Trump's Greenland gambit: How geopolitical theatre threatens European automotive production

The collision between territorial ambition and trade policy reached a new extreme on 17 January when President Donald Trump announced 10 per cent tariffs on eight European countries "until such time as a Deal is reached for the Complete and Total purchase of Greenland," with rates escalating to 25 per cent by 1 June. The targeted nations include Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands and Finland, all NATO allies that deployed small military contingents to Greenland for Arctic training exercises.

For European automotive manufacturers already navigating considerable trade friction, Trump's latest move constitutes a fundamental shift in how trade policy intersects with geopolitical objectives, with the potential impact on vehicle production hanging in the balance. The announcement came despite a trade framework reached in July 2025 that established 15 per cent tariffs on most European automotive products, an agreement European lawmakers have yet to ratify - and now seem unlikely to approve.

The automotive production sector finds itself peculiarly vulnerable to this latest escalation. Europe's major manufacturers maintain substantial export operations to the United States whilst simultaneously managing intricate cross-border supply networks. The threatened tariffs would layer atop existing duties, compounding costs at a moment when the industry confronts slowing electric vehicle (EV) demand, Chinese competition and substantial transformation expenditure.

Trump's stated rationale invokes national security concerns. "China and Russia want Greenland, and there is not a thing that Denmark can do about it," Trump wrote on platform, Truth Social, characterising European military deployments to the territory as "a very dangerous situation for the Safety, Security, and Survival of our Planet." European leaders rejected this framing entirely, with eight nations issuing a joint statement affirming their commitment to NATO whilst emphasising that their Greenland deployments "poses no threat to anyone."

Danish Prime Minister Mette Frederiksen expressed surprise at the tariff announcement, noting it followed "a constructive meeting" with US Vice President JD Vance and Secretary of State Marco Rubio. European Commission President Ursula von der Leyen framed the confrontation as "a test of Western values," declaring "We choose partnership and cooperation. We choose our businesses. We choose our people."

Manufacturing floors react as share prices tumble

Markets rendered immediate judgement on the tariff threat's implications for automotive manufacturing. European carmaker shares fell sharply on Monday morning, with Germany's three major manufacturers bearing the brunt. Mercedes-Benz Group shares dropped as much as 6.7 per cent in Frankfurt, BMW fell 7 per cent and Volkswagen declined 5.4 per cent. Europe's broader Stoxx Automobiles and Parts index also traded 2 per cent lower.

Milan-listed shares of Stellantis, which encompasses Jeep, Dodge, Fiat, Chrysler and Peugeot brands, fell 2.1 per cent, while Ferrari dipped approximately 2 per cent. The market reaction reflects investor recognition that the automotive sector is widely regarded as acutely vulnerable to levies, particularly given the high globalisation of supply chains and the heavy reliance on manufacturing operations across North America.

Rob Brewis, director and investment manager at Aubrey Capital Management, noted that whilst tariffs created considerable disruption when first announced in April 2025, "their impact diminishes with time and with repeated use." Yet he acknowledged that the automotive industry remains amongst sectors most exposed to Trump's latest threats.

The market volatility compounds already difficult operating conditions for European manufacturers. Volkswagen, BMW and Mercedes have each lost between 6 and 8 per cent of their value over recent days as tariff uncertainty has mounted. This erosion of market capitalisation constrains access to capital precisely when manufacturers require substantial investment for electrification transitions and production modernisation.

European production footprint faces renewed scrutiny

The threatened tariffs force manufacturers to reconsider production allocation strategies they have refined over decades. European automotive operations produced 14.8 million vehicles in 2023, including 12.2 million cars, across 255 plants assembling vehicles, batteries and engines. The sector provides direct and indirect employment to 13.8 million Europeans, representing 6.1 per cent of total EU employment.

German manufacturers face particularly acute exposure given their substantial US market presence. In 2024, Mercedes-Benz sold more than 374,000 vehicles in the United States out of 2.4 million worldwide. BMW and Mercedes both derive significant revenue from North American operations, with the US market accounting for 20 per cent and 26 per cent of their respective 2023 revenues. BMW's Spartanburg facility in South Carolina serves as its largest global production site, manufacturing top-selling US models.

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Stellantis, Volkswagen, and Ford are pausing production at multiple plants across Europe amid falling demand, rising inventories, and shrinking market share. With utilisation rates dropping, industry-wide plant closures are beginning to look inevitable.

Volkswagen Group, including brands such as Porsche, Škoda and Audi, confronts complex calculations. Whilst some subsidiaries maintain US manufacturing presence, Porsche and Audi lack American production facilities and would face full tariff exposure. The group's position as the world's second-largest car manufacturer amplifies the potential impact of sustained high tariff rates.

Stellantis presents a different profile. Although approximately 40 per cent of revenue originates from the United States, the company includes several American brands within its portfolio, with significant production based in the US market. This could reduce tariff exposure relative to purely European manufacturers, though the company's diverse brand portfolio creates varied vulnerability across its operations.

Retaliatory measures threaten transatlantic manufacturing ecosystem

European Union ambassadors convened emergency meetings on Sunday to formulate responses to Trump's announcement. Discussions centred on two primary options. The more immediate involves reviving a €93 billion ($108 billion) package of retaliatory tariffs on US goods, prepared in 2025 but suspended following the July trade framework. This suspension expires on 7 February unless the European Commission extends it.

The second, more severe option involves deploying the EU's Anti-Coercion Instrument, a tool so powerful it has been characterised as a "trade bazooka." Adopted in 2023 with the United States and China explicitly in mind, the instrument targets economic coercion where third countries "apply or threaten to apply measures affecting trade or investment in order to prevent or obtain the cessation, modification or adoption of a particular act by the European Union or a member state."

French President Emmanuel Macron has reportedly requested activation of the anti-coercion instrument. The tool's scope extends beyond traditional tariffs to encompass restrictions on services trade, foreign direct investment and financial market access. Its deployment would represent an unprecedented escalation in transatlantic trade relations, with implications extending well beyond the automotive sector.

European leaders have scheduled an extraordinary summit for 22 January to coordinate a unified response. European Council President Antonio Costa stated the bloc is "ready to defend itself against any form of coercion." Yet disagreement persists over optimal strategy. Some officials advocate measured responses to avoid escalation, whilst others argue forceful retaliation represents the only means to deter future threats.

Investment plans disrupted by geopolitical volatility

The manufacturing sector's most pernicious challenge may be neither the tariffs themselves nor potential European retaliation, but rather the significant uncertainty both introduce into long-term planning. Automotive manufacturing operates on extended development cycles, with major platform decisions typically spanning five to seven years. Substantial capital investments require confidence in stable policy frameworks.

Steven Durlauf, professor at the University of Chicago's Harris School of Public Policy, observed that Trump's actions "really do represent an end of the credibility of American commitments. That's going to have adverse effects on the world economy," he said. For manufacturers, this credibility erosion complicates every major investment decision.

Joseph Foudy, an economist and trade expert, noted that beyond immediate costs, "the real cost of the tariff conflicts, because tariff rates seem to sometimes change by day, is the factories that were never built just because companies aren't certain enough." This observation captures a central dilemma facing European automotive manufacturers. The industry requires massive capital deployment for electrification transitions, but tariff volatility undermines the planning certainty such investments demand.

European automotive production already confronts substantial headwinds. According to McKinsey analysis, the transition to EVs demands an estimated investment of €200 billion to €300 billion by 2035 to maintain regional competitiveness. Meeting tightening emissions and sustainable production standards, whilst competing against manufacturers in markets with greater regulatory flexibility adds further complexity. The 2035 ban on new petrol and diesel car sales in the EU forces wholesale transformation of an industry that typically plans in decade-long cycles.

German manufacturers bear disproportionate exposure

Germany's automotive sector embodies the challenges facing European manufacturers at large. The country hosts three major premium manufacturers alongside Volkswagen Group's mass-market operations. Collectively, these companies have invested substantially in US production facilities whilst maintaining intricate transatlantic supply networks.

Hildegard Müller, president of the German Association of the Automotive Industry (the VDA), characterised the tariffs as protectionism that "will have negative effects on economic growth worldwide" and "affect jobs." The VDA estimates tariffs will trigger higher prices primarily in the United States, resulting in lower demand that would affect entire production operations and supply chains elsewhere, including Europe.

Mercedes-Benz, which has maintained operations in the United States since 1888 and directly and indirectly employs 163,000 people at 24 locations across 13 states, faces difficult decisions about cost absorption versus price increases. The OEM previously announced it would absorb 25 per cent tariffs on 2025 models for a limited period, but unrelenting high rates would prove unsustainable.

BMW similarly confronts substantial exposure despite its Spartanburg operations. The carmaker previously indicated tariffs could hit earnings by $1.1 billion in 2026. CEO Oliver Zipse has called on the European Union to expedite ratification of the US trade agreement reached in July, noting delays leave automakers bearing significant costs whilst facing 31 per cent tariffs on EVs produced in China and shipped to the EU.

Volkswagen Group articulated the industry's broader predicament in a statement noting that "US tariffs and any counter-tariffs will have negative consequences for growth and prosperity in the US and other economic areas. The entire automotive industry, global supply chains and companies as well as customers will have to bear the negative consequences."

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British and Italian operations caught in crossfire

British automotive manufacturing faces particular complexity given Brexit's existing disruption to supply chains and investment patterns. The UK now produces fewer cars than in decades, though certain segments including the aftermarket, classic car industry, motorsport engineering and luxury bespoke manufacturers remain globally competitive.

Premium British brands including Jaguar Land Rover, Aston Martin and Bentley maintain significant US market exposure. JLR previously paused shipments of UK-made cars to assess tariff effects, illustrating how even temporary policy uncertainty can disrupt manufacturing cadences and delivery schedules.

British Prime Minister Keir Starmer condemned the tariff threats as "completely wrong," stating that "applying tariffs on allies for pursuing the collective security of NATO allies is completely wrong." Yet Britain's position outside the European Union complicates coordinated responses, potentially leaving British manufacturers navigating parallel but distinct trade frameworks.

Italian automotive production presents another variant of vulnerability. Whilst supercar manufacturers including Ferrari, Lamborghini and Maserati occupy profitable niches where pricing power can absorb tariff costs, mass-market Italian production has largely disappeared. Brands like Alfa Romeo and Lancia struggle to maintain viability, and additional tariff burdens could prove decisive for marginal operations.

Battery and component production and supply chains face new friction

The automotive sector's transition to electrification adds yet another layer of complexity to tariff implications. European battery manufacturing has emerged as a strategic priority, with substantial investment flowing into gigafactory development and upstream supply chain integration. Yet the sector already confronts challenges including cost competitiveness relative to Asian producers and uncertain demand trajectories.

European battery cell production capacity reached modest levels in 2025, with Asian companies including LG Energy, Samsung SDI, SK On and CATL accounting for approximately 92 per cent of operational capacity in the EU. European battery makers, most notably Automotive Cells Company, represent merely 8 per cent of running capacity. Tariff-driven trade friction could complicate technology transfer agreements and supply chain integration essential for scaling European production.

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Critical raw materials access presents another dimension of vulnerability. European automotive players require reliable access to lithium, cobalt, nickel and other materials concentrated in geopolitically sensitive regions. Trump's tariff threats compound existing concerns about supply chain resilience, particularly given China's dominant position in battery material processing.

The European Commission's Action Plan for automotive competitiveness, presented in March 2025, emphasised ensuring reliable access to critical raw materials through streamlined permit procedures and supporting joint private sector investments. A Critical Raw Materials Centre planned for 2026 aims to aggregate supply and demand. Yet these initiatives presume stable international trade frameworks that Trump's approach actively undermines.

EU's anti-coercion instrument enters manufacturing consciousness

The potential deployment of the EU's Anti-Coercion Instrument represents uncharted territory for transatlantic trade relations. Never used since its 2023 adoption, the mechanism was explicitly designed to counter economic coercion by the world's two largest economies. Its activation would signal European willingness to escalate trade friction to unprecedented levels.

Under the instrument's provisions, the European Commission could restrict trade in goods and services, limit foreign direct investment and target financial market access. The breadth of available measures exceeds traditional tariff retaliation, potentially affecting US automotive manufacturers' European operations, technology companies' market access and financial services firms' ability to operate within EU jurisdictions.

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For automotive manufacturers, the instrument's activation could prove more disruptive than the tariffs themselves. American automotive companies maintain substantial European manufacturing presence. General Motors' Opel operations, Ford's facilities in Germany, Romania and Spain, and various tier suppliers' European operations could face new restrictions if the EU deploys its full arsenal of coercive countermeasures.

The instrument also includes provisions targeting services trade and investment flows. Given the automotive sector's increasing reliance on software, connectivity services and financial products, restrictions in these domains could prove particularly consequential. American technology companies providing automotive software platforms, mapping services and autonomous driving systems might find European market access constrained.

Planning horizons collapse under policy uncertainty

Perhaps the most corrosive effect of Trump's Greenland tariff threat concerns its impact on manufacturing sector confidence and planning certainty. The automotive industry's capital intensity and long product development cycles require stable policy frameworks. When tariff rates "seem to sometimes change by day," as economist Joseph Foudy observed, manufacturers face impossible planning challenges.

The Greenland dispute illuminates how trade policy has become detached from traditional economic considerations. Tariffs historically served protectionist industrial policy objectives or revenue generation. Trump's deployment of tariffs to compel territorial acquisition by a NATO ally represents something qualitatively different, a weaponisation of trade policy for geopolitical ends with little regard for economic consequences.

This shift fundamentally alters manufacturers' risk assessments. When tariff policy responds to traditional economic factors such as trade imbalances or industrial competitiveness, manufacturers can model scenarios and develop mitigation strategies. When tariffs instead serve territorial ambitions or geopolitical objectives disconnected from economic rationales, planning becomes speculative guesswork.

Norwegian Prime Minister Jonas Gahr Støre's observation that threats have no place among allies captures the broader uncertainty Trump's approach introduces. If trade policy among longstanding military allies can shift dramatically based on territorial disputes or political whims, what confidence can manufacturers maintain in any policy framework?

Broader implications extend beyond immediate tariff impact

The Greenland tariff episode's significance transcends its direct economic effects. Trump's willingness to threaten close allies over their opposition to his territorial ambitions signals that no relationship, however longstanding, provides immunity from economic coercion. For European manufacturers, this realisation demands fundamental reassessment of transatlantic economic integration.

The timing proves particularly unfortunate given the European automotive sector's existing challenges. Production costs in the EU run approximately 30 per cent higher than in China according to recent analysis. Labour costs, energy prices and regulatory complexity all weigh on competitiveness. Chinese manufacturers increasingly capture European market share, particularly in the expanding EV segment.

Against this backdrop, additional tariff burdens and trade policy uncertainty could prove decisive for marginal operations. Factory closures and job cuts announced in recent months reflect slowing EV uptake and cost pressures. Further tariff-driven cost increases or investment hesitancy could accelerate consolidation and capacity rationalisation.

The Greenland dispute also highlights NATO's growing fragility. European leaders warned that any US attempt to take Greenland by force could spell the alliance's end. Trump's tariff announcement, whilst potentially signalling abandonment of military options, nevertheless ratchets pressure on Denmark and Europe through economic means. The precedent this establishes regarding intra-alliance relations extends well beyond automotive manufacturing, but the sector's vulnerability to trade disruption makes it an early indicator of broader tensions.

The future of European vehicle production

The coming days will prove critical for determining whether Trump's Greenland tariffs represent serious policy or negotiating theatre. The 1 February implementation date approaches rapidly, and European leaders face difficult choices about response strategies. Measured reactions risk encouraging further economic coercion, whilst aggressive retaliation could trigger escalating trade conflict neither side can afford.

European automotive manufacturers must develop sufficient flexibility to navigate policy volatility whilst maintaining the operational efficiency competitive markets demand. Investment decisions made today must account for multiple potential futures, each carrying significant capital implications and none offering certainty.

The sector faces not merely a tariff challenge but a test of its ability to maintain competitiveness amid fragmenting trade architectures and geopolitical instability.