Europe warns of worldwide trade war over steel

Economy: Commissioner accuses America of 'wild west' tactics as leaders prepare for a damaging round of tit-for-tat sanctions

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

The world could be plunged into a full-scale trade war, the European Union warned yesterday, as it prepared to retaliate against America over the imposition of tariffs on European steel exports.

In a furious response to the new trade barriers, the European trade commissioner, Pascal Lamy, accused America of "wild west" tactics. Pledging retaliation, he said that it was his right to protect European industry and jobs.

Asked whether such a reaction from Brussels might spark a damaging round of tit-for-tat trade sanctions, Mr Lamy replied: "That danger exists".

Condemnation came from national leaders including the German Chancellor, Gerhard Schröder, who described the decision as "unacceptable" and "against free world markets".

The dire warnings and fierce rhetoric reflect the size of the stakes. Not only is the EU planning to respond to the US measures, but it will have the opportunity to levy massive trade sanctions against America next month in a separate trade dispute.

Measures taken by the EU in response to the US action are likely to hit other exporters such as Japan and South Korea, who also face exclusion from the American market and want to sell more to the EU. Unless voluntary deals can be struck, this could plunge the world into a fresh round of protectionist retaliation and strain the global trading system.

Mr Lamy was blunt in accusing the Bush administration of flouting the rules. "The steel market worldwide is not the wild west where everybody just does what they like," he said. "There are disciplinary rules."

The commissioner denounced the US measures as "political, not economic", alluding to the forthcoming mid-term elections in America.

The EU says it will be the biggest victim of the US measures because it accounted for more than 25 per cent of imports of high-added-value steel products hit by the highest 30 per cent tariff. Last year total estimated steel exports to America were 4 million tons.

Mr Lamy's fightback will consist of several elements. The EU will challenge the US measures in the World Trade Organisation, a process that may take 18 months to resolve. Meanwhile, the authorities in Brussels are preparing to draft measures to prevent cheap steel, now blocked from America, being diverted into Europe. A compensation claim from the US may be made.

Anger at the Bush decision was mixed with alarm at its implications. The move could provoke a trade war and snuff out prospects of an economic recovery.

Next month the EU will have the option of imposing sanctions against the US in a separate trade dispute that the EU has won. On 29 April the WTO will decide the amount of sanctions which the EU can impose on America in a row over foreign sales corporations, a system that allows tax concessions to American exporters.

Because the sums at stake are enormous, between $1bn and $4bn, the EU has hinted that it will soft-pedal on sanctions while America changes its law. That position may no longer be sustainable.

Nick Clegg, the trade spokesman for the Liberal group in the European Parliament, argued: "I do not think there is any incentive for Europe to acquiesce in any way with what is blatant American protectionism. We should not make it easy for them, quite the reverse, we should make it extremely uncomfortable."

Another source added: "If you are holding a sledgehammer over someone's head and they knee you in the nuts, they shouldn't be too surprised if you use the sledgehammer."

Mr Lamy wants to take measures under a "safeguard clause" of the WTO agreement to protect the EU steel industry. That may not be an immediate process, because the EU will have to assess the potential damage to its industry, taking into account the view of all parties, before it can impose tariffs. America used the same procedure to bring in Tuesday's tariffs on imported steel, but conducted an internal inquiry first.

While America may technically have adhered to the rules, it is unlikely to win at the WTO when its action is challenged. First, the EU disputes the central US claim that steel imports are rising; Mr Lamy said US imports had declined by 33 per cent since 1998. America does not dispute this, although it argues that it suffered from European subsidies to its steel industries when they restructured in the 1970s and 1980s.

The EU argues that the cause of the crisis in the American steel industry is not a drastic change in trade patterns but the lack of competitiveness of a sector that never endured the wholesale restructuring seen in Europe,

Most Europeans believe that America knows it will lose the case, but realises it can buy at least 18 months while the case is heard, taking the Bush administration well past its mid-term elections.