Trump’s TACO on Greenland could stave off an economic war

President Donald Trump’s threat to tariff countries opposed to his effort to annex Greenland is gone, and, with it, the prospect of tit-for-tat economic warfare with Europe, one of America’s most important trading partners.

Trump on Wednesday announced a framework for a future deal on Greenland and called off his promised tariffs – his latest TACO (the Wall Street acronym for “Trump Always Chickens out”).

Europe was considering emergency action against the United States, because Trump’s demand that Europe give the US the sovereign territory of a NATO ally or face punishing tariffs was a line the region’s leaders were not prepared to let him cross — at least not without a fight. European Union leaders still plan to hold a previously scheduled emergency meeting in Brussels Thursday.

It’s not clear if the EU’s threats to retaliate with its own trade measures or its decision Wednesday to pause final approvals on its trade deal with the US motivated Trump to back down.

Whatever Trump’s TACO rationale, though, a nasty war appears to have been averted – for now.

DOA trade deal

On Wednesday, EU lawmakers responded to Trump’s tariff threat by agreeing to suspend ratification of a draft EU-US trade deal forged last summer through blood, sweat and (mostly) European tears.

The deal set a 15% levy on most imported goods from the bloc – with several notable carveouts, including pharmaceuticals – and includes an EU commitment to buy $750 billion worth of US energy products.

The trade deal’s prospects remain unclear. Julian Hinz, head of trade policy research at the Kiel Institute, thinks many in Europe don’t believe the deal is worth protecting. He told CNN that many Europeans view it as “very asymmetric” in favor of the US.

Tit-for-tat tariffs

In retaliation against the United States, the EU could have dusted off a package of retaliatory tariffs worth €93 billion ($109 billion) drawn up last year in response to previous Trump tariff threats. It reportedly targets products ranging from American soybeans to whiskey.

The tariffs could have dealt a political blow to Trump as he faces midterm elections later this year, said Jacob Funk Kirkegaard, senior fellow at the Peterson Institute for International Economics.

“That package was already designed to target Republican states, agricultural states… it would have, I think, a fairly significant negative impact on (these places).”

“Trade bazooka”

The EU could have gone further than retaliatory levies and activated its so-called “trade bazooka” for the first time, a mechanism allowing the bloc’s executive to impose a range of penalties on trading partners.

The so-called Anti-Coercion Instrument allows the EU to slap controls on European exports to the US, introduce new tariffs and limit American companies’ investments in the bloc, said Carsten Brzeski, global head of macro research at ING.

“The beauty (of the ACI) is that everything could be in it and nothing,” he said.

That allows it to inflict significant damage on the United States, noted Kirkegaard – as long as enough member states agree.

“This tool is legitimately described as a bazooka… but you can also regard it maybe as a scalpel that really can hurt US business interests in a very surgical way.”

In brandishing the ACI, Europe may have taken inspiration from China’s forceful retaliation against the United States in its own trade war last year.

The world’s second-largest economy – which, at one point, had a 145% overall US tariff on its goods – introduced export controls for critical minerals. It also ramped up exports to new and existing markets with great success, showing that it could not only withstand US tariffs, but thrive.

US Treasury sell-off

EU countries collectively own $8 trillion worth of US stocks and bonds, making it America’s largest lender, George Saravelos, Deutsche Bank’s head of foreign exchange research, wrote in a note on Sunday. He suggested that Europe could unload US government debt in retaliation for Trump’s grab for Greenland, a move that could raise borrowing costs in the US and push up the cost of living.

US Treasury Secretary Scott Bessent dismissed the note at the World Economic Forum in Davos, Switzerland, on Wednesday, saying Deutsche Bank’s CEO told him the bank doesn’t stand by that analysis.

Dumping US debt is almost certainly fanciful because it would backfire, reducing the value of the countries’ remaining Treasury holdings.

“I therefore don’t regard this as a really live trade weapon,” said Kirkegaard. “It is the kind of thing you do (if there is) actually a war in Greenland.”

Playing with fire

A trade dispute would have cost the United States – and Europe. Trump threatened 30% tariffs on the bloc ahead of the deal.

That could have raised prices in the United States and further eroded business confidence and pushed a teetering US jobs market over the edge. And it could have hurt European businesses by turning American customers off their products.

Retaliation could have been a dangerous proposition, some argue, because it may have lead Trump to abandon other policies that are crucial to Europe.

“If Europe starts to impose tariffs, who stops the US government from saying ‘oh well then we’ll stop supporting Ukraine’?” said Brzeski. “Europe still thinks we are in a game with very clear rules – we’re not.”