Sparks still flying in transatlantic trade dispute

European leaders hailed President Bush's retreat from import tariffs on steel Friday, welcoming it as a sign that Washington is ready to abide by international rules despite the US administration's reputation abroad for "America First" policies.

The suspension of the tariffs more than a year earlier than planned, avoiding a costly trade war with America's largest trading partners, "shows that everyone, including the United States, must obey multilateral discipline," said Pascal Lamy, the European Union trade representative.

The decision also cleared a cloud from transatlantic relations as US Secretary of State Colin Powell sought to mend fences with European allies, asking NATO foreign ministers in Brussels to play a larger role in Iraq's transition to self rule.

The EU had threatened to impose $2.2 billion of retaliatory sanctions on US exports from next week unless Washington rescinded its tariffs, designed to help US steel manufacturers but ruled illegal by the World Trade Organization.

"Bush could have decided to fight with the Europeans," says Bernhard May, an analyst of transatlantic relations at the German Foreign Policy Society in Berlin. "His decision is helpful because it sends a signal that the Americans are trying to improve relations. It creates a much better atmosphere."

Though the end to tariffs of up to 30 percent will be politically unpopular in big steel producing states such as West Virginia, Pennsylvania, and Ohio, Mr. Bush was clearly unwilling to risk trade relations with America's largest partner. The US and the EU do more than $1 billion worth of trade a day.

The president was also under pressure from US exporters who would have suffered from EU sanctions: Brussels had tailored its sanctions to hit "products that are sensitive to important US constituencies" such as Florida oranges and textiles from California because "they are very vocal sectors that would make their case to the administration," says Arancha Gonzales, an EU spokeswoman.

Florida and California are also key states in next year's presidential elections, which gave Bush a domestic political rationale for ending the tariffs. "We ensured that the sanctions we would have imposed ... would hurt here or there because this is politics," Mr. Lamy told French radio on Friday. "At the end of the day the US president takes a political decision, and you have to be able to play the same game."

The easing of transatlantic trade tensions came as Washington and some leading European nations appear to be reaching an understanding on another point of friction - European Union plans to beef up its joint defense capability.

US officials had long voiced fears that such plans might duplicate NATO's role, and thus undermine the Western alliance: the Pentagon had been especially critical of the idea mooted by France, Germany, and Belgium of setting up an EU military planning headquarters outside Brussels.

British Prime Minister Tony Bair, sympathetic to US reservations, worked out a deal with his French and German counterparts late last month, however, under which an EU planning staff would be reinforced to handle operations that NATO does not want to undertake while also setting up a permanent EU planning cell at NATO headquarters.

Germany, France, and Britain would be allowed to participate in a common defense - as the vanguard of European policy - only with the approval of all EU members.

US Secretary of Defense Donald Rumsfeld, on a visit to Brussels this past week, reacted cautiously to the project, refraining from the sharp criticism he had voiced in the past and saying he was willing to consider ideas that did not represent competition for NATO.

Disagreements between Europe and America remain over major issues, however.

On the trade front, the EU is still waiting for Washington to rescind tax breaks given to US exporters that the WTO has ruled illegal, as in the steel case.

The EU is threatening to levy a $4 billion package of sanctions - approved by the WTO - if the US does not repeal the tax law by March 1; Congress is due to vote on the issue in the new year but it is not clear whether it will act in time.

If the tax breaks remain in place, "either we will fight a real trade war like we have not seen for very many years, or the EU will have to decide to postpone its action," says Dr. May. More broadly, European leaders have not given up their hopes that the US administration will offer a greater role to the United Nations in overseeing the political transition in Iraq.

A sign that Washington might be moving in that direction came last Thursday, when Mr. Powell told a NATO summit that "The United States welcomes a greater NATO role in Iraq's stabilization. We welcome a more robust United Nations role as well."

That suggested that the US is prepared to share control of Iraq with other countries, which would undoubtedly demand a say in how the country is run if they were to contribute troops to its pacification.

Europe and the US "are moving towards each other," says May. "It is a process, but it is moving in the right direction, and the steel decision is another step in that direction."