U.S. calls for 3.5% GDP defense spending at Shangri-La Dialogue. Japan, Philippines, Netherlands plan increases. Ukraine lessons reshape procurement. What investors need to watch.
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The 2026 IISS Shangri-La Dialogue in Singapore produced a clear shift in global defense budgeting. U.S. Secretary of War Pete Hegseth set a 3.5% of GDP spending target in his Saturday remarks, and nations including Japan, the Philippines, and the Netherlands are planning increases in their defense allocations. Even New Zealand, currently below the 3.5% mark, is boosting spending. The target, long pressed by President Donald Trump and initially met with resistance, now enjoys broad public endorsement. Dutch Deputy Prime Minister Dilan Yesilgoz-Zegerius said the U.S. is "right" to ask for more, noting that Russia's invasion of Ukraine changed the calculus for the Dutch public.
For investors tracking defense sector exposure, the dialogue offers concrete signals about where procurement dollars will flow and which geopolitical risks are driving budget decisions. The simple read is that higher defense spending benefits contractors across the board. The better market read requires parsing which countries are committing, what capability gaps they are trying to fill, and how the lessons from Ukraine are reshaping procurement priorities.
Hegseth's call for countries to spend at least 3.5% of GDP on defense marks a significant escalation from the long-standing NATO target of 2%. The message was directed not solely at NATO allies. Hegseth addressed the entire Asia-Pacific audience, warning Beijing that there is "rightful alarm" regarding China's military buildup.
Several nations used the dialogue to signal concrete budget increases:
The acceptance of higher defense spending is not merely rhetorical. It reflects a structural change in threat perception. Canada's Chief of the Defense Staff, General Jennie Carignan, articulated the logic: "No one country can do it all alone. Having the ability to get together to complement each other's capabilities is incredibly important. In order to do that, you have to have your own defense." This interdependence creates a multiplier effect. As each country builds its own capacity, collective demand for defense equipment, training, and technology rises.
For the second consecutive year, China did not send its defense minister to the Shangri-La Dialogue. Dong Jun was absent, with Beijing's delegation led by Major General Meng Xiangqing from the People's Liberation Army National Defence University. The absence was widely noted and criticized.
Despite the lower-level representation, Chinese delegates defended their positions vigorously. Meng took aim at Japan's defense spending hikes and expansion of weapon sales, questioning whether Asian countries will trust Tokyo remilitarizing after its actions in World War II. Former Vice Minister of Foreign Affairs Cui Tiankai maintained Beijing's position that cross-strait tensions are a matter of territorial integrity and national unity: "No one cares more about stability in Taiwan Strait than we in China, because on both sides of the Taiwan Strait it's Chinese territory."
The absence of ministerial-level engagement creates a vacuum that increases uncertainty. For defense investors, this uncertainty is a double-edged sword. It justifies higher spending but also raises the risk of miscalculation or conflict.
Ukraine's fight against a larger, better-resourced Russia continues to resonate strongly within the international community. The concept of asymmetric warfare has reshaped defense strategy globally, and the Shangri-La Dialogue provided a platform for sharing those lessons.
Former Ukrainian Foreign Minister Pavlo Klimkin told CNBC: "There's a very keen interest in lessons from Ukraine and around Ukraine. It's a kind of understanding that first asymmetric deterrence and asymmetric fighting is something which matters." He added: "What is at stake in this war is the whole sense of security. Whether we have or we don't have any security architecture in Europe and around Europe, where Ukraine belongs to, and how to fix it within the future security architecture."
Countries like the Philippines are eyeing Ukraine's tactics as they boost defense spending. Dutch Chief of Defense General Onno Eichelsheim revealed that Ukrainian advisers are working with the Netherlands to assess what is useful and what is not, helping allocate resources more effectively. This direct transfer of battlefield experience is accelerating the adoption of drones, electronic warfare, and precision munitions.
Manila's Teodoro struck the most combative tone of any delegate. He accused China of "unrepentant" expansionism and said, "They're unrepentant with their expansionism and unrelenting. To deny that would be to be absolutely dishonest." The Philippines is a key flashpoint in the South China Sea, and its defense spending increases are directly tied to countering Chinese assertiveness.
The Philippines' stance, combined with Japan's military buildup and the U.S. commitment to the region, creates a multi-layered demand environment. Each country is prioritizing different capabilities. Japan focuses on long-range strike and missile defense. The Philippines focuses on maritime patrol and asymmetric warfare. The Netherlands focuses on interoperability with NATO. For defense contractors, this means diversified revenue streams across platforms and geographies.
The Shangri-La Dialogue 2026 provides a clear catalyst path for defense sector earnings. The 3.5% GDP target, if adopted broadly, would represent a structural increase in defense budgets across the Asia-Pacific and Europe. The lessons from Ukraine are shifting procurement toward asymmetric warfare capabilities, which may benefit smaller, more agile suppliers.
The dialogue made one thing clear: the era of 2% GDP defense spending is ending. Investors who understand which countries are committing, which capabilities they are buying, and how Ukraine's lessons are being applied will be better positioned to navigate the coming multi-year defense cycle.
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