Greenland and the weaponisation of global trade

For a few days in January, the fate of the global economy seemed to hang in the balance on the tundra of Greenland. US President Donald Trump’s threat of tariffs on European countries over Greenland was quickly reversed, but part of a familiar pattern of weaponising trade for political leverage. Trump’s claim that the US should “own” the island (an autonomous territory in the Kingdom of Denmark) to ensure international security has pushed relations between Europe and the United States to a new low.

On 17 January, Trump threatened eight nations (Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland) with tariffs of 10%, rising to 25% from 1 June, if they continued to oppose his annexation of Greenland. These European nations had sent small numbers of soldiers to Greenland to reinforce security as part of Operation Arctic Endurance, an action seen as hostile by President Trump. This was a significant step in Trump’s latest attempt to gain control of the Arctic island, but was reversed only four days later after “the framework of a future deal” had been agreed with NATO secretary-general Mark Rutte.

The S&P 500 fell 2.1% on the 20th as part of Wall Street’s worst day since October

Markets were quick to react both to the initial threat of tariffs and its reversal. The S&P 500 fell 2.1% on the 20th as part of Wall Street’s worst day since October, while stock markets fell similarly across Europe. This reflected fears of the impact of a trade war with the EU, which had considered responding with tariffs of its own, or even invoking the “Anti-Coercion Instrument” to counter economic bullying with punitive tariffs and service restrictions. By framing the Greenland demand as coercion rather than a trade dispute, the EU effectively froze the Turnberry Framework Agreement and threatened immediate retaliation on €93 billion ($108 billion) of American exports, including aircraft and cars.

Relief was evident when the tariffs were called off, with both European and American stock markets recovering some of their previous losses. Gold, however, a key indicator of uncertainty and instability, continued to rise to a record high of over $5,000. This latest rise is significant but follows a trend that has seen the precious metal almost double in price since Trump took office just over a year ago. This reflects fears that the President’s erratic, unpredictable trade policies will harm the global economy by raising trade barriers.

To understand the stakes of these tariff threats, we need to look at their mechanics. Tariffs are taxes on goods entering a country, paid by domestic consumers, that reduce demand for imports and are seemingly irrelevant to a discussion of Greenland’s sovereignty. However, higher prices also reduce demand for imports, which harms foreign producers, such as German car manufacturers. This turns negotiations into a game of brinkmanship where each party waits for the other to back down to avoid the mutually damaging economic consequences if tariffs were introduced. Over Greenland, it seems like Trump has chosen to back down, even if he claimed victory.

Trump’s tariff threats over Greenland […] reflect a major shift in global trade negotiations.

Geopolitical influence is only one of Trump’s conflicting reasons for using (or threatening) tariffs over the first year of his second term. Among the others are bringing manufacturing back to the US and raising revenue for the government to fund tax cuts, though these rely on actually implementing the taxes long-term. The first major tariff announcement was “Liberation Day”, which included blanket rates of over 30% for many countries. This precipitated retaliation from China, the European Union, and others, leading to a climbdown and reduction of rates.

Trump’s tariff threats over Greenland are not unique for his administration but reflect a major shift in global trade negotiations. The gradual progress towards freer trade that has been a hallmark of the global economy since WWII is under threat. The World Trade Organisation and other international bodies have warned that sustained tariff escalation could slow world trade growth and increase barriers, undoing decades of tariff reductions under GATT and the WTO framework.

Whilst the immediate threat of trade (or even real) war appears to have passed with Trump’s announcement at Davos, Europe is still adjusting to Trump’s relentless pursuit of deals for himself at any cost.