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With the end of the Cold War, the United States dramatically cut defense expenditures. This trend began in the administration of Ronald W. Reagan and continued through the presidencies of George H. W. Bush and William J. Clinton. In spite of the decline in defense expenditures, America remained the world's foremost military power. Concurrent reductions in defense budgets by Washington's allies renewed controversies over burden sharing within the North Atlantic Treaty Organization (NATO) and heightened concerns over the ability of U.S. forces to operate with allied troops. By 2006, U.S. defense spending totaled more than the rest of the world combined. America's share of the NATO budget declined from almost 50 percent during the Cold War era to 26 percent by 2006 following successive waves of alliance expansion. Nonetheless, the United States spent three times as much on research and development as all of the NATO partners combined in 2006. The gap in spending on new technology highlighted concerns about the ability of U.S. and allied troops to maintain interoperability during operations. However, American weapons research bolsters the nation's defense exports. In 2006, the United States provided 65 percent of the imported weapons used by the NATO allies.

The 1990s witnessed the most significant decline in U.S. military spending since the end of World War II. The percentage of defense spending as a share of the nation's gross domestic product (GDP) fell from its 1980s peak of 6.2 percent to a low of 3 percent in 1999, before rebounding during the war on terror to 3.7 percent of GDP in 2006. In dollar terms, American defense expenditures at the end of the Cold War were more than $420 billion per year. Spending declined to $305 billion in 1998 and then rebounded to $470 billion in 2006. American forces were reduced by half during the 1990s to 1.4 million (by 2006 increasing slightly to 1.45 million). In addition, while military expenditures accounted for an average of 60 percent of total government discretionary spending during the 1980s, that percentage declined to 50 percent by 1995 and 47 percent in 2006. As was the case in the aftermath of the Vietnam War, the Clinton administration oversaw a shift away from the maintenance of large standing forces to weapons development and procurement. This emphasis reinforced the administration's efforts to promote American arms sales and weapons transfers. The George W. Bush administration cut some procurement programs and refocused spending on special operations forces and information warfare. U.S. participation in international peacekeeping missions in Haiti and the Balkans strained the capabilities of the standing forces and resulted in the increasing use of reserve troops and National Guard units. Operation Enduring Freedom and the 2003 Iraq War accelerated this trend, with 40 percent of the troops deployed being either reserves or National Guard units.

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