President Trump's bid to annex Greenland and unleash tariffs on several European countries has plunged the trans-Atlantic alliance into crisis. If a trade war breaks out, the U.S. economy could feel the pain -- from South Carolina to Silicon Valley.
European leaders, many of whom are gathering in Davos, Switzerland, this week for the World Economic Forum, are considering the bloc's options to retaliate, including imposing tariffs on more than $100 billion of American goods, and making it harder for American multinationals to bid on European contracts. A trade war would be devastating for Europe, which already suffers from stagnant growth.
Economists say tit-for-tat tariffs probably won't cause a recession in the U.S. but could slow growth, hit an already sluggish domestic manufacturing sector and push up prices for consumers and businesses when the U.S. is already struggling to get inflation back to comfortable levels.
In the long run, worsening ties could lead Europe to lessen its dependence on the U.S. and deepen trade ties elsewhere, weakening a relationship that has been a driver of prosperity on both sides of the Atlantic.
For the U.S., the eventual outcome could be American firms selling less to Europe, denting their profits and opening the door to competitors from countries like China, said Mary Lovely, a senior fellow at the Peterson Institute for International Economics, a think tank. "Once those new relationships get made, it's very hard to change them," she said.
The economies of the U.S. and Europe are deeply intertwined. The European Union is the U.S.'s biggest trading partner -- and Europe is the largest source of foreign direct investment in the U.S., with $3.6 trillion invested into the U.S. as of 2024. It goes the other way too: U.S. companies make a fortune selling software, financial products and oil across the Atlantic.
"There are essentially no deeper relationships in trade," said Philip A. Luck, director of the economics program at the Center for Strategic and International Studies. "If you look at the AI [and] data center build-out right now, that is being financed by the revenue generated from Europe and other places."
A trade war isn't the only economic risk. Some analysts warn that Trump's threats against Europe could also cause European investors to pare back investments in U.S. stocks and bonds, leading to a weaker U.S. dollar, declines in U.S. stocks and higher U.S. borrowing costs. Higher borrowing costs, in turn, tend to weigh on business investment and household spending, leading to slower economic growth.
Trump has wielded the unparalleled might of the American economy as a powerful tool with which to bend allies and rivals to his will. And so far, he has mostly gotten his way. Europe, which depends on U.S. military support against a hostile Russia, has more to lose from a rift, giving its leaders an incentive to appease Trump rather than hit back. That is what happened last year, when the EU agreed to a lopsided trade deal rather than risk losing U.S. support for Ukraine's war effort. But some analysts say it isn't a foregone conclusion Europe will fold again.
On Saturday, Trump said he would slap 10% tariffs on Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands and Finland starting Feb. 1. The tariffs would rise to 25% on June 1 if no deal to sell Greenland to the U.S. is reached by then, Trump wrote on social media. Among the European products that the proposed tariffs would hit are a range of luxury and high-end goods, from French perfumes, cheeses and wines to German automobiles.
While the trans-Atlantic goods trade has grown more slowly since the 2007-09 recession, U.S. services exports have continued to expand rapidly. That includes financial, legal and insurance services, but increasingly centers on digital services and cloud computing provided by leading American tech companies such as Microsoft, Amazon, Alphabet and IBM. The European Union is the largest destination for U.S. services exports, which for the bloc totaled $294.7 billion in 2024.
Sridhar Ramaswamy, CEO of U.S. cloud-software company Snowflake, said every successful tech company makes a large amount of revenue from places like Western Europe. "Whether it is regulation or actual tariffs and taxation, I think this is very consequential," Ramaswamy said from Davos.
Some EU leaders have said they might hold off on ratifying last year's trade deal with the U.S., which cuts tariffs on many U.S. exports to Europe. They are also considering retaliatory levies. Europe's response, economists say, would likely be calibrated to maximize political pressure on the U.S., by targeting U.S. exports that are both visible and "symbolically significant for red states," says Brad W. Setser, an economist at the Council on Foreign Relations. In past trade disputes, the EU has tariffed products such as bourbon, Harley-Davidson motorcycles, and farm goods.
"Think high-end consumer goods that Europe likes but can do without," said Setser.
The stakes rise sharply as tariff rates climb and Europe's retaliation broadens. Some economists think Trump's threatened 25% tariff layered upon existing duties of 10% to 15% in some sectors starts to become high enough to halt two-way trade in affected categories.
Even if Europe doesn't retaliate, the additional tariffs will likely be a slight drag on the U.S. economy, at least in the short run, because they raise prices for U.S. companies and consumers, economists say.
A new study from the German think tank the Kiel Institute for the World Economy found that American companies and consumers paid 96% of tariff costs in 2024 and 2025, with foreign exporters absorbing just 4%. Tariffs so far haven't caused the surge in inflation economists expected, and the U.S. economy grew at its strongest rate in two years -- far outpacing Europe.
Yet the U.S. economy has weaknesses. Its manufacturing sector, already under pressure from trade tensions and high interest rates and in contraction by some measures, is particularly vulnerable because its supply chains are tightly intertwined with Europe, said Lovely.
Many U.S. factories get machines, turbines and components from Europe, and tariffs raise their costs. If Europe retaliates with levies on U.S. goods, manufacturers who export across the Atlantic could get hit. "It's just another blow," Lovely said.
Among the places most at risk: Spartanburg, S.C. The region is home to a sprawling BMW factory that employs around 12,000 people and indirectly supports tens of thousands of jobs across South Carolina. The factory gets some engines and parts from Europe and exports more than half the cars it produces, many to the EU. Retaliatory tariffs could lead BMW to cut production in the U.S., said Stuart Pearson, head of automotive and mobility research at Oxcap Analytics.
Still, U.S. carmakers are much less reliant on the European market and could benefit if higher tariffs hit European auto imports, making them less competitive, Pearson said. Tariffs could also entice more foreign firms to open factories in the U.S., boosting the manufacturing sector in the long run.
European investors hold around $8 trillion of U.S. stocks and bonds, "almost twice as much as the rest of the world combined," George Saravelos, global head of FX research at Deutsche Bank wrote in a report published Sunday.
"In an environment where the geoeconomic stability of the Western alliance is being disrupted existentially, it is not clear why Europeans would be as willing to play this part," he added.
This is hardly the first time Wall Street has wondered if other countries could try to become less politically and financially tied to the U.S. Worries about a potential "sell America" trade emerged early last year after the Trump administration signaled it was wary of supporting Europe militarily and then later when it threatened tariffs on global imports.
Those fears ultimately proved overstated. Foreign investors still showed strong demand for U.S. financial assets last year, with the S&P 500 logging its third straight year of double-digit gains. U.S. Treasurys remain the ultimate safe asset for central banks and investors around the world, helping the country run huge budget deficits without facing much higher interest rates.
Rich Nuzum, a top executive at asset manager Franklin Templeton, said the markets have learned to brush off Trump's tariffs and suggested the new threatened levies on Europe would be the same. "There was a point in time when the market really cared about tariff announcements. That's no longer the case," he said. "The market believes that this will get worked through. It may be noisy, it may be disruptive, it may be scary, but that it will get worked through."
The most severe economic escalation would come if Europe deployed its so-called anti-coercion instrument, nicknamed "the Bazooka," which would allow it to target American services and investment. Under such a scenario, the EU could raise taxes, tighten regulatory scrutiny or otherwise constrain American firms operating in Europe.
That would hit sectors like pharmaceuticals. American companies often route R&D activity through countries like Ireland and manufacture active ingredients there, allowing profits to be booked in low-tax jurisdictions. Technology firms could face similar exposure. Apple, for example, keeps significant intellectual property and records a large share of global profits in Ireland, even though many of its devices are manufactured in China and worldwide.
"The businesses of the world's most profitable companies have a significant European leg," said Setser, at the Council on Foreign Relations. Europe going after that, he added, would mean lower global profits for U.S. firms, weaker stock market valuations, especially in technology, and less capacity to invest in areas such as artificial intelligence.
