Transatlantic trade tensions are escalating dramatically as former US President Donald Trump threatens punitive tariffs on eight European countries, pushing the European Union to consider deploying its powerful but untested "big bazooka" retaliatory tool. The dispute centres on Trump's renewed ambition to purchase Greenland, an autonomous Danish territory.
The Tariff Threat and the EU's Deterrent
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 is a direct response to their opposition to his plan to seize Greenland. He warned that if a deal for the "complete and total purchase" of the Arctic island is not reached, the tariff rate would skyrocket to 25% on 1 June.
In response, EU leaders have threatened to activate the bloc's Anti-Coercion Instrument (ACI), colloquially known as the "big bazooka." This law, which came into force in 2023, was designed to give the EU powerful tools to counter political bullying and trade blackmail from other nations. It was originally inspired by China's economic pressure on Lithuania but is now being considered for use against the United States.
The ACI grants the EU sweeping powers to impose sanctions, which could include:
- Excluding US companies from the EU's internal market.
- Imposing export controls.
- Ending intellectual property protections for US firms.
Will Europe Fire the Bazooka?
Internally, the EU is divided on how to respond. France, the instrument's biggest champion, has urged allies to consider deploying it if Trump follows through. German Finance Minister Lars Klingbeil echoed French President Emmanuel Macron's suggestion to "consider using these measures."
However, German Chancellor Friedrich Merz struck a more conciliatory tone, highlighting Germany's heavy dependence on exports and suggesting Trump might be open to persuasion. Nations like Ireland, the Netherlands, and Italy have historically been reluctant to use such aggressive measures, preferring dialogue.
A crisis meeting of EU senior diplomats on Sunday revealed no current majority for activating the ACI. Brussels officials are adopting a wait-and-see approach, hoping this is another "Taco moment"—a reference to the acronym "Trump Always Chickens Out" that describes his history of U-turning on tariff threats after market jitters.
The EU is also awaiting a US Supreme Court ruling on the legality of Trump's tariffs, expected as early as Tuesday. The bloc views the ACI primarily as a deterrent and will not act pre-emptively.
Economic Fallout and Global Implications
The potential economic damage is significant. The combined value of US imports from the eight targeted nations exceeded $365 billion (£272 billion) last year. Germany would be the hardest hit, with exports worth over $160 billion, followed by the UK ($68 billion) and France ($60 billion).
According to Goldman Sachs, a 10% tariff could lower real GDP in the affected European countries by 0.1% to 0.2%, with Germany facing a potential 0.3% hit. The eurozone and UK could each see a 0.1% reduction in GDP.
The US would not escape unscathed. Tariffs would likely be paid by US businesses and consumers, potentially stoking inflation and hurting investment. International Monetary Fund chief economist Pierre-Olivier Gourinchas warned a tit-for-tat trade war could drag down global output by about 0.3%, stating firmly, "there are no winners in a trade war."
If the EU chooses not to use the ACI, it has a faster alternative: reactivating suspended tariffs on €93 billion (£81 billion) of US goods, including bourbon, aircraft, and soybeans. These countermeasures, paused after last summer's trade deal, could be reinstated as early as 7 February.
Can a Crisis Be Averted?
Experts see several potential off-ramps. A Supreme Court ruling against Trump would void his threat. Domestic political pressure may also play a role; a recent CNN poll found 75% of Americans oppose annexing Greenland, and Congress could block his ambitions.
However, analysts warn Trump may have 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," said Kallum Pickering, chief economist at Peel Hunt.
While last year's trade tensions had a relatively muted impact as companies adapted by front-loading shipments and absorbing costs, economists warn that capacity for such adjustments is now diminished. A new trade war could sap business investment, hit consumer confidence, and trigger volatility in financial markets already nervous about record-high equity prices.
The coming weeks will be critical as Europe watches Washington, weighing diplomacy against the unprecedented step of aiming its regulatory "big bazooka" at its oldest ally.
