US/EU tensions over Greenland escalate as Trump threatens tariffs

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What happened?
In a social media post on Saturday, US President Donald Trump threatened to impose escalating tariffs on eight European countries until the US is allowed to buy Greenland.

Trump said that goods from Denmark, Norway, Sweden, France, Germany, the Netherlands, Finland, and Great Britain would be subject to an additional 10% import tariff from 1 February, which would increase to 25% on 1 June and continue until a deal is reached for Greenland to be sold to the US.

Leaders of Denmark and Greenland have stated that the country is not for sale. In a joint statement published on Sunday, the eight European nations said that "tariff threats undermine transatlantic relations and risk a dangerous downward spiral.” The EU is considering retaliatory measures, with France’s president Emmanuel Macron reported to favor using the EU’s “anti-coercion instrument” that can restrict access to the single market for US companies.

What do we expect?
US interest in Greenland stems from its strategically important location from a national security perspective and its mineral resources, including rare earths. The current tensions should also be seen in the context of the US claim of dominance over the Western Hemisphere, which was outlined in November’s National Security Strategy. In light of this, we see three potential scenarios for how the current tensions could be resolved:

1. The Trump administration establishes free military and resource access without acquiring Greenland. The US already has the right to expand its military presence in Greenland under a 1951 defense agreement, and Greenland has shown openness to increased commercial US activity. Denmark and NATO have also signaled their readiness to increase spending on infrastructure and defense capabilities in Greenland. At present, however, Trump has said that “[c]ountries have to have ownership and you defend ownership, you don't defend leases.” This suggests concessions by Greenland and Denmark that stop short of sovereign rights may not be enough to satisfy US demands.
2. The US gains (quasi) sovereignty over Greenland by non-military means: Such a scenario could include treaties that allow the US full control over certain territories, or a closer relationship between Greenland and the US after the former becomes independent, although this route could take several years.
3. The US declares control over Greenland, potentially backed up by an increased military presence: Denmark’s and the EU’s military capabilities are insufficient to prevent a military-backed takeover of Greenland by the US. This course of action would increase the rift within NATO and would likely come against resistance from within the US, including from Congress.

How do we invest?
The latest escalation in tensions could create market volatility in the short term. However, as seen with other geopolitical events, including the US strike against Iranian nuclear facilities and the arrest of Venezuela’s president Maduro, wider financial markets tend to respond less to quick conclusive actions. We therefore believe a US annexation of Greenland by mutual agreement would likely have an only modest and short-lived effect on financial markets.

A prolonged standoff or a retaliatory tariff escalation between the US and Greenland/Denmark/the EU, with both sides exerting economic and political pressure on one another, would likely have the most damaging effect on risk assets—in particular in Europe. That said, pointing to military options may be part of a US negotiation strategy to extract concessions. Experience from last year shows that the Trump administration is prepared to negotiate and dial back tariffs from initially imposed levels. The impending Supreme Court judgment on the use of IEEPA tariffs, were it to deem them unlawful, could also hamper President Trump’s ability to impose fresh tariffs.

Our base case is that tensions over Greenland are not a reason to change our overall positive view toward risk assets, though we are mindful of potential short-term volatility. Investors should maintain a well-diversified portfolio across different asset classes and geographies to mitigate the impact of idiosyncratic risks. In addition, we see two specific options for investors to make portfolios more robust against potential risks from an escalation around Greenland:

First, gold tends to be a reliable hedge against a rise in geopolitical risks in general. We prefer gold to other precious metals for this purpose, as its price is less affected by industrial demand cycles, and it is benefitting from persistent demand from central banks for reserve diversification.

Second, a rift between NATO allies would increase the need for European nations to boost defense spending and accelerate procurement timelines, likely prompting an even stronger focus on sourcing military equipment from within the region. This should support European defense stocks, which form part of our “European Leaders” investment theme.