Why Economic Coercion Over Greenland Would Backfire

The economic incidence of these tariffs, however, would fall primarily on Americans. A large body of empirical research shows that U.S. tariffs are passed through almost entirely to domestic importers and consumers. Research by the Kiel Institute for the World Economy, drawing on more than 25 million shipping transactions worth nearly $4 trillion, finds that approximately 96 percent of tariff costs are borne domestically, with foreign exporters absorbing only about 4 percent. In other words, tariffs function overwhelmingly as a tax on U.S. firms and households, not on foreign producers.

In addition to the disruption in trade, evidence suggests that the economic burden of new tariffs on European partners would fall overwhelmingly on Americans, increasing costs for consumers and reducing competitiveness for producers.

This near-complete pass-through is visible directly in prices. The same research documents a surge in U.S. customs revenue of roughly $200 billion in 2025, revenue paid almost entirely by U.S. businesses and consumers. These findings are reinforced by independent evidence from Harvard's Pricing Lab Tariff Tracker, which shows that imported goods prices are more than 5 percentage points higher than they would have been absent tariffs. Domestic prices rise by similar magnitudes, as reduced foreign competition allows U.S. producers to increase prices as well. Figure 2 tracks these parallel increases in imported and domestically produced goods.

Country-level effects are also significant. For the three largest trading partners threatened with tariffs, research suggests that import prices have increased by roughly 3.5 percentage points for German goods, 4 percentage points for French goods, and up to 10 percentage points for UK goods, all since the beginning of the second Trump administration.

These impacts are especially damaging because Europe, and especially the countries previously targeted, are not a marginal supplier to the U.S. economy. European partners are among the United States' most important sources of pharmaceuticals, industrial machinery, vehicles and auto parts, electrical equipment, and precision medical and scientific instruments. Europe exports far more than luxury goods-it supplies critical inputs to U.S. manufacturing, healthcare, and advanced technology sectors. Figure 3 illustrates the scale and sectoral breadth of European imports to the United States.

By raising the cost of these inputs, tariffs would push up production costs inside the United States, making U.S.-made goods more expensive at home and less competitive abroad. This dynamic directly undermines U.S. industrial competitiveness and risks offsetting the intended benefits of other industrial and trade policies aimed at strengthening domestic production.

The distributional effects are especially concerning. In 2025, small businesses-which make up 97 percent of all importers-have been particularly impacted by tariffs and the uncertainty they create. At the same time, lower-income households have experienced faster price increases than higher-income consumers. Tariffs raise prices most sharply for everyday goods and lower-cost alternatives, making them functionally regressive.

According to Harvard's Tariff Tracker, since 2025, the largest tariff-driven price increases have occurred in

• household and durable goods (approximately a 4 percentage point increase since 2025, and an 8 percentage point increase relative to pre-tariff trends);
• food and beverages (3 percentage point increase); and
• health and medical products (2 percentage point increase).

Lower-priced and "budget" varieties often experience price increases nearly double those of higher-end goods, leaving cost-conscious consumers with few meaningful substitutes. As households attempt to stretch limited budgets, traditional escape hatches-cheaper brands or imports-are hit hardest.

In short, escalating tariff pressure against European allies would compound existing economic strains rather than enhance U.S. economic security. The direct economic costs would be borne primarily by U.S. workers, farmers, small businesses, and consumers, while delivering little in the way of strategic or economic gain. Opening another front in the trade war risks sustained damage to U.S. competitiveness and household welfare, undermining, rather than strengthening, the industrial and economic resilience these policies are intended to promote.

Q4: If the United States were to threaten similar tariffs again, would Europe retaliate, and if so, why now, when it has often refrained in the past?

A4: Almost certainly, because this case is viewed in Europe as fundamentally different.

European restraint so far in the second Trump administration has reflected both the prioritization of broader European security interests and recognition of the depth and importance of the transatlantic economic relationship, which approaches $1.5 trillion in annual trade. While neither of these underlying conditions has changed, the nature and rationale of U.S. coercion are now viewed as fundamentally different and as threatening European security, both territorially and through the institutional foundations of the European common market.

In European capitals, this coercion is seen as different in both method and motive.

• Method of Coercion: The threat to impose different tariff rates on individual EU member states based on their positions on Greenland crossed an institutional red line. The European Union is a customs union; the free movement of goods and a common external trade policy are foundational to the European project. Differential treatment of member states based on sovereign foreign-policy decisions strikes at the legal and political core of the Union.

  From Brussels' perspective, this would be analogous to a foreign power imposing differential trade measures on individual U.S. states in response to their positions on Taiwan or Israel. The United States would rightly view such actions as an attack on the federal union itself. The European Union views this behavior in the same way.

• Motive of the Coercion: The purpose of the recent pressure also marks a sharp departure from previous disputes. The European Union's Anti-Coercion Instrument is explicitly designed to address the use of economic tools in disputes not covered by the World Trade Organization settlement, particularly when such pressure threatens sovereignty or fundamental rights. While past U.S. tariff threats sought economic concessions, the recent demands aim to extract political and territorial concessions unrelated to trade. By any reasonable definition, this constitutes a threat to the sovereignty of an EU member state and a clear act of economic coercion.

  Under these conditions, European leaders may conclude that failing to respond would invite future coercion and erode the credibility of the European Union as a political and legal union. Retaliation may therefore be viewed not as escalation, but as institutional self-defense.

Q5: If the European Union were to retaliate against coercion, what would be hit and who would be hurt?

A5: The short answer is everyone-but the details matter.

The European Union recently passed its Anti-Coercion Instrument, designed for precisely this type of situation. European officials sometimes refer to it as a "trade bazooka." The analogy is imperfect but useful in one respect: as with any powerful weapon, the impact depends on where it is aimed. While no one can predict the course of a trade war, three paths for EU retaliation are worth consideration, each progressively more escalatory.

1. Traditional Retaliation: If the European Union follows its traditional approach, it will seek to maximize political impact while minimizing damage to its own economy and preserving off-ramps. This option would resemble the retaliation package the European Union proposed nearly a year ago. Those countermeasures are explicitly designed to maximize political leverage by targeting industries with high visibility and geographic concentration. The bloc already has a retaliation package covering €93 billion in U.S. exports, including industrial goods-aircraft and parts, automobiles and parts, chemicals, plastics, medical devices, electrical equipment, and machinery-as well as agricultural and food products, such as alcohol (bourbon, whiskey, and wine), meat and dairy (beef, poultry, and livestock), grains and oils (wheat, barley, oats, soybeans, corn, vegetable oils, and rice), and fruits and juices (citrus and orange juice).

   Many of these industries are already absorbing higher input costs from existing U.S. tariffs or facing retaliation on other trade fronts. U.S. agriculture, in particular, remains under acute strain: soybean exports in 2025 were well below historical norms due to reduced demand from China, and farm bankruptcies in the first three quarters of 2025 were already 36 percent higher than all of 2024.

1. Targeting Services: If Europeans sought a more escalatory path with real economic impact on both sides, they could target services exports, as some analysts are already suggesting. The United States exported $295 billion worth of services to the European Union in 2024. Many of the largest and most influential U.S. firms-such as Google, Meta, Microsoft, and Apple-earn significant profits in the European market.

These profits do not simply pad stock prices; they provide critical capital that is reinvested in the United States, including in the AI data-center buildout. Even a temporary disruption could trigger market reactions that reverberate across technology and financial markets. Beyond its negotiating leverage, some European policymakers also view restrictions on U.S. tech services as a pathway toward greater technological self-sufficiency.

This would be a highly escalatory response and would impose high costs on both sides of the Atlantic. However, if the European Union perceives an existential threat to its institutional integrity, this option cannot be ruled out. U.S. services firms and industry associations should communicate clearly to policymakers the importance of transatlantic services trade to U.S. competitiveness, particularly in the AI sector.

1. Financial Escalation: The highest-risk option would be to target U.S. financial markets, particularly U.S. Treasury securities. Collectively, the jurisdictions involved hold more than $1.7 trillion in U.S. Treasuries, though most of this is held in pension funds and private asset managers that have fiduciary duties to their investors, making it difficult for governments to mandate a sell-off. Headline figures of foreign Treasury holdings overstate the share directly controlled by governments in sovereign wealth funds and currency reserves, but countries could still adjust holdings in ways that would materially affect Treasury markets. Norway's sovereign wealth fund holds $184 billion in U.S. government debt, and a Danish pension fund has already announced it will sell $100 million in Treasuries.

   Recent experience suggests that bond-market reactions can influence trade policy. In April 2025, Treasury market volatility contributed to the administration's decision to temporarily walk back proposed "Liberation Day" tariffs, and the shock to stocks and Treasury yields is credited with influencing the administration's recent de-escalation.

   This option carries extreme risks and could generate global market contagion. It would likely be reserved as a last resort in response to actions perceived as threatening core European interests. The fact that it remains available underscores the potential for severe unintended consequences from the proposed tariff threats.