President Trump announced over the weekend that, beginning February 1, the U.S. will impose a 10% tariff on all goods imported from Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland. Tariffs would rise to 25% in June unless “a deal is reached for the complete and total purchase of Greenland.”
The administration argues that U.S. control of Greenland is necessary to counter China and Russia, citing the island’s strategic geographic position in the North Atlantic and its vast untapped critical mineral reserves. Yet, this argument has raised eyebrows. The U.S. already benefits from a longstanding defense agreement with Denmark, with a willingness to further expand the U.S. military presence in Greenland. Moreover, President Trump’s past negotiations with other countries over access to critical minerals have never proposed the acquisition of sovereign territory.
The proposal has not only sparked outrage across Europe but also prompted an unusually sharp public rebuke from some Republican lawmakers, who argue that targeting NATO allies risks violating Danish sovereignty and undermining U.S. credibility within the alliance.
The announcement immediately placed last year’s U.S.–EU trade agreement at risk. The EU has indicated that the deal—intended to reduce tariffs on a range of U.S. exports—could now be stalled or revisited. Ultimately, officials are now weighing a series of potential retaliatory actions.
One option under consideration is activating the EU’s anti-coercion instrument (ACI), which authorizes an expansive set of countermeasures, including new tariffs, digital taxes, targeted investment restrictions, limits on market access, and the potential exclusion of U.S. firms from European public procurement markets. These measures could be targeted at major U.S. tech firms operating in Europe, creating significant distress to the tech sector. Yet triggering the ACI would require a lengthy, formal process and risks significantly escalating the crisis.
As a faster, less forceful alternative, EU ambassadors have revived discussions about the €93bn package of retaliatory tariffs drafted in response to Trump’s measures last year but never implemented. Reopening this option signals that Europe is prepared to respond swiftly if Washington proceeds.
Although Europe holds several trillion dollars in U.S. assets, the likelihood of large-scale divestment remains low. Still, both sides retain ample room to escalate, through targeted sectoral measures, additional tariff rounds, or new regulatory barriers, if tensions worsen. Extreme scenarios remain unlikely, but the rhetoric could easily intensify, raising the risk of a broader confrontation.
This latest threat returns tariff policy to center stage after a period of relative calm. A 10% tariff would lift the average effective U.S. tariff rate from roughly 12% to 13%, and a move to 25% would raise it to around 14%—the highest level since the 1930s Smoot–Hawley era and far above the ~2% level of early 2025.
While prior tariff rounds had a smaller-than-expected drag on growth, the marginal impact may be larger this time. The targeted European economies have deep value chain linkages with U.S. industries, raising the risk of supply chain disruption and higher input costs. Any inflation pass-through, particularly in categories with limited domestic alternatives, would complicate the Federal Reserve’s rate-cutting plans, effectively lifting the inflation floor policymakers must navigate.
Europe faces an immediate shock via reduced export volumes to the U.S., one of its most important external markets. The drag on growth will hinge on price elasticities: how much exporters can absorb cost increases versus pass them on. Retaliation risk creates a meaningful left tail scenario in which a tit for tat cycle amplifies the shock.
The inflation effect is less clear-cut. While tariffs may raise prices for some exporters, weaker demand should dominate, creating a disinflationary tilt. This dynamic would likely pressure the ECB, which had previously been expected to keep monetary policy on hold, to consider renewed easing.
At the same time, fiscal responses, particularly increased defense spending at both national and EU levels, would act as partial buffers against the adverse growth shock.
Whether these tariffs ultimately take effect remains uncertain. Trump frequently backed away from his most aggressive tariff threats last year, often without securing concessions, highlighting a pattern of political signaling preceding policy dilution.
Another layer of uncertainty stems from the imminent Supreme Court ruling on the legality of using the International Emergency Economic Powers Act (IEEPA) to impose tariffs. If the Court rules against the administration, the proposed European tariffs could be halted before they begin.
Yet, markets broadly assume the administration would pivot to alternative legal authorities, implying that the ruling may delay, but not derail, the broader trade agenda.
The main implication for investors from a Supreme Court ruling against using IEEPA is heightened uncertainty rather than a material change in direction.
With U.S. markets closed yesterday, the full investor reaction is still emerging. European equities fell around 1.5%, the U.S. dollar weakened sharply, while gold hit fresh all-time highs, reflecting demand for geopolitical hedges.
A muted equity market reaction would be consistent with year-to-date market behavior. Investors have looked mainly through a series of shocks, from the capture and arrest of a foreign leader to a Department of Justice probe into the Fed Chair, focusing instead on the continued strength of the U.S. and global economy. Policy noise has not yet displaced fundamentals as the dominant market anchor.
The consensus entering 2026 was that political volatility would diminish, tariff headlines would fade, and affordability concerns would restrain new trade measures. The latest announcements surrounding Greenland challenge all three assumptions.
Yet, markets may still respond in a measured way:
- High bar for repricing political risk. Threats without clear implementation pathways are often discounted. Investors wait for action, not headlines.
- Affordability concerns limit escalation. In a midterm election year, tariffs that risk higher goods inflation and thereby complicate further Fed rate cuts can carry political costs.
- Legal uncertainty slows execution. The upcoming IEEPA ruling could delay implementation, even if the broader agenda remains intact.
- Earnings remain the anchor. Robust corporate profits, strong household balance sheets, and solid labor markets continue to drive equity performance. If earnings momentum holds, equities can extend gains despite policy noise.
Even with U.S. equities at all-time highs and therefore more sensitive to risk-premium shifts, and provided Europe does not activate its anti-coercion tool or a large-scale divestment of U.S. assets, a correction on the scale of the post-Liberation Day pullback appears unlikely.
However, this episode may accelerate an emerging structural shift: global investors have shown greater appetite to diversify away from U.S. concentration risks, especially in AI leadership, and renewed geopolitical unpredictability strengthens this incentive. Recent dollar softness is consistent with this gradual global portfolio rebalancing.
Despite rising policy uncertainty, the global macro backdrop remains exceptionally resilient. Global equities delivered one of their best performances on record last year—even as a broad trade war unfolded—underscoring investors’ willingness to look through geopolitical noise when fundamentals are strong. At the start of 2026, U.S. growth continues to outperform, supporting expectations for another robust earnings season, and these fundamentals remain the primary anchor of investor behavior.
At the same time, Washington’s growing reliance on tariffs as a geopolitical tool suggests that trade policy volatility will remain a structural feature of the investment landscape. Even if many threats ultimately recede (as policymakers often step back from actions that could seriously disrupt financial markets), the sheer frequency and unpredictability of tariff signaling introduces persistent uncertainty.
For investors, this environment strengthens the case for broad diversification across geographies, currencies, sectors, and policy regimes. Markets may continue to absorb episodic shocks, but the cumulative effect of policy volatility argues for more balanced global portfolios, built to withstand the possibility of sharper swings in trade and geopolitical risk.
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The information in the article should not be construed as investment advice or a recommendation for the purchase or sale of any security. The general information it contains does not take account of any investor’s investment objectives, particular needs, or financial situation.
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