2026-01-21
US-EU Trade War Reignites: Tariff Threats Rock Global Markets
U.S. President Donald Trump has recently threatened to impose a 10% tariff starting February 1 on goods exported to the United States from eight European countries—Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands, and Finland—should they fail to reach an agreement on the purchase of Greenland. The tariff rate would be further raised to 25% on June 1, triggering sharp volatility across global financial markets. In response, U.S. equities sold off heavily on January 20, with the Dow Jones Industrial Average plunging 871 points in a single session, while the S&P 500 and Nasdaq Composite fell more than 2% and 2.39%, respectively, marking the largest one-day decline in recent months. European equity markets also opened broadly lower by over 1.5%, led by sharp losses in automotive, technology, and luxury goods stocks. Meanwhile, the VIX volatility index surged above 20, signaling a rapid escalation in risk aversion.
The latest trade tensions stem from Washington’s attempt to strengthen its influence over Greenland, an autonomous territory of Denmark. After European countries firmly rejected the proposal, the U.S. resorted to tariffs as a pressure tactic, consistent with its long-standing protectionist trade stance. In response, the European Parliament announced on January 20 that it would freeze the approval process of the trade agreement reached with the U.S. in July last year, while also considering retaliatory tariffs on up to EUR 93 billion worth of U.S. goods, underscoring a hardened countermeasure posture. On the macro front, eurozone headline HICP inflation slowed to 1.9% year-over-year in December, marking the first reading below the European Central Bank’s 2% target since May last year. Core inflation also eased, although escalating trade frictions could push up import costs and undermine the recent disinflation trend.
Looking ahead, EU leaders are expected to convene an emergency summit this week to assess whether to activate the “Anti-Coercion Instrument,” which could restrict U.S. companies’ access to the EU market. In the near term, financial market volatility is likely to remain elevated, with U.S. and European equities facing continued correction pressure, while capital may rotate toward gold and other safe-haven currencies. Over the medium term, should the tariffs be implemented as planned, the EU’s 2026 economic growth forecast could be revised down by 0.5 percentage points, while U.S. producer price inflation may rise from 2.8% to 3.0%, reigniting inflationary pressures. This would likely constrain the Federal Reserve’s rate-cut trajectory and accelerate the restructuring of global supply chains. Overall, although negotiations may eventually help de-escalate tensions and avert a full-scale trade war, geopolitical uncertainty is expected to continue to dominate investor sentiment ahead of the midterm elections.