A looming clash between European leaders and US President Donald Trump has raised fears of a full-blown transatlantic trade war. Trump has threatened to impose punitive tariffs on eight European countries if they do not allow him to “seize” Greenland, a Danish territory.
The US president has said a 10% tariff will be slapped on all goods shipped to the US from Denmark, Norway, Sweden, the UK, France, Germany, the Netherlands and Finland from 1 February, unless a deal is reached for the “complete and total purchase” of Greenland. This would then be increased to 25% on 1 June if no agreement is reached.
In response, EU leaders have threatened to deploy the bloc’s powerful “anti-coercion instrument” (ACI) – dubbed the “big bazooka” – which allows the imposition of sweeping trade sanctions on the aggressor. This could include excluding US companies from the EU’s internal market, imposing export controls or withdrawing intellectual property protections.
France, a long-time champion of the ACI, has urged European allies to consider using the measure if Trump follows through on his Greenland tariff threat. Germany’s finance minister has agreed with suggestions from French President Emmanuel Macron that the EU should “consider using these measures”.
However, not all member states are on board. Countries with a strong emphasis on free trade, such as Ireland and the Netherlands, or those led by politicians with close ties to Trump, such as Italy, have been reluctant to consider such measures in the past. Most are currently putting the emphasis on dialogue with the US.
The combined value of US imports from the eight countries targeted by Trump’s threats amounted to more than $365 billion (£272 billion) last year – equivalent to roughly half of EU exports to the US. Germany sold the most, at more than $160 billion, followed by the UK at $68 billion, and France at $60 billion.
Economists estimate that a 10% tariff would lower real GDP in the affected European countries by between 0.1% and 0.2% via lower exports, with the biggest hit being for Germany, worth up to 0.3% if implemented as a blanket tariff on all goods. For the eurozone as a whole, the implied hit would be around 0.1%, with a similar-sized blow to the UK.
The US would not escape consequences either, as additional border taxes on US imports would be paid by US businesses and consumers, hitting activity and investment, and possibly stoking inflation.
Experts are hopeful that a US Supreme Court ruling against Trump’s tariff plans could avert a full-blown trade war. Alternatively, market pressure or threats of EU retaliation may persuade the president to once again back down on his tariff threats, as he has done in the past.
However, the latest escalation goes beyond Trump’s normal playbook, raising concerns that he may have backed himself into a corner over his ambitions in Greenland. Economists warn that the tensions could sap business investment, hit consumer confidence, and trigger a sell-off in financial markets, potentially turning into a crash.
