🥛 U.S. vs Europe trade war - what’s next? ⚔️

GM. This is Milk Road Macro, the newsletter that unpacks geopolitics faster than Trump can tweet a new trade war into existence.

Here’s what we’ve got for you today:

✍️ Tariffs are back in the headlines - so what in the world is going on?
🎙️ The Milk Road Macro Show: Your Macro Framework Is Missing the Strongest Signal in the Market w/ Caleb Franzen
🍪 Scott Bessent says a Fed Chair pick could come next week.

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Prices as of 10:00 a.m. ET.

TARIFFS ARE BACK IN THE HEADLINES - SO WHAT IN THE WORLD IS GOING ON?

You might have thought they were gone.

But they’re back.

Yes - tariffs are back in the headlines.

The U.S. and Europe are potentially on the verge of a renewed trade war.

And the developments have buffeted asset markets again.

So, is this Liberation Day 2.0?

Probably not - let’s not get too carried away.

But let’s take a deeper look into what in the world is going on - and what might happen next…

What’s going on?

President Donald Trump wants more control over Greenland, and he’s using his favorite economic weapon to attempt to get what he wants - tariffs.

Over the weekend, Trump announced that the U.S. will impose a 10% tariff on imports from eight European countries (Denmark, Norway, Sweden, France, Germany, the UK, the Netherlands, and Finland) from February 1.

He plans to raise this tariff to 25% on June 1 and maintain the levy until the U.S. has reached a deal to purchase Greenland.

85% of Greenlanders do not want to become part of the U.S., according to a recent poll.

European nations are almost unanimous in standing against Trump’s Greenland plans.

How much of a big deal is this?

According to Goldman Sachs, a new 10% tariff would lower the real GDP of the affected European countries by 0.1-0.2%.

So not a massive impact.

But some European nations already have exceptionally tepid GDP growth, so a small hit could be a relatively big hit for some countries.

Goldman Sachs estimates that Germany would be the hardest hit.

Source: Goldman Sachs

How have markets reacted?

The Greenland headlines erupted over the weekend.

Since trading opened on Sunday evening, here’s how markets have reacted (at the time of writing).

S&P 500 futures (-2%) and bitcoin (-5%) have both fallen, while gold has risen (+2%).

Source: TradingView

The dollar (Dollar Index) has fallen (-1%).

Source: TradingView

U.S. Treasury yields have edged higher.

Source: TradingView

EuroStoxx 50 (representing 50 large-cap European stocks) has fallen (-3%).

Source: TradingView

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TARIFFS ARE BACK IN THE HEADLINES - SO WHAT IN THE WORLD IS GOING ON? (P2)

Will the EU respond?

The Trump threats immediately spurred European nations into action.

So far, Europe has threatened to delay last year’s EU-U.S. trade deal - and is also considering tariffs on $93B of U.S. goods.

But there is yet to be any confirmed response.

According to George Saravelos, Deutsche Bank’s global head of FX Research:

“The key thing to watch will be whether the EU decides to activate its anti-coercion instrument by putting measures that impact capital markets on the table.”

So what is this so-called “Anti-Coercion Instrument”?

Also known as the “EU’s bazooka” - it’s a legal tool that the EU can use to attempt to deter “economic blackmail by non-EU nations”, allowing powers that go beyond traditional tariffs.

It’s an option that the EU has never used before, and includes the ability to:

Restrict imports/exports.
Restrict access to EU public procurement/tenders.
Target digital services, presumably including U.S. tech giants.
Limit foreign investment.
Restrict IP rights or market access in certain areas.

On Sunday, French President Emmanuel Macron said he intends to request the activation of the anti-coercion instrument.

But German Chancellor Friedrich Merz pushed back, saying he wants to tone the rhetoric down.

UK Prime Minister Keir Starmer also ruled out tit-for-tat threats, instead calling for "calm discussion".

In a note, Christopher Dembik of Pictet Asset Management wrote:

“I take the view that Europe doesn’t have the means to wage a full-blown trade war with the U.S. so I don’t expect any major escalation from here.”

Is this all just bluster?

We’ve seen this multiple times before over the past 12 months - involving various countries.

The tried and tested playbook goes something like this:

Trump says something ridiculous.
Markets panic.
Talks are held.
A compromise is made.
Markets recover.

Depending on how you see things, it’s either “The Art of the Deal” or “The TACO” (Trump Always Chickens Out).

But either way - the base case should be that a similar situation plays out here.

Head of Goldman Sachs’ Delta One Trading Desk, Rich Privorotsky, believes the most likely scenario is a last-minute compromise.

In a note, he wrote:

“First, this is not popular domestically. Just 17% of Americans approve of Trump’s efforts to acquire Greenland. It's a mid-term year and risking something very unpopular makes this less likely.”

Source: Reuters

Privorotsky added:

“Second, this fits the known escalate to de-escalate playbook. If the objective appears more about mineral rights, an expanded military presence, a united Arctic alignment… then the U.S. is entering negotiations on the most favorable terms. Is it a coincidence that this is happening during the same week as Davos? I think not.”

And here’s an excerpt from a note from JP Morgan’s International Market Intel Team:

“I think we need to read this from an ‘Art of the Deal’ perspective. Trump creates noise and throws in a maximal stance designed to trigger negotiation and create leverage/urgency. It doesn’t seem like a particularly difficult issue to resolve and this might as well happen at Davos. Hence, we stand by the scenarios outlined below:

The most likely outcome is a NEGOTIATED ARRANGEMENT that expands U.S. security/eco presence in the territory and addresses U.S. stated objectives – stronger Arctic security posture, enhanced early warning for missile defense and access to Greenland’s natural resources – while Denmark preserves sovereignty.
A SALE is less likely because the U.S. does not need formal territorial control to achieve the stated objectives, and it would seem to have to get approval from both Denmark and Greenland.
An INVASION is really a tail outcome for more than one reason: polls horribly with voters and, needless to say, it would melt NATO faster than Arctic ice….”

Here’s JP Morgan’s “table of feasibility” for Greenland options:

Source: JP Morgan

How could this escalate?

Let’s look into a hypothetical scenario where:

The U.S. decides it wants Greenland at all costs.
European nations are united in standing against the U.S. control of Greenland at all costs.

How could this escalate on both sides?

Well, Trump could just double down on his favorite weapon - tariffs.

Just higher and higher tariffs.

We already saw this in late 2025.

During tit-for-tat trade escalations between the U.S. and China in October - Trump pushed China’s total tariff rate to a whopping 145% before things eventually calmed down.

But on the other side, beyond the anti-coercion instrument, one potential extreme countermeasure from European countries could be to offload huge amounts of U.S. assets.

European countries hold trillions of dollars of U.S. bonds and stocks, a large chunk of which sit with public sector funds.

That’s spurring speculation they could sell those assets, according to Bloomberg, potentially driving borrowing costs up and equities down, given U.S. reliance on foreign capital.

U.S. assets held within the European Union amount to over $10T, according to U.S. Treasury data, with more in the UK and Norway.

Let’s check prediction markets

So, what are prediction market speculators saying about all of this?

The U.S. to acquire Greenland before 2027?

20% chance.

Source: Polymarket

The U.S. to acquire part of Greenland in 2026?

24% chance.

Source: Polymarket

Will any of Trump’s Greenland tariffs go into effect by February 1?

40% chance.

Source: Polymarket

Will all of Trump’s Greenland tariffs go into effect by February 1?

19% chance.

Source: Polymarket

Wrapping up

We’ve been here before on several occasions.

There may be uncertainty hanging over markets for a few days.

But the base case should be that some kind of compromise is reached before February 1, when Trump’s first wave of new EU tariffs are set to kick in.

And Trump has already confirmed a “very good phone call” with the Secretary General of NATO regarding Greenland, as well as agreeing to a meeting with "various parties" in Switzerland this week.

However, if things do escalate and morph into a serious tit-for-tat trade war - prepare for some potentially Liberation Day-esque drawdowns for asset markets (I think this is unlikely).

That’s it for this edition - catch you in the next one.

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