Bush, the man of steel, is humbled by a $4bn battering from the WTO

In 1908, Andrew Carnegie, the Scot who was then America's biggest steel tycoon, was facing a tense Senate hearing on hefty US import tariffs and the prospect of a trade war with Europe. "Take back your protection; we are now men and we can beat the world at the manufacture of steel," he thundered.

Nearly a century later, the biggest names in US steel appear to find themselves on rather shakier ground. Despite having spent decades extolling the glories of globalisation, the US has suddenly found its steel industry the simultaneous victim and abuser of free trade. The US is swamped with cheap eastern European imports, and as a last resort the Bush administration has fallen back on the blunt instrument of protectionist tariffs.

In keeping with tradition, the US steel industry maintains its access to Washington's ear. With a move that stunned those who had not read the story in The Independent on Sunday predicting it, President Bush clearly demonstrated that fact in March when he announced a series of tariffs on steel imports – some as high as 150 per cent. The motive was obvious: nearly 30 US steel companies had filed for Chapter 11 bankruptcy protection since 1998, and more would surely follow unless something were done. With mid-term elections looming in November, the steel industry did not have to work hard to remind Mr Bush of the dangers of mass lay-offs in Ohio and New Jersey.

But over the last 10 days, Mr Bush has been forced into some serious backtracking. As the official complaints and threats of retaliation have rained in from around the world, Washington has grudgingly exempted around a quarter of steel imports from the tariffs. Sniffing victory, some of the larger European producers optimistically believe that a complete reversal could now be close.

In the UK, the Department of Trade and Industry continues to lobby hard on behalf of Corus, while the EU has been even more aggressive about anti-US sanctions, with a string of proposed tariff targets including Wonderbras, Nike shoes, Levi's jeans, Harley-Davidson motorbikes and Pepsico fruit juices. Even if the tariffs never happen, the proposals underline the growing bitterness between the EU and US, and have strengthened the realisation in Washington that the resolve of an angry Brussels cannot be dismissed.

The biggest victory for the EU came on Friday when the World Trade Organisation (WTO) gave it permission to impose a record $4bn (£2.5bn) in duties to compensate for an illegal US tax break that saved the likes of Boeing nearly $300m in 2000 alone. The ruling, which is 20 times higher than the previous record, could have one of two effects. The optimists hope it will force an end to the steel dispute at the heart of the feud. The doom-mongers believe it could simply escalate the trade war.

But the affair is more than just a flexing of the EU's muscles. It perfectly demonstrates to the US what many countries around the world have known for years: that world trade can be a very nasty business. As Colin Campbell, SG Securities' metals analyst, explained: "The US has to accept that steel is a global market like everything else. You can't expect to divide it up, and tariffs do not achieve any long-term gain."

That verdict was backed up last Thursday when the International Trade Commission (ITC), an independent agency, decided that US steel-makers like Nucor and Bethlehem had not, in fact, been badly hurt by the cheaper imports of cold-rolled steel that kicked the whole tariff issue off in the first place.

The US has also learnt what it feels like to be on the receiving end of complaints to the WTO. Over the years, US corporations' constant use of the WTO in their push for globalisation has given the organisation a reputation as something of a Washington poodle. Its decision on Friday goes a long way to reversing that, and leaves the door open to many more potential complaints – on non-steel issues – from the EU and the WTO's newest member, China.

According to the analysts, the concept of global free trade is probably what has pushed Mr Bush into backtracking. On the political level, the US does not want to make enemies of its traditional allies: with a possible war against Iraq in the offing, even the most fervent US isolationist sees the need for good relations with big industrial nations.

But on the home front, the steel tariffs were not popular either. Auto-makers such as Ford and General Motors, and other buyers of steel, have been hurt by the higher prices that have resulted from the tariffs, and they employ many thousands more than the steel industry.

The incident has also exposed how troubled the US steel industry is. The sector remains, according to all analysis, highly fragmented and inefficient but the restructuring required would cost many thousands of American jobs. It is a painful process that European players have duly gone through, but Washington seems determined to delay as long as possible.

On this side of the Atlantic, share prices among the steel-makers have been soaring as the markets sheepishly admit they may have overreacted when the news first came out. The Bush back-down has revealed the ease with which European steel companies, and their investors, are prone to fly into a panic.

In March, all the talk from Wales to Warsaw was of probable mill closures and mass redundancies. Now they are talking with the same kind of confidence that Mr Carnegie showed when Europe was on the back foot.