US’s Greenland tariffs threaten more political than economic fallout

Faced with resistance to his push to acquire Greenland, President Trump on 17 January announced 10% tariffs through social media on eight NATO allies: Denmark, Norway, Sweden, the United Kingdom, France, Germany, the Netherlands, and Finland. The levies are set to take effect on 1 February, and rise to 25% on 1 June, absent a deal.

If implemented, we believe the macroeconomic impact of these new tariffs will be contained. These eight European economies account for 10.5% of total US goods imports. The new US levies would most likely be imposed under the International Emergency Economic Powers Act (IEEPA), a provision currently under discussion at the Supreme Court. Based on current IEEPA tariff patterns, 44%-to-50% of imports from the targeted countries would be exempt as they are subject – or potentially subject - to ‘Section 232’ tariffs. After exemptions, the increase in the effective US tariff rate would be around 0.5 percentage points under a 10% tariff scenario and 1.5 points under a 25% scenario. That is well below the impact of the global tariff announcements of April 2025.

This modest effect, coupled with material implementation uncertainty, including the fact that the announcement came through social media rather than as an executive order, a pre-condition tied to Greenland’s purchase, a two-week window before the February deadline, and the president’s record of walking back threats, means that we keep our macroeconomic forecast for US economic growth unchanged at 1.9% for 2026.

One important difference is that unlike in August 2025, when the European Union accepted the 15% tariff deal framework, the bloc now has greater leverage and looks more likely to retaliate with counter-tariffs. Europe has scope to respond economically ahead of the US mid-term elections. Potential actions may echo those from March 2025, when the EU countered Mr Trump’s steel and aluminium tariffs with measures targeting Republican strongholds, notably duties on Kentucky bourbon, Harley-Davidson motorcycles from Wisconsin (a key swing state) and agricultural products from Iowa and other states.

Mid-term elections are now just months away, making counter-tariffs much more politically potent

While these were suspended in the August deal, three factors make retaliation more credible this time. First, the November 2026 mid-term elections are now just months away, making counter-tariffs much more politically potent. Second, the Greenland rationale is likely to meet broad political support in Europe. Finally, these tariffs specifically target NATO allies who deployed troops to Greenland for collective defence, creating cross-party unity in Europe, and even bipartisan opposition within the US.

First reactions from European leaders point in this direction, with potential countermeasures targeting up to EUR 93 billion’s worth of US exports by 6 February, to allow time to de-escalate tensions. French President Emmanuel Macron has also threatened the use of the EU’s Anti Coercion Instrument (ACI). If Europe retaliates, we think the political impact on President Trump ahead of the midterms will be more consequential than the direct economic effects of the tariffs themselves.

Rising geopolitical risk premia

Overall, we maintain our base case that despite escalating tensions, these 10% tariffs will either not take effect, or be implemented only for a short period, as this time Mr Trump has more to lose and Europe more incentives to retaliate firmly. We also acknowledge the possibility of spiralling tensions between the EU and US, and higher tariffs on both sides.

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In markets, we expect geopolitical risk premia to rise, led by gold. The magnitude and duration will depend on the risk of EU-US trade escalation, and a Supreme Court ruling on the use of the IEEPA framework.

…we see no lasting market impact. However, we anticipate more pronounced regional and sector differentiation

Absent significant escalation, and with earnings holding up so far, we see no lasting market impact. However, we anticipate more pronounced regional and sector differentiation, with a rotation to defensive sectors as well as AI-exposed stocks at reasonable valuations. We expect Swiss, Japanese and emerging market (EM) equities to outperform. Within EM equities, we expect more domestic-led markets such as China and India to outperform more US-exposed markets such as Taiwan, or Korea, which are more vulnerable to profit taking. 

If tensions escalate, however, European equities are the most vulnerable, particularly in export sectors linked to IEEPA tariffs, including healthcare, machinery, luxury goods, capital goods and select tech hardware, which would face headwinds in terms of margin pressures and valuations. France, Germany, the UK look the most exposed. US equities are not immune either, particularly in a scenario where the EU follows through with tariffs on EUR 93 billion of US imports. This poses risks to industrials, exporters, global consumer brands and broader sentiment. The EU’s potential unwinding of its USD 8 trillion holdings of US assets may lead to a higher US equity risk premium and a weaker US dollar. For now, strong AI-related earnings momentum will help limit downside for US equities, unless trade tensions escalate into a more systemic and prolonged conflict.

The dollar is unlikely to appreciate, given the US’s weak net international position and Europe’s role as the largest foreign holder of US assets

We also expect some limited volatility in short-term US interest rates, with upside risks mostly in longer dated yields if tensions intensify, reflecting geopolitical risks and policy uncertainties. The dollar is unlikely to appreciate, given the US’s weak net international position and Europe’s role as the largest foreign holder of US assets. Pressure to diversify away from, or hedge, dollar exposures remains. The Swiss franc is likely to record temporary gains as a haven. We confirm our US dollar-negative view and expectation of emerging currency resilience. We expect limited impact in our tactical portfolio positioning beyond increased market volatility, with our overweight position in gold providing diversification benefits. We are monitoring the situation and will adjust our positioning as needed.

Realpolitik at Davos

President Trump has opened the year with multiple policy fronts after the action in Venezuela and a criminal case against the Federal Reserve Chair. The world’s leaders, including President Trump and a number of European leaders including German Chancellor Friedrich Merz are expected to in Davos, Switzerland this week, at the annual World Economic Forum meetings. Much more news will flow on these topics and we are monitoring events carefully.