Trump's tariff threat over Greenland

On 20 January the White House threatened European countries with immediate 25 per cent tariffs on all their goods exports unless Denmark and its European allies formally open talks on handing sovereignty over Greenland to the United States. Diplomacy has had stranger weeks, though not many. The threat arrives six months after Brussels and Washington agreed at Turnberry, in Scotland, to cap most American tariffs on European goods at 15 per cent, a deal European leaders defended at home as the price of predictability.

Truman wanted it too

Washington's interest in the island is older than the current administration. Harry Truman's government offered to buy Greenland from Denmark in 1946, and the United States has run a military base in the far north-west of the island, now called Pituffik Space Base, since the early Cold War. Donald Trump raised the idea of a purchase during his first term in 2019 and called off a state visit to Copenhagen when the Danish government dismissed it. What has changed is the instrument. Seven years ago the pressure was verbal, and now it comes with a customs schedule attached.

The only territory the United States has actually bought from Denmark came through a willing sale. In 1917 Washington paid $25m in gold for the Danish West Indies, now the US Virgin Islands, driven by fear that Germany might seize the islands during the first world war. As part of that deal the United States declared that it would not object to Denmark extending its political and economic interests to the whole of Greenland. The security logic then resembled the Arctic argument made today, but the method was a negotiated purchase, and the 1917 settlement is one of the documents on which Danish sovereignty over the island now rests.

Tariffs as a tool of territory

The Greenland demand takes the use of trade policy as a geopolitical weapon about as far as it can go. Trade agreements, commercial treaties and WTO commitments count for nothing here. Powers meant to deal with trade imbalances are being used to press for strategic Arctic land and its rare earth deposits, and to push back against Russian and Chinese shipping routes in the north. The legal footing looks thin as well, since the emergency-powers statute behind last year's tariffs was written for sanctions, and a challenge to its use for tariffs reached the Supreme Court in November.

The mechanics are simple and the incidence is not. The duty is collected from American importers when goods clear customs, so the first bill lands on US distributors, wholesalers and the American subsidiaries of European firms. How much they pass on depends on pricing power: a luxury handbag can carry a 25 per cent levy in its sticker price, while a commodity chemical or a machine component usually cannot, and its European maker ends up cutting margins to keep the order. Because trade policy belongs to the European Union rather than its members, and Denmark sits inside the single market, a threat aimed at Copenhagen and its allies in practice falls on the exports of the whole bloc, whose largest single export market is the United States.

Boardrooms cannot plan for this

European companies have no sensible way to operate under such a threat. A German factory-automation maker, a big Danish drugmaker or an Italian luxury house has no obvious hedge against border taxes set off by a dispute over Arctic territory. Currency hedges offer little comfort: after last April's tariff announcements the dollar weakened rather than strengthened, so European exporters lost on the exchange rate as well as at the border. The best-protected firms are those that already build in America, such as the German carmakers with plants in the southern states, and the threat will push more boards towards that expensive answer.

The exposure is uneven across sectors and countries. Pharmaceuticals, machinery, cars, and wine and spirits make up a large share of European sales to America, and Denmark's own exports to the United States are dominated by medicines. A general 25 per cent levy on top of the Turnberry rates would fall hardest on mid-sized manufacturers that sell specialised equipment to American factories and have no plants there. American buyers would pay too: many of those machines and components have no domestic substitute, so the tariff would raise costs for the same factories the administration says it wants to revive.

Brussels has an unused weapon

The EU does have a response on the shelf. Its anti-coercion instrument, which entered into force at the end of 2023, lets the Commission retaliate against a country that uses trade measures to force a political choice, through tariffs, limits on access to public procurement or restrictions on services and intellectual property. It was prompted by China's trade embargo on Lithuania in 2021 and has never been used. A demand for territory backed by tariffs fits its definition of coercion more neatly than anything its drafters had in mind, which makes it harder for cautious member states to argue for restraint.

An ally squeezed before

The United States has used economic pressure against a close ally once before with decisive effect. During the Suez crisis of 1956, the Eisenhower administration refused to support sterling as it came under heavy selling and blocked Britain's access to emergency funds from the International Monetary Fund until London agreed to withdraw its forces from Egypt. Britain gave way within weeks. The episode shows that financial pressure on a friend can work when the target depends on American support, but the aim then was a military withdrawal rather than a transfer of territory, and the damage to trust took years to repair.

The case for calm

The strongest argument against alarm is the administration's own record. Tariff threats over the past year have often been diluted, delayed or dropped once markets fell and lobbyists arrived, and Denmark will not negotiate away a territory whose people have their own government and, under a 2009 law, the right to choose independence. On that reading the threat is an opening bid for a larger American military and mining presence on the island, which Copenhagen could concede without touching sovereignty. The damage survives a climbdown all the same, because investors have now learned that a tariff can be triggered by almost any White House objective.

What to watch

Markets offer the first test. A sustained fall in European equities and the euro would signal that investors believe the threat will be carried out, while a quick recovery would suggest they expect another retreat. The Supreme Court's pending ruling on the emergency-powers tariffs matters here too: if the court finds that the statute does not authorise tariffs, the legal basis for this threat would fall with the others, although the administration could look for authority elsewhere.

The political signals worth watching are whether a formal order appears in the Federal Register with an effective date, whether the Commission asks member states to start the anti-coercion procedure, and whether NATO offers Washington an Arctic security arrangement that lets both sides step back. Using tariffs to extract territory leaves little of the rules-based trading order standing. European exporters now face tariffs that can arrive at any time for reasons that have nothing to do with trade, and they will probably price that risk into every investment decision this year.