From Factories to Markets: What Does Escalation with Europe Mean for the U.S. Economy?

SadaNews - Amid the flags of Davos and its intense meetings, the Greenland file was present not just as a geographical issue, but as a factor threatening one of the deepest economic ties in the world.

President Donald Trump's escalation, by seeking to annex Greenland and imposing tariffs on European countries, has pushed markets and decision-makers to reevaluate the relationship that has made Europe the largest trading partner and financial ally of the United States.

An analysis by the Wall Street Journal paints a picture of consequences extending from American factories to financial markets, should political tension evolve into an open trade war.

The Threat of Tariffs and the Expanding Circle of Danger

According to the Wall Street Journal, Trump's threat to impose a 10% tariff starting in February on Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands, and Finland, raising it to 25% in June if no deal is reached regarding Greenland, has plunged the transatlantic alliance into an unprecedented crisis.

Economists believe that tariff exchanges would not drive the U.S. economy into recession, but they could slow down growth, pressure an industrial sector already suffering from slowdown, and raise prices for goods and services at a time when the U.S. is struggling to bring inflation back to comfortable levels.

Deeply Interconnected Economies

Europe is the largest trading partner of the United States, and the largest source of foreign direct investment in it. In 2024, European direct investments in America were about $3.6 trillion, compared to nearly $3.97 trillion of U.S. investments in Europe.

Philippe Lac, director of the Economics Program at the Center for Strategic and International Studies, notes that "there are no deeper relationships in trade," pointing out that U.S. corporate revenues from Europe fund vital expansions such as data centers and artificial intelligence.

American Companies in the Crosshairs of European Response

Mary Lovely from the Peterson Institute for International Economics warns that deteriorating relations could lead American companies to sell less in Europe, pressuring their profits and opening the door for competitors from other countries. She adds: "Once those new relationships are formed, changing them becomes extremely difficult."

Analysts also fear that escalation could drive European investors to shrink their holdings of American stocks and bonds, weakening the dollar and raising borrowing costs in the U.S., a path that negatively impacts investment and consumption.

Tariffs, Goods, and Services

The newspaper explains that the proposed tariffs will target high-value European goods, from perfumes and cheeses to French wine and German cars. However, the broader impact may emerge in the service sector, where U.S. exports continue to grow rapidly.

The European Union is the largest destination for U.S. services, valued at about $294.7 billion in 2024, including financial, legal, insurance, as well as digital and cloud computing services provided by major American tech companies.

Sreeram Ramaswamy, CEO of Snowflake, stated from Davos: "Every successful tech company generates a large part of its revenues from Western Europe... whether through regulation or tariffs, it is extremely important."

Limits of Response and Severity of Escalation

European leaders are considering measured response options, from suspending the ratification of trade agreements to imposing retaliatory tariffs targeting "visible and politically symbolic" American products, such as alcoholic beverages, motorcycles, or agricultural goods.

Economists warn that reaching tariff levels of 25%, above the current rates of 10% to 15% in some sectors, could halt bilateral trade in entire categories.

Even without a European response, additional tariffs would constitute a burden on American businesses and consumers.

Internal Costs and Political Stakes

A study by the Kiel Institute for the World Economy, reported by the Wall Street Journal, indicates that American businesses and consumers bore 96% of the cost of tariffs in 2024 and 2025, while foreign exporters only bore 4%. Despite this, the U.S. did not experience a significant inflationary jump, and its economy achieved its strongest growth in two years.

However, vulnerabilities remain, especially in manufacturing, where many American factories rely on European machinery and components. Areas like Spartanburg in South Carolina, where a BMW factory employs around 12,000 workers and supports tens of thousands of jobs, are among the most exposed to the impacts of any retaliatory tariffs.

The Dollar and Markets: Between Anxiety and Adaptation

European investors hold about $8 trillion in U.S. stocks and bonds, nearly double the holdings of the rest of the world combined, according to George Saravelos from Deutsche Bank.

He believes that "the geo-economic stability of the Western alliance is facing an existential disruption," raising questions about Europe's readiness to continue in this role.

Nevertheless, experience shows that fears of "selling America" are often exaggerated, as foreign investors continued to flock to U.S. assets last year, and the Standard & Poor's 500 recorded its third consecutive year of double gains.

Rich Nozick from Franklin Templeton says that markets "have learned to ignore tariff announcements," considering that while the noise may be significant, it is often contained in the end.

A Potentially More Severe Escalation

The most extreme scenario remains if the European Union resorts to a tool aimed at "countering coercion," which could target American services and investments through stricter regulations or taxes. In that case, sectors such as pharmaceuticals and technology, where American companies earn a significant portion of their profits and intellectual property in low-tax European countries, would be affected.

As Brad Setser from the Council on Foreign Relations states: "The most profitable businesses in the world have a significant European arm," and any targeting of them would mean lower global profits, weaker stock valuations, and diminished ability to invest in areas such as artificial intelligence.

In this landscape, the dispute with Europe does not seem merely a trade conflict but a test of the costs of using U.S. economic power against its closest allies, while markets balance between adapting to the noise and fearing its transformation into an uncontainable reality.

Source: Wall Street Journal