The latest U.S. tariff threats, targeting Europe over the control of Greenland, raises risks to trade and economic growth, says Fitch Ratings.
In a new report, the rating agency said that the threat of new tariffs on eight European countries, and the prospect of retaliation, intensifies geopolitical risks.
While the implementation of new levies “remains highly uncertain,” Fitch said that it also “signifies a serious upsurge in transatlantic tensions, increasing pressure in Europe to raise defence spending, posing risks to trade and growth, and weakening deterrence against future Russian aggression.”
The economic impact of a new 10% tariff could reduce European GDP by about 0.5% by the end of 2027 relative to the baseline forecast, with an increase to 25% implying “roughly twice the GDP impact,” it noted.
Germany would be “hardest hit,” Fitch said.
For the U.S., higher tariffs would likely raise prices for U.S. consumers, who are already facing higher cost-of-living concerns.
At this point, Fitch expects that the European retaliation would be relatively modest.
“But a more meaningful European response is possible,” it said. “The French president has suggested using the EU’s anti-coercion instrument, which would allow for much more extensive retaliatory measures, including on imports of services, for example regarding the large U.S. tech firms.”
However, these latest tariffs could also face greater opposition from Republicans in Congress, Fitch said, as they have “more substantial geopolitical implications.”
Alongside the potential negative impact on trade and growth, renewed trade tensions have risks for the viability of NATO and regional security, Fitch said.
“Tail-risk scenarios related to a potential escalation in Russian aggression, for example against the Baltic states, could become more likely,” it said — although Fitch said that direct conflict between eastern members of NATO and Russia “is very unlikely in the near term.”
The increased tensions will also amplify defence spending pressures in Europe, it said.
“NATO members have agreed to increase defence spending to 5% of GDP (total) and 3.5% (core) by 2035 from a current EU median of about 2.1%. Several eastern and northern European countries and Germany are already increasing defence spending more rapidly and the latest developments could accelerate this process,” Fitch said.