The EU’s magical, mystery trade weapon — and other options to nail Trump

 

The EU’s magical, mystery trade weapon — and other options to nail Trump

 

POLITICO analyzes the actions that European leaders can consider when they gather for an emergency summit this week.

 

January 19, 2026 6:54 pm CET

By Koen Verhelst and Carlo Martuscelli

https://www.politico.eu/article/the-eu-magical-mystery-trade-weapon-other-options-donald-trump/

 

BRUSSELS — The trade war is back.

 

Donald Trump’s threat to impose tariffs on European countries over Greenland has blown up last year’s transatlantic trade truce and forced the EU into a familiar dilemma: hit back hard, or try to buy time.

 

On paper, Brussels has options.

 

It could target politically sensitive U.S. exports like Republican-state soybeans. Or it could unleash its trade “bazooka,” the Anti-Coercion Instrument.

 

Here are the actions that EU leaders can consider when they gather for an emergency summit on Thursday:

 

Hitting back against U.S. products

Retaliatory tariffs on €93 billion worth of U.S. goods are still sitting in the EU’s pantry. These date back to Trump’s first round of tariffs last year and were frozen for six months in August.

 

This package will automatically kick into force on Feb. 7 unless the Commission proposes to extend the freeze and the 27 EU countries agree with that. Such a suspension can happen very quickly, however, as the Commission typically sounds out support from capitals several times a week.

 

Part of the package targets distinctively American products like Levi’s jeans, Harley Davidson motorcycles and Kentucky bourbon. Other goods would be targeted because they originate in states that lean towards the Republican side of the spectrum. A tariff on soy beans, for instance, would target the red state of Louisiana from which House Speaker Mike Johnson hails.

 

Deploying the trade “bazooka”

The biggest weapon in the EU’s arsenal is its Anti-Coercion Instrument. This all-purpose tool is meant to deter other countries from using trade tactics to extort concessions in other areas.

 

With it, Brussels can impose or increase customs duties, restrict exports or imports through quotas or licenses, and impose restrictions on trade in services. It also can curb access to public procurement, foreign direct investment, intellectual property rights and access to the bloc’s financial markets.

 

But in a case like this, it would take a few months to first clear diplomatic hurdles between the Commission and the Trump administration.

 

Because it has never been triggered before, the EU is in uncharted waters. That is especially true for the dynamics between the Commission and national capitals. Brussels needs to propose launching the mechanism, and would only do so if it knows enough capitals will agree. France is keen, but Germany and other countries? Not so much.

 

“It’s one of the cards,” but “it’s really not the first in the line that you use,” Lithuanian Finance Minister Kristupas Vaitiekūnas told POLITICO in an interview.

 

Playing the China card

Canadian Prime Minister Mark Carney did something unprecedented last Friday. Turning the page on the acrimonious relationship between Canada and China born out of the arrest of a high-profile Huawei executive, the Canadian leader struck a preliminary trade deal with Beijing to liberalize imports of Chinese electric vehicles in exchange for a steep reduction in tariffs on Canadian agricultural goods.

 

Carney didn’t mention Trump by name, but the message was clear: Canada has other partners, and it won’t sit quietly while Washington tries to strong-arm it. 

 

A blueprint for Brussels? It’s not that simple. While the EU has tried to thread the needle on its trade relations with Beijing — the Asian country remains its second-largest trading partner  — policymakers are keenly aware of the competitive threat posed by China, Inc.

 

Germany’s automotive industry is reeling from high energy prices and fierce competition from China (now the world’s top automotive exporter). In general, overcapacity — the term for China’s dizzying output of products that, unable to be absorbed by its domestic market, are sold abroad — keeps EU business leaders up at night.

 

Compared with Canada, for the EU China is a “whole different can of worms,” said trade expert David Kleimann. “The Chinese are outcompeting us on all of our main exports and domestic production,” he said. “We will need more barriers, more managed trade with China.”

 

An asset firesale

America’s enormous debt pile is one Achilles heel. The U.S. loves to spend, and Europeans, in turn, snap up that debt. George Saravelos, head of foreign exchange research at Deutsche Bank, said that European public and private sector entities hold a combined total of $8 trillion of U.S. stocks and debt — “twice as much as the rest of the world combined.”

 

“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,” the analyst wrote in a note to clients.

 

If European governments order their banks and pension funds to dump their holdings, that would almost certainly spark a financial crisis, sending America's borrowing costs soaring. The ensuing financial Armageddon would engulf Europe as well, though. The firesale of financial assets would crush prices, and European lenders would book huge losses — the financial equivalent of nuclear mutually assured destruction.

 

Increasing decoupling from the U.S. financial system looks likely, but a violent wholesale break is extremely unlikely.

 

Playing for time

Restraint is the EU’s weapon of choice for now. “The priority here is to engage, not escalate, and avoid the imposition of tariffs,” Olof Gill, deputy chief spokesperson for the European Commission, said on Monday.

 

Under their trade deal struck last year, the United States has already lowered tariffs on most EU products to 15 percent, while the EU has yet to make good on its pledge to cut its tariffs on U.S. industrial goods to zero. That’s because Trump’s threats have derailed a vote in the European Parliament on lowering tariffs for U.S. products.

 

While this stalemate lasts, EU companies actually benefit from lower costs while the reverse is not true for their American counterparts.

 

“Trade continues to flow, investment continues to flow,” Gill added. “So we need to be very sensible in how we approach the difference between a threat and operational reality.”

 

With Trump trying to drive a wedge between European leaders by threatening tariffs against some countries, including France and Germany, while sparing others, like Italy, maintaining cohesion will be a huge challenge. Any serious retaliation, such as wielding the bloc’s trade “bazooka,” the Anti-Coercion Instrument, would require very broad support.

 

What comes next

The U.S. Supreme Court might rule on some of Trump’s tariffs as soon as Tuesday. If the administration loses the case, Trump would have to deal with the fallout while he’s attending this week’s World Economic Forum in Davos.

 

“On a purely economic warfare basis, that would play in our favor,” said Kleimann. “But we haven’t considered Trump’s ambitions to actually put boots on the ground.”

 

At Davos, Trump might meet with Commission President Ursula von der Leyen, although no bilateral is yet confirmed. Von der Leyen will speak at Davos on Tuesday; Trump is due to arrive the day after.

 

Then on Thursday, EU government leaders hold an emergency summit in Brussels to discuss transatlantic relations and the latest tariff threats. The meeting is not expected to create a glitzy attack plan but rather to sound out whether the EU should indeed target the U.S. goods or maybe shoulder its trade bazooka.

 

By Feb. 1, the U.S. tariffs on the European allies would kick in, if Trump follows through on his threats. A week later, the EU’s retaliation package automatically kicks in if no solution is found.

 

If that happens, the U.S. and EU really will be in a trade war.