By: Marta Bengoa
U.S. President Donald Trump threatened eight NATO allies with escalating tariffs on January 17th, unless Denmark sold Greenland. The announcement had roiled the U.S. and international markets for four days before he abruptly reversed course. Trump had threatened 10% duties starting February 1st on Denmark, Norway, Sweden, France, Germany, the Netherlands, Finland, and the United Kingdom, escalating to 25% by June 1st, unless a deal was reached for the complete purchase of Greenland. The rationale shifted between national security concerns about Russian and Chinese ambitions in the Arctic, complaints about joint military exercises, and demands for territorial acquisition justified through nineteenth-century imperial logic.
U.S. markets responded immediately to the initial threats, with the S&P 500 index dropping over 2% on January 20th, its worst day since October, as investors fled U.S. assets. The 30-year Treasury yield spiked to 4.91%, driving mortgage rates higher and threatening to push monthly payments further out of reach for American homebuyers already struggling with affordability. Mortgage rates closely track the 10-year Treasury yield plus a spread of approximately 1.8-2.2 percentage points. Sustained increases in Treasury yields, therefore, push monthly housing payments higher. For a $300,000 mortgage, every quarter-point increase in rates adds roughly $45 to monthly payments, or $540 annually that families must find elsewhere in their budgets. The Federal Reserve's December rate cuts, intended to support economic growth, were being overwhelmed by fiscal policy choices that drove borrowing costs higher through market mechanisms the central bank cannot control.
The direct economic costs of these tariffs also mirrored previous tariff escalations. The eight targeted countries collectively represent over $700 billion in annual bilateral trade with the United States. American consumers would have faced higher prices across categories from automobiles to pharmaceuticals, while European retaliation (already being calibrated) threatened to hit U.S. agricultural exports, aerospace products, and services. Early estimates suggested affected product categories could see price increases of 2-3%, functioning as an effective consumption tax that disproportionately impacts lower and middle-income families.
Trump's dramatic reversal came on January 21st after meetings with NATO Secretary General Mark Rutte and pressure from his own advisers. Speaking at Davos, Trump first ruled out using military force to acquire Greenland (after weeks of refusing to do so), then hours later announced what he called a "framework of a future deal" with NATO on Arctic security. Based on this framework, Trump canceled the February 1st tariff threats. The agreement reportedly focuses on expanding U.S. military presence in Greenland, increasing European security commitments in the Arctic, granting U.S. access to mineral development rights, and coordinating efforts to exclude Russian and Chinese influence from the region.
The framework remains deliberately vague. Trump told reporters the deal involves "security and minerals and everything else" and would be "forever," while Rutte emphasized collective efforts to defend the Arctic region without addressing Greenland's sovereignty directly. According to NATO officials, discussions will focus on Arctic security through the collective efforts of allies. Crucially, neither Denmark nor Greenland participated in these discussions. Greenlandic politicians immediately rejected Trump's characterization, with Member of Parliament Aaja Chemnitz calling the claims "completely crazy" and stating that "NATO has no mandate whatsoever" to negotiate on Greenland's behalf. Multiple sources suggest the framework merely reemphasizes pre-existing commitments from the 1951 U.S.-Denmark treaty, while European nations recommit to increasing Greenland's defense.
European leaders now confront a different set of decisions than they faced days earlier. The European Parliament had suspended ratification of last July's trade agreement, which had capped most EU-facing tariffs at 15%. Brussels had prepared to reactivate 93 billion euros ($108 billion) in previously suspended retaliatory tariffs targeting American goods from Boeing aircraft to Kentucky bourbon to agricultural products. French President Emmanuel Macron had pushed to deploy the Anti-Coercion Instrument for the first time since its 2023 adoption.
The ACI represents Europe's most powerful economic countermeasure, which some call the trade bazooka. Unlike conventional tariffs, the ACI allows the European Commission to target virtually any aspect of U.S. market access. Options include restricting public procurement participation, imposing limits on financial services, curtailing intellectual property protections, or blocking foreign direct investment. The instrument requires a qualified majority vote from EU member states, giving France and Germany effective veto power but also ensuring broad European consensus before deployment. Activation would signal that Europe views Trump's demands as economic coercion rather than legitimate trade negotiation, fundamentally changing the nature of the dispute.
German Chancellor Friedrich Merz played a moderating role, reportedly working to persuade Macron to tone down the EU response given Germany's heavier dependence on exports. Merz welcomed Trump's reversal, calling it "the right way to go," while warning that "any threat to acquire European territory by force would be unacceptable." European leaders have responded with cautious relief mixed with recognition of lasting damage. As Danish Foreign Minister Lars Løkke Rasmussen noted, while the day ended "on a better note than it began," fundamental questions about sovereignty and territorial integrity remain unresolved.
The episode reveals three critical dynamics: First, Trump's pattern of escalating threats followed by partial retreat creates persistent uncertainty that paralyzes business investment regardless of temporary resolution. Markets now understand that tariff threats can materialize with minimal warning based on non-economic grievances. Second, the framework arrangement (assuming it moves beyond mere rhetoric) could actually serve legitimate security interests. The United States already maintains Thule Air Base with Danish cooperation. Expanded coordination on Arctic security, increased European defense commitments, and mineral development agreements negotiated respectfully with Denmark and Greenland represent achievable objectives. What Trump claimed to seek through territorial acquisition and coercion could have been pursued through normal diplomatic channels without threatening allies or disrupting markets.
Third, the costs of this approach have already been borne. American consumers experienced days of elevated Treasury yields and mortgage rate pressure. American businesses watched European allies accelerate trade diversification strategies. Canada pursued closer economic ties with Beijing. The EU accelerated its Mercosur trade agreement with South America. These responses to American unreliability will reduce U.S. economic leverage regardless of whether specific tariff threats are implemented.
The fundamental problem remains Trump's inability to articulate achievable objectives through normal diplomatic processes. Denmark and Greenland categorically rejected any sale from the beginning, making the stated precondition for tariff removal impossible to satisfy. The framework announced with Rutte provides Trump a face-saving exit while changing nothing about Greenland's sovereignty. Trump can claim victory for a deal that essentially restates existing security arrangements and aspirational commitments to Arctic defense. European allies can claim they stood firm on sovereignty principles while offering cooperation on legitimate security concerns.
When allies cannot determine what actions would satisfy American demands, they respond with defensive measures rather than cooperation. The resulting economic barriers and geopolitical tensions serve no discernible American interest. The episode demonstrates that erratic threats followed by vague frameworks create costs that persist long after specific policies are reversed: Markets price in American unreliability. Allies diversify their economic dependencies. Trading partners cannot build long-term strategies around commitments that evaporate within days based on presidential mood shifts.
The costs have already materialized through higher borrowing costs, disrupted business planning, and diminished American credibility. Whether the framework leads to substantive Arctic security cooperation or remains another example of Trump declaring victory without achieving objectives, the damage to transatlantic economic relations has been done.
Marta Bengoa is a Non-Resident Fellow at ORF America.