The spectre of a major transatlantic trade war looms large after former US President Donald Trump threatened to impose sweeping import tariffs on eight European countries. The move, linked to his ambitions to acquire Greenland, has prompted the European Union to consider deploying its most powerful and untested retaliatory weapon: the so-called 'big bazooka'.
The Tariff Ultimatum and Europe's Potential Response
Over the weekend, Trump declared that a 10% tariff would apply to all goods shipped to the US from Denmark, Norway, Sweden, the UK, France, Germany, the Netherlands, and Finland starting 1 February. This punitive measure is conditional on these nations not acceding to his demand for the "complete and total purchase" of Greenland from Denmark. He further warned that if a deal is not reached, the tariff rate would escalate to 25% on 1 June.
In response, EU leaders have threatened to activate the bloc's Anti-Coercion Instrument (ACI), a legal tool devised to counter political bullying and trade blackmail. Enacted in 2023 and originally inspired by China's pressure on Lithuania, the ACI grants the EU sweeping powers to impose sanctions. These could range from excluding US companies from the European single market to imposing export controls or revoking intellectual property protections.
A Complex Calculus of Retaliation and Risk
Pulling the trigger on the 'big bazooka' is neither simple nor swift. The European Commission could take up to four months to determine if coercion is occurring, followed by an 8-10 week period for member states to endorse any decision. Retaliation requires a weighted majority vote.
Internally, the EU is divided. France has championed the use of the ACI, with President Emmanuel Macron finding some support from Germany's Finance Minister, Lars Klingbeil. However, German Chancellor Friedrich Merz has urged a more conciliatory approach, citing Germany's heavy export dependence. Nations like Ireland, the Netherlands, and Italy have historically been reluctant to deploy such drastic measures. A Sunday crisis meeting of senior diplomats revealed no current majority for immediate action.
As an alternative, the EU could swiftly revive previously suspended tariffs on €93 billion worth of US goods, including bourbon, aircraft, and soybeans. These countermeasures, paused after a summer 2023 deal, are set to automatically reactivate on 7 February if the pause lapses.
Economic Fallout and Global Implications
The economic stakes are enormous. US imports from the eight targeted nations exceeded $365 billion last year. Germany would be hardest hit, with exports worth over $160 billion at risk, followed by the UK ($68bn) and France ($60bn). Goldman Sachs estimates a 10% tariff could lower real GDP in affected European countries by 0.1% to 0.2%, with Germany potentially facing a 0.3% reduction.
The US would not escape unscathed. Tariffs would act as a tax on American businesses and consumers, potentially dampening investment and stoking inflation. International Monetary Fund chief economist Pierre-Olivier Gourinchas warned a tit-for-tat conflict could reduce global output by approximately 0.3%, stating firmly that "there are no winners in a trade war."
Experts suggest several off-ramps exist. A pending US Supreme Court ruling on the legality of Trump's tariffs could void his threat. Market pressure or the threat of EU retaliation might also lead to another reversal—a scenario some diplomats refer to as a "Taco moment," an acronym for "Trump always chickens out." Furthermore, domestic US opposition is significant, with a recent CNN poll finding 75% of Americans oppose annexing Greenland.
However, the situation remains perilously volatile. As Kallum Pickering, chief economist at Peel Hunt, noted, "The risk is that Trump has backed himself into a corner. Having made clear he wants US ownership of Greenland, anything less than that could look like a loss for him." The coming weeks will test the resilience of transatlantic trade ties and the EU's resolve to wield its formidable new defensive arsenal.
