arms procurement decision in its history, Denmark chose the French-Italian SAMP/T air defense system over the U.S. Patriot. While the decision also included discussion of the likely delay in procurement of U.S. made systems, accompanying public comments from Danish officials speak volumes:

“Buying American weapons is a security risk that we cannot run.”

—SørenRasmus Jarlov, Chairman, Danish Parliamentary Defense Committee, March 2025

Denmark is shifting away from U.S. aerospace, sensors, and electronics—precisely the sectors the research identifies as enjoying the largest NATO trade premium. One could argue that the mechanism the research identifies is currently playing out in real procurement decisions.

The Window Is Closing, But Has Not Closed

For NATO’s frontline states, those with the most direct exposure to Russian aggression and the most acute interest in a credible U.S. commitment, the instinct remains to preserve the transatlantic relationship.

“We need to support our national and European defense industries, while also keeping and nourishing transatlantic bonds, which means buying American weapons.”

—Dovilė Šakaliėnė, Lithuanian Defence Minister, 2025

The above sentiment—shared by Poland, the Baltic states, and others on NATO’s eastern flank—is the alliance’s most important remaining asset. The demand is still there. The institutional memory is still there, and the research shows that trade and investment relationships, once established, are durable.

Yet the erosion of trust is real and substantial. In another frontline NATO member, Finland, trust in the U.S. has fallen to just 4 percent, approximately the same as Fins’ trust in Russia and China.

The same research also makes clear that rebuilding that lost trust and the economic gains it creates is a slow process. The benefits of membership compound over 15-to-20-year horizons. The costs of disruption compound in the same way. Each additional year of perceived unreliability pushes farther out the timeline for recovering the alliance’s full economic benefits.

Conclusion

NATO was designed to do more than provide security. It built deep economic integration that has become one of its least appreciated strengths. The economic gains are large, durable, and, in many cases, effectively self-financing relative to the costs of membership. As the alliance’s hub, the United States has benefited disproportionally from this economic integration and would see some of the steepest losses should the alliance dissolve.

Europe is already investing in alternatives and building stronger indigenous defense capacity. Once procurement networks, standards, and supplier relationships begin to reorient away from the United States, they will not be easy to win back. NATO is therefore not only a defense alliance to be preserved for security reasons. It is a long-built economic asset. And like any asset accumulated over 75 years, it can be lost much faster than it was created.

Philip A. Luck is director of the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS). Karen Jackson is a reader in economics at the University of Westminster. Oleksandr Shepotylo is a reader and senior lecturer at Aston Business School.