Donald Trump and the limits of the tariff threat

In his bid to take control of Greenland, Donald Trump has reached again for his favourite diplomatic tool: tariffs.

You thought tariffs were a story from last year? Wrong! The first two weeks of January have dashed those hopes already. First, because investors are watching like a hawk the Supreme Court's decision on reciprocal tariffs.

And now, because Donald Trump is once again using tariffs as a diplomatic tool. Over the weekend, he threatened eight European countries that have deployed soldiers in Greenland with 10% tariffs from February 1. These tariffs would then rise to 25% on June 1. And this would remain in place until the United States acquires Greenland.

In recent months, the markets have become accustomed to Donald Trump's threats. Market reactions have been fairly muted at the start of this week. Everyone is playing the "TACO trade” to some extent - the idea that Donald Trump always backs down after his initial threats, which are more of a negotiating tactic.

Indeed, this is a strategy that may be showing its limits. First, because this time Europe does not seem ready to fold immediately, and several countries have, in recent months shown that it is possible to stand up to Donald Trump. And second, because all of this has consequences for Americans, just months ahead of the midterms.

Europe responds

In July, Europe caved to Donald Trump's blackmail and accepted 15% tariffs on European products. The President of the European Commission was also heavily criticised during this episode.

This time, Europeans have chosen to respond. First with the threat of tariffs on $93bn worth of US products. A measure adopted last summer as trade talks between Washington and Brussels stalled. The European Commission ultimately put the measure on hold after an agreement was reached between Ursula Von der Leyen and Donald Trump in Scotland at the end of July.

The other option being floated is the "anti-coercion instrument” (ACI), introduced in 2023 and never used since. This "bazooka” can notably restrict imports or access to certain public procurement markets. France is pushing to use this instrument.

Last summer, Europeans preferred to sign an unbalanced agreement that would guarantee a stable and predictable environment for their businesses.

That argument no longer holds. If you give in to every threat, and are forced to go back on previous agreements, you undermine that stability. That is why business circles are broadly aligned with European leaders in the view that they must not fold now.

In recent months, several countries have also chosen to stand up to Donald Trump and play hardball: India, Brazil, China. The question is whether you have the means to withstand the pressure.

Beyond the aforementioned measures, Europe has cards to play. "Europe has Greenland, and it also holds a lot of Treasuries,” notes Deutsche Bank strategist George Saravelos, who estimates that Europeans directly hold $8,000bn in US assets - several figures have been circulating in recent days, depending on the perimeter used.

To come out of this episode in better shape, the most important thing in this showdown is probably not to appear weak. "Europeans project weakness, the United States projects strength,” Treasury Secretary Scott Bessent said on NBC on Sunday. The comments directly echoed those made by Donald Trump about his European counterparts. "I think they're weak,” he told Politico last December.

Americans pay the bill

The other limit to Donald Trump's tariff aggression is Americans themselves. They are overwhelmingly opposed to taking control of Greenland. And more broadly, they would like their president to spend less time on international issues and focus more on domestic problems.

At the top of their concerns is the cost of living - affordability. Tariffs, however, are a tax on Americans.

A study published by the Kiel Institute, a German think tank,on Monday shows that Americans absorb almost all of the additional cost of tariffs. Researchers at the German institute conclude that US consumers and importers shoulder 96% of tariffs, compared with just 4% for exporting companies.

In recent months, fears of a tariff-driven surge in inflation have not materialised, while growth has resisted fairly well. It is likely that the rise in consumer prices will take longer to filter through.

The need to adopt measures that support Americans' purchasing power also pushes Donald Trump to backtrack, or to grant exemptions, at a later stage. That was the case with Brazil, for instance. After raising tariffs to 50% in August, several products were ultimately exempted from the additional 40% surcharge (beef, green coffee, cocoa, fruit).

The Republicans are heading into the midterm campaign with fairly unfavorable ratsings and therefore could lose their majority in Congress. Donald Trump will certainly have to take that into account in his tariff outbursts.