Hamish McRae: The steel war is just part of a larger pensions conflict

If companies downsize, they will find an ever smaller business having to support a growing army of pensioners

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Blair promises to defend UK industry against 'arbitrary and unjustified' tariffs

Europe warns of worldwide trade war over steel

Donald Macintyre: The EU is the place to fight Mr Bush's new steel tariffs

Leading article: Europe should not be drawn into a trade war with America

The really important issue in the US/EU steel war is not so much what happens to the steel industry around the world but what happens to pensions in all industries that, like steel, are radically cutting their workforces.

At the moment the main thrust of coverage is that the US action is a threat to world trade, partly because it will invoke retaliation and partly because it will inhibit further liberalisation post-Doha.

Of course, there will be some form of retaliation and there will be some inhibitions on the growth of trade. And certainly there is a theoretical danger that the liberalisation of trade in services, perhaps the most important element of the Doha accord, will take place more slowly than it otherwise might. But there are a string of reasons why the threat should be contained.

The most obvious is that it is in everyone's self-interest to cool it. Everyone knows that President George Bush did not want to introduce the steel tariffs but conceded to them because of overwhelming domestic pressure. The US remains the world's largest market for imports by a huge margin: in 1999 imports were $1,244.2bn (£875.6bn), ahead of Germany's $584.7bn and the UK's $396.2bn. It also runs an enormous current account deficit, nearly 4 per cent of GDP.

So no one can accuse the US of being a "bad importer". Indeed, the whole EU economic recovery seems to turn on the US recovery continuing to develop.

That leads to the second reason why the threat should be contained: US manufacturing is clearly turning up. On the top, factory output has only just started to climb but the ISM manufacturing survey points to a sharp recovery later this year. Meanwhile, as shown below, shipments of both hi-tech capital goods and (less markedly) traditional capital goods are also climbing.

An upturn in US manufacturing will tend to help the steel industry in general, though it produces such a segmented range of products that you have to be careful about generalisations: steel for, say, office construction, is completely different from the steel used in car production. Yes, there will be damage to the steel industry in the rest of the world – that is not in dispute. But a rise in underlying US demand for steel does provide some help and a recovery in the world economy, led by the US, provides huge help.

None of this is to defend the US steel companies, which have been more tardy than their European competitors in cutting out surplus and unsuitable capacity. Nor is it to praise the US President's action. It is simply to argue that the damage will be contained. This is another episode of a familiar story in the post-industrial world: industries trying to buy time while they cut back on capacity that is no longer needed.

But hidden in this familiar story is a newer and ultimately more significant one: an industry brought to its knees in part by the pension overhang. There are roughly 600,000 retirees from the US steel companies, whose pensions and health care (this is the US) are the responsibility of their former employers. The industry sought to get the US government to take on these responsibilities. But the Bush administration rejected this partly on cost grounds – an estimated $10bn – but more on the grounds that this would be a dangerous precedent for other industries.

There is going to be much more of this. US companies have a particular difficulty that their European counterparts escape if they have to cover health as well as pension liabilities. But the problem is universal for all companies that carry pension liabilities.

Here in the UK, the current concern is the problem for companies with under-funded final salary schemes. How times change: many schemes that had a healthy surplus three years ago and were facing claw-backs from the Treasury now have an actuarial deficit. This is not new: back in the mid-1970s when share prices plunged, many company pension schemes were under water. Hard-pressed companies were forced to top them up. Defined contribution schemes, by contrast, transfer this market risk to the pensioner and will become the norm in the future.

But with final salary schemes at least the risk is out in the open. On the Continent, however, there are enormous under-funded pension liabilities of companies that are not shown on balance sheets. The practice varies from country to country and company to company but in many instances paying a pension to past workers is an obligation that has to be carried by a current business with only limited funds set aside for that purpose.

While companies grow that is acceptable. But if and when they downsize their labour force and shrink their activities, they will find an ever smaller business having to support a growing army of pensioners – just like the US steel industry.

In the UK we have this problem, but only really in the public sector. Local authorities are increasingly finding that funds are having to be taken from current spending on services like police and fire-fighting to pay pensions to past employees. Early retirement, or retiring people on "health" grounds, makes matters much worse.

In this instance the US administration has chosen not to take over the pension liabilities of a commercial enterprise, though I suspect that in the end it may well be forced to do so. Certainly European governments would find it impossible to adopt such a hands-off approach if companies were unable to pay pensioners the sums due. The voting power will be with the old – those either receiving pensions or about to do so.

So what we are seeing now is an early skirmish in what will become a war. The pensions war will be a civil war in the sense that it will be fought between citizens of the same country rather than an international conflict, like the steel war. You could argue that by not conceding to the demands for a pension bail-out, the US administration has done the governments of the rest of the world a bit of a favour. It has put down a marker that shows that governments can resist the demand to take on such liabilities. But as I noted above, I expect such resistance will crumble in the end.

Steel wars are old-style wars; wars of the future will be about pensions.