Markets Plunge as Trump Threatens 200% Tariffs on French Wine Over Gaza Diplomacy Feud

Trump's Tariff Escalation Rattles Markets

U.S. President Donald Trump on Tuesday threatened to impose 200% tariffs on French wines and champagne after French President Emmanuel Macron was reported to be unwilling to join his "Board of Peace" on Gaza. The threat sent shockwaves through financial markets, compounding existing volatility from Trump's announcement on Saturday that eight European allies would face increasing tariffs, starting at 10% on Feb. 1 and rising to 25% on June 1, if a deal is not reached that allows Washington to "buy" Greenland.

The dramatic escalation marks a significant shift in how the Trump administration wields trade policy, weaponizing tariffs against diplomatic disagreements rather than traditional trade disputes. "I'll put a 200% tariff on his wines and champagnes and he'll join, but he doesn't have to join," Trump said when questioned by reporters in Miami on Monday, directly linking the tariff threat to France's refusal to participate in the Board of Peace initiative.

Unprecedented Coupling of Trade and Diplomacy

The "Board of Peace" was threatened after an aide for French President Emmanuel Macron said France "does not intend" to accept an invitation to join the "Board of Peace" for Gaza. The United States is asking participating countries to pay more than $1 billion to join the board. Several countries have already accepted Trump's invitation, including Hungary, Vietnam and Morocco.

The Trump administration's strategy represents a dramatic departure from traditional diplomatic channels. Trump's tariff threat underscores a broader shift from rules-based diplomacy toward personalised, coercive bargaining. While such tactics may generate headlines and short-term leverage, they risk long-term damage to alliances and multilateral norms.

European Markets Face Significant Losses

The pan-European Stoxx 600 ended the session down 0.72%, with most sectors and all major regional bourses in negative territory. The wine industry bore particular brunt of the announcement. Paris-listed shares of luxury giant LVMH — which owns Moët & Chandon, Dom Pérignon and Veuve Clicquot — were 2.1% lower at the end of Tuesday's dealmaking.

French wine exports to the US, worth an estimated €1.96 billion (US$2.2 billion), face potential market shutdown. The current 15% tariff, combined with a weakened dollar, has already imposed a significant burden on European producers. CEEV previously estimated the combined financial impact on the sector could reach 30%, with investments halted and export volumes declining.

Industry groups have expressed alarm at the tariff threat. "Comments signaling the potential for extreme tariffs—especially when tied to non-trade issues—create uncertainty across the entire three-tier system," said WSWA President and CEO Francis Creighton. "Even the prospect of a 200% tax on imported goods sends shockwaves through supply chains, contracts and pricing decisions, and ultimately puts American jobs at risk."

European Response and Potential Retaliation

"We do prefer respect to bullies … we do prefer rule of law to brutality," Macron said at the World Economic Forum in Davos on Tuesday. European leaders are not taking the threat lightly, with serious consideration being given to retaliatory measures.

The EU is weighing the use of retaliatory tariffs on €93bn of US goods, a measure that was floated then abandoned last year during an earlier trade stand-off with Washington. Using its "trade bazooka," which could suspend US company licenses or tax US services, could take the EU months to implement.

The European Parliament last week postponed a vote to ratify the EU-US trade agreement in solidarity with member states targeted by Trump's Greenland-related tariffs, which include France, Germany, and the Netherlands. This development signals broader European unity against the tariff threats, with the potential to undermine recent trade agreements.

Broader Economic Implications and Uncertainty

The tariff threats extend beyond wine and champagne exports. European carmakers and the luxury goods sector were hit hard as investors reacted to the tariff proposals. The Stoxx Europe 600 Automobiles & Parts Index was 2.22% lower. Volkswagen slumped about 2.82%, while Porsche fell 2.68%, paring some earlier losses, and BMW shed almost 3.74%.

The uncertainty about whether Trump will escalate his tariff threats or back out before imposing new duties could make trading partners steer clear of America long-term. "Uncertainty is the enemy of growth," said economists evaluating the situation.

International financial institutions have taken notice of the deteriorating situation. IMF Managing Director Kristalina Georgieva issued a stark warning to European leaders on Tuesday: "Get your act together." She urged European policymakers to strengthen the continent's economic competitiveness and structure in response to mounting trade pressures.

The Road Ahead: Davos Negotiations

Trump later Tuesday posted online what he said was the text of a message Macron had sent him seeking to arrange a dinner in Paris on Thursday while he is in Europe for the World Economic Forum. The planned meetings at Davos this week could prove decisive in determining whether the tariff threats materialize or serve as negotiating leverage.

However, the fundamental tension remains unresolved. France is likely to stand firm against joining the board under pressure, especially if tariffs remain rhetorical rather than implemented. As markets wait for clarity on whether these threats will translate into policy, volatility is expected to persist across European equities, currency markets, and commodities.

The situation underscores a critical shift in global trade dynamics, where non-economic geopolitical demands are increasingly coupled with economic weaponry. Whether this approach yields diplomatic concessions or precipitates a transatlantic trade war remains to be determined in negotiations ahead.