The Horizon: Trade Friction
Signals: week of 24 January 2026 - Greenland de-escalation, EU-Mercosur challenge, EU independence, and Mark Carney’s middle-power manifesto.
Top Signal: Trump-Greenland Crisis De-escalates (For Now, at Least) After Tariff Threats
This week, US President Trump, who had threatened new tariffs on several European countries both within and outside the EU including Denmark, Germany, France, Sweden, the Netherlands, Finland, the United Kingdom, and Norway over their support for Denmark and Greenland who had refused to negotiate a sale of the Arctic island for security needs, backed down citing reaching a framework for a long term deal on Arctic security. The move followed a meeting in Davos brokered by NATO Secretary-General Mark Rutte. Details remain elusive; however, sovereignty is a red line for Denmark and Greenland. Greenland is a semi-autonomous territory of Denmark.
EU leaders held an emergency summit in Brussels this week to discuss the latest developments, which could have included preparing €93 billion worth of retaliatory tariffs. Earlier in the week, the European Parliament had agreed to hold off the ratification of the EU-US trade deal, which was agreed last year. The EU’s anti-coercion tool, known as the “trade bazooka,” which effectively shuts off access to the European single market, was also an option. However, Trump stepped back following his trip to Davos, easing the immediate risks and sending European shares to a nearly two-month high. In his speech to political and business leaders at the World Economic Forum, Trump also ruled out taking military action against his NATO ally to acquire the territory. European lawmakers are now also likely to resume ratification of the trade deal.
With friction in the transatlantic relationship reaching a new high, the President of the European Commission is reported to have called on the EU to strengthen its economic power by diversifying its supply chains and also becoming more independent of the US. However, complicating matters is Europe’s continued dependence, at this point, on the US in security matters, particularly on the goal of ending the war in Ukraine. A week is a long time in transatlantic politics, and market volatility is likely to remain elevated. Reuters Euronews Le Monde Rfi WEF The Guardian
Key Signals
EU-Mercosur Deal Referred to Court of Justice in Razor-Thin Vote
The Northern transatlantic relationship was not the only source of trade friction this week, as the blooming trade relationship between the EU and the Southern Atlantic also hit a snag.
This week, the European Parliament voted 334-324 to refer the recently concluded EU-Mercosur trade agreement with Brazil, Argentina, Uruguay, and Paraguay to the Court of Justice of the European Union (CJEU), effectively freezing ratification and potentially delaying the deal by up to two years. The legal challenge questions whether the Commission can bypass national parliaments through provisional application, and whether the “rebalancing mechanism” improperly limits EU environmental and consumer health policies. Germany’s Chancellor Merz expressed his disappointment at Davos, while France hailed it as consistent with its opposition. Still, the Commission may provisionally apply the deal as early as March once Paraguay ratifies, however, not without a potential backlash within Europe. The deal, 25 years in the making, would, if and when approved, represent nearly 30% of global GDP and more than 700 million consumers, creating one of the world’s largest free trade areas. Le Monde Reuters Euronews
EU Signals Economic Reforms Amid Competitiveness Crunch
Returning to Davos, independence, strategic autonomy, and competitiveness were top priorities for EU leaders in attendance this week, as the continent faces a structural change in how the world is ordered. For the European Commission, that means making it easier to do business within the union. The EU Commission President, Ursula von der Leyen, outlined priorities for the coming period, which include creating a new European company structure, known as “EU Inc.”, with a single, simple set of rules that will apply seamlessly across the Union. There are also plans to establish the Savings and Investment Union to keep more capital within Europe for investment, and to build an interconnected, affordable energy market. Furthermore, the EU has started a cumulative surge in defence spending, which will invest up to €800 billion until 2030, and is actively pursuing further trade deals with key countries, including India, Australia, the Philippines, Thailand, Malaysia, and the UAE.
The leaders of the largest member states also echoed these priorities. The German Chancellor Friedrich Merz told his audience of political and business leaders that to succeed in this era of great power politics, Europe must face harsh realities and chart its course with clear-eyed realism. That means massive investment in defence, rapidly improved economic competitiveness, and working closer together within Europe. While French President Emmanuel Macron also prioritised more competitiveness and more autonomy, based on investment and innovation. EU Commission, German Federal Chancellery, French Presidency
Carney’s Middle-Power Manifesto
In a much-talked-about and thoughtful address at Davos this week, which contrasted with US President Trump’s worldview, Canada’s Prime Minister, Mark Carney, received a standing ovation after he spoke about the end of rules-based order and signalled a principled and pragmatic way forward for medium-sized powers such as Canada in this era of intensifying great power rivalry. It is an approach based on a belief that “middle powers must act together because if you are not at the table, you are on the menu”, he said. Rather than compete with each other to curry favour from the great powers, he proposed that they should instead combine to create a third path with impact.
He signalled building strength at home and pursuing “variable geometry” abroad, with “different coalitions for different issues, based on values and interests”.
Urging plurilateralism, he said Canada was championing efforts to build a bridge between the Trans-Pacific Partnership and the European Union, creating a new trading block of 1.5 billion people. On critical minerals, it is forming buyer’s clubs anchored in the G7 to diversify away from concentrated supply, and on AI, he said that Canada is cooperating with like-minded democracies to avoid having to choose between hegemons and hyperscalers. Prime Minister of Canada WEF Reuters
Strategic and Systems Insight
The week’s signals emanated from the World Economic Forum in Davos. The main theme was trade friction, that is to say, the breaking apart and reshaping of the global order, and how that affects countries’ control over their own economic destinies. Every signal, from Trump’s Greenland play to Carney’s applauded middle-power manifesto, points to an emerging sort of multipolar mercantilism where states are reasserting relative control over strategic domains, from trade, tech, and defence to natural resources. They are awakening to the new reality and focusing on interdependence and strategic autonomy while still navigating dependence in key areas.
The recent de-escalation over Greenland highlights a US–EU relationship that remains structurally fragile. The Greenland play was essentially about who controls Arctic access. Europe this week showed more readiness than before to deploy its “trade bazooka”, revealing it can also play the game where actors are willing to weaponise economic tools in pursuit of their own interests. In the end, it didn’t have to, but there was a time not so long ago that even considering using it against the US would have been unthinkable. There is now more realism in Europe; the continent is now thinking more in terms of power, rather than just process. Yet, its continued dependence on U.S. defence and tech limits its autonomy for now.
Meanwhile, the EU-Mercosur referral reveals that the EU is not completely singing from the same hymn sheet, and its internal democratic machinery can paralyse its broader geoeconomic strategic ambition. It reveals that the EU’s regulatory complexity is also a geopolitical vulnerability.
Still, Von der Leyen’s “EU Inc.” proposal, the Savings & Investment Union, and the defence surge mark the EU’s pivot toward economic realism as it tries to fuse scale, capital, and capability in an age of geopolitical contest. If experience is a reliable indicator of future scenarios, then proposed reforms could quite likely collide with different member state priorities.
Mark Carney’s speech highlighted what may be the most important long-term systemic insight: the rise of a coalitional form of multipolarity. It painted the picture where medium-sized economies have sufficient sovereignty to shape outcomes by forming flexible, issue-based alliances around critical minerals, AI standards, or trade corridors rather than aligning with or competing for the attention of a single superpower. This suggests a world of “variable geometry” where network advantage replaces scale advantage. In such a scenario, businesses that can operate within overlapping regulatory and trade systems will thrive.
Thoughts shared here are intended for discussion and knowledge only, not financial, investment, or legal advice. Always chat with your advisors first.