In this article, Sinclair Davidson contextualises and disseminates the IPA’s research into Australia’s National Defence
The United States has realised that leasing military access from Denmark is an incomplete contract fraught with intolerable transaction costs.
When Donald Trump first floated the idea of “acquiring” Greenland, the response from Europe’s diplomatic class was predictable – it was dismissed with contempt and derision. That Trump is regarded in European capitals as a vulgarian is well known; that this contempt might impair their judgment doesn’t appear to have occurred to them.
The American interest in Greenland, however, is not an eccentricity – a “Gulf of America” moment – requiring psychological explanation. It has a straight-forward economic explanation.
This is a textbook “make or buy” business problem, one that would have arisen regardless of who occupied the White House. The United States has realised that its current arrangement – leasing military access from Denmark – is an incomplete contract fraught with intolerable transaction costs.
It is here that the insights of economics Nobel laureate Oliver Hart apply. Since the 1951 Defence Agreement, the US has essentially leased its security presence in Greenland. But that lease was written for a static Cold War. It did not anticipate a world in which the North-West Passage becomes a viable trade route, China bidding for Arctic airports, or Greenland being on a slow trajectory toward independence.
Under a lease, the ‘residual rights of control’ remain with the owner – in this case, Denmark. If Washington wants to install a new class of undersea sensors or block a Chinese mining concession, it must negotiate with a partner whose interests are increasingly divergent. By seeking ownership, the United States is attempting to internalise these externalities and secure unilateral control over the asset.
US seeking vertical integration
This logic is deepened by economics Nobel laureate Oliver Williamson’s work on ‘asset specificity’. Greenland is a highly specific asset; its geography is non-substitutable. You cannot relocate the Greenland-Iceland-United Kingdom Gap.
When a firm makes massive, site-specific investments in an asset it does not own – like the multi-billion-dollar upgrades at Pituffik – it becomes vulnerable to ‘hold-up’. As Greenland inches toward independence, a newly sovereign government in Nuuk could threaten to revoke access or raise rent to extortionate levels, knowing the US cannot easily pivot elsewhere.
“For Australia, watching on from the southern hemisphere, the lesson should be disquieting”
Washington might manage this through conditional aid or treaty renegotiation, but such arrangements require continuous diplomatic maintenance and remain hostage to local politics. Ownership eliminates the problem at its root. In economic terms, the United States is seeking vertical integration to avoid being held to ransom by a future landlord.
Critics might point to the US presence in Australia or Japan as proof that leasing works, but this overlooks some fundamental differences. In Australia, we have a ‘joint production’ relationship with the US. Denmark, and NATO more generally, has an ‘insurance underwriting’ relationship with the US.
Australia is not just a landlord; it is a business partner with skin in the game and high-value human capital. Greenland offers none of this. It has a population barely larger than Wagga Wagga and is dispersed across a landmass three times the size of NSW. Its government subsists on a Danish block grant of roughly US$600 million ($895 million) annually—a subsidy the U.S. could internalise as a rounding error, but which represents a significant fiscal drag on a mid-sized European economy. To confuse the two cases is to confuse a high-tech joint venture with a tenancy on undeveloped land.
If the logic for ownership is so compelling, why hasn’t a deal been struck? In an ideal world, parties negotiate their way to efficient outcomes. But as economic Nobel laureate Ronald Coase argued, transaction costs matter.
The costs here are political and not economic. Denmark cannot sell without admitting that its Arctic policy has been a prolonged exercise in managed decline. Greenland cannot sell without confronting questions of identity its political class would rather defer. European goodwill towards the US will decline. The result is a suboptimal equilibrium maintained by diplomatic squeamishness on all sides.
The US may never get its title deed. But its ‘Arctic Monroe Doctrine’ means the era of the genteel lease is over. In the language of the firm, the US is no longer content to be a tenant in the Arctic. It wants to buy the building.
For Australia, watching on from the southern hemisphere, the lesson should be disquieting. Geography is the ultimate specific asset, and the United States is demonstrating that it will pay handsomely to control it – or exact a price from those who obstruct that control.
Mateship and shared history are fine sentiments; they are not a strategic framework. Whether Canberra understands that difference remains an open question.
