War Dogs: The Effects of U.S. Defense Procurement on Local Labor Markets After the 2018 Trade Wars

Abstract

This paper estimates whether U.S. defense manufacturing procurement amplifies or insulates county-level labor markets from tariff shocks. Using a Bartik shift-share measure of county tariff exposure, weighted by pre-period county industry composition, this paper finds that defense activity amplified the 2018–2019 trade war’s tariff damage on local labor markets. Counties with any defense manufacturing contracts experienced nearly twice the tariff-induced employment losses of non-defense counties. However, tercile analysis reveals that this impact is heterogeneous across defense dependency levels. Low- and medium-defense counties, dominated by small subcontractors operating under fixed-price structures, experience the greatest damage, while high-defense counties show no statistically significant additional effect. This finding is consistent with the cost-plus architecture of large defense contracts, where government mechanisms absorb the price increases. Local projections then trace the cumulative dynamics of this interaction and establish that the defense amplification coefficient grows by 134% across four horizons. Together, these results suggest that trade policy that does not account for downstream defense supply chain effects creates national security vulnerabilities. Therefore, coordinating tariff exclusion processes with defense procurement exposure provides a viable policy intervention that could alleviate these concerns.