The economic cost of the threatened Greenland tariffs

The risk that tariffs and policy uncertainty will weigh more heavily on the global economy early this year increased over the weekend. This followed US threats to impose tariffs on six EU countries, the UK, and Norway, as Washington hardens its stance over the proposed acquisition of Greenland.

Although there remains a great deal of uncertainty about what happens next, to provide a greater gauge of the potential scale of the Greenland tariff threats, we’ve used our Global Economic Model (GEM) and Global Industry Model (GIM) to quantify the risks of the threatened tariffs and provide a preliminary assessment to bookend the impact.

Economic cost of threatened tariffs and one-for-one retaliation

We model a scenario in which the US carries out its tariff threat by raising tariffs on the EU and UK by 10% on February 1 and by 25% by June 1, and that the EU and UK retaliate in kind.

Although these tariff increases on the face of it sound smaller than some of the tariff increases faced by several economies last year, a blanket 25% tariff increase on Europe would drastically change the landscape for global trade.

Our scenario highlights that trade hostilities along these lines would have a significant adverse impact on the world economy.

• World GDP growth in 2026 and 2027 would ease to 2.6%.
• US GDP would lower by 1 relative to our baseline at peak impact. The deceleration in the economy would be noticeable ahead of the midterm elections.
• The peak hit to the Eurozone would be similar, but more drawn out.
• The inflationary impact would be only modestly positive.

Greenland trade war could significantly dampen industrial outlook

At the sectoral level, European industries would bear the largest hit. Our modelling shows that under this scenario, EU manufacturing value-added output could stagnate through the end of 2026. Tariffs would constrain industrial activity, causing it to plateau rather than recover due to heightened uncertainty and lost US market share. Relative to our current baseline, this effect could perpetually reduce EU industrial activity by around 1.5% over the next few years.

Trade-intensive European economies tied to the US, such as Germany, and their upstream suppliers, would bear the brunt, with manufacturing output growth turning negative by the end of the year. Sectors like machinery and automotive would be hit, as the cumulative tariffs would make their products uncompetitive in the US. Blanket tariffs leave more US-exposed sectors like pharma and high-tech especially vulnerable.

The relative silver lining is that this scenario would not fundamentally disrupt the main growth driver we see for European industry over the next years: namely, a domestic defence- and infrastructure-backed demand recovery. This should still spur a return to growth in 2027, despite weaker demand from the US. The geopolitical shock may prompt governments to accelerate or deepen such commitments, which could potentially offset some of the downside. European defence stocks have risen, indicating some upside for armaments-related sectors.

For the US, industrial activity would also face a short-term hit, driven mainly by increased uncertainty, but would rebound faster and more strongly due to the lower trade intensity of its industry.

A change to our baseline forecast in February will depend on the rhetoric over the coming days, whether the US carries out its tariff hike threat on February 1, and how willing European countries are to retaliate. The looming Supreme Court ruling on the International Emergency Economic Powers Act (IEEPA) tariffs could also force sweeping changes to the US tariff regime. We will continue to monitor developments closely and provide independent analysis as the situation unfolds.