Another tariff curveball

Key takeaways

• Greenland-related tariff threats are unlikely to significantly disrupt the U.S. economy, with inflation and growth impacts expected to remain modest and manageable.
• Europe and the UK face greater downside risk if these tariffs are implemented.
• While tariffs may ultimately serve as a negotiation tool, we believe investors should consider staying diversified and be prepared to find opportunities if market volatility creates short-term dislocations.

It may have been a long weekend in the United States, but the “firehose of headlines” didn’t pause. Investors were thrown another tariff curveball, with the U.S. administration declaring that unless a deal for the U.S. to acquire Greenland can be reached, a 10% tariff will be imposed on eight European countries (Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands and Finland) effective Feb. 1. In addition, the U.S. hinted that the tariff rate could ramp up to 25% by June 1 if no deal is reached by then.

In response, both equities and long-dated U.S. Treasuries have sold off, with the 10-year yield reaching its highest level in months.

In a recent article, we highlighted the importance of considering the fundamental implications, rather than just the noise, from a geopolitical shock. What follows is our assessment of the potential economic impact from these new tariff developments. 

As we’ve previously indicated, there are two main adverse impacts of tariffs onto the U.S. economy: they have the potential to cause a one-time boost to price levels, and they weigh on economic growth. But by our estimates, the impact from these Greenland-related tariffs may be relatively modest. Even in an adverse scenario in which the full 25% tariff rate were to apply to all European countries and the United Kingdom (instead of just the eight countries noted in the announcement), we would likely only see a 0.5% additional boost to the U.S. inflation rate, and a similar-sized modest additional drag on U.S. growth. With U.S. core inflation currently at 2.6% year-over-year and many economists anticipating 2% to 2.5% GDP (gross domestic product) growth for 2026, this shock is likely to be manageable for the U.S. economy.

The impact to U.S. trading partners might be more pronounced than the impact to the U.S. itself. Should these tariffs take full effect, they could significantly dampen the exports and overall economic activity of the United Kingdom and Europe. Moreover, the British economy is already in low-gear, and the tariff impact would only exacerbate an already challenging situation. Meanwhile, even though German fiscal policy could be a key tailwind for Europe into 2026, Europe is still likely to start the year with weaker GDP growth than in the U.S, which also makes these Greenland tariffs potentially more challenging for the continent. 

While the tariff developments have the potential to inject an added layer of uncertainty into the economic backdrop, that uncertainty may be somewhat two-sided. We’ve seen the U.S. administration use tariffs as a negotiation tool before, and it’s possible this may be at play again. Although the U.S. has already reached preliminary trade understandings with Europe and the United Kingdom, the countries are still yet to fully put pen to paper on the legislative text for the deals. Perhaps this could be a gambit to accelerate the final “crossing of the t’s.” Furthermore, getting its NATO allies to commit to higher defense spending has been a key policy aim of the U.S. These tariffs may be a way to encourage more robust defense spending by those countries. It is possible that these higher tariffs never take effect, even without the U.S. actually acquiring Greenland.

On the other hand, there is a risk that a cycle of tit-for-tat retaliatory tariffs kicks off as a result of these Greenland-related developments. Such a scenario would likely be viewed negatively by markets, as it could mean more amplified growth and inflation impacts. However, we’ve also seen from the 2025 experience that markets can act as a self-correcting mechanism to restrain countries from imposing high tariffs.

Ultimately, we do not expect the situation to progress in a way that would materially impact portfolios. In the very low-probability scenario of a U.S. acquisition of Greenland, financing questions could emerge given elevated U.S. debt levels and the potential for higher long-term borrowing costs. More broadly, this episode reinforces the value of geographic diversification, alongside continued monitoring of Europe’s policy response, defense spending trends, and the longer-term U.S. fiscal outlook.

Last week, we highlighted the importance of managing portfolios with a deliberate blend of growth and resilience. We believe that wisdom continues to hold true in this environment. With market psychology still not yet euphoric, we think investors would benefit from sticking close to their strategic asset allocations and ensuring their portfolios are sufficiently diversified. Should markets experience a sudden, sharp dislocation, we would view that as a potential for finding opportunity, rather than a reason to worry.