Steeling For a Fight

First, George W. Bush twitted Europeans’ environmental correctness by deciding to let the United States sit out the Kyoto treaty on global warming. Then he offended their sophisticated moral sensibilities with his plainspoken bluster about “the axis of evil.” But last week, U.S. unilateralism struck an especially sensitive part of Europeans’ anatomy: their pocket books. In a decision that seems directly to contradict the free-market gospel that is America’s chief political export, Bush imposed protectionist tariffs of 8% to 30% on foreign steel.

That’s lower than the up to 40% penalties Big Steel said it needed to survive a deluge of cheap overseas metal, but more than enough to provoke the outrage of Europeans, who fear that their manufacturers and workers have the most to lose as the world’s second-largest net importer of steel, after China, starts turning ships away. (About 28%, by value, of steel imported by the U.S. in 2001 came from the E.U.; Japan, Korea and Russia were also hit by the tariffs.) Even British Prime Minister Tony Blair, who never met an American President he didn’t like, howled at the “unacceptable and wrong” measures. European Union trade Commissioner Pascal Lamy resorted, as Europeans so often do when the Americans baffle them, to cowboy clichés. “The world steel market is not the Wild West where everyone can do as he pleases,” he said. “There are rules.”

Lamy and the E.U.’s member governments have every intention of seeing to it that those rules (or, at least, Europe’s interpretation of them) are enforced. The E.U. is building a case to challenge the U.S. tariffs at the World Trade Organization, a process that could take nearly two years. In the meantime, Europe’s biggest problem isn’t really the business it stands to lose in America — Germany’s ThyssenKrupp Steel, for example, says the tariffs will directly affect products that accounted for just 2% of its ?12.6 billion revenues last year — but the 2 million to 5 million tons of mostly low-priced steel, particularly from Asia, that could be redirected from the U.S. to Europe. Invoking the same wto safeguard provisions that the U.S. used to justify tariffs, the E.U. could soon seal off its own steel market. Some European politicians even argue that wto rules will allow for sanctions against other U.S. products, though Lamy says he takes a dim view of a “you kick me, I punch you” response.

It may not come to an all-out trade war, but the brief era of post-Sept. 11 togetherness is now officially over. The Americans are serene about this. “The Europeans will scream,” a Bush administration official told TIME last week. “But coming from them, it’s a little hard to take.” As U.S. Trade Representative Robert Zoellick, heretofore regarded as one of the Bush team’s great internationalists, pointed out, the Europeans subsidized their steel industry to the tune of $50 billion over the past 30 years.

More important, British prime ministers and German steelworkers can’t vote in West Virginia. “When you think about it politically, it’s a no-brainer,” says a White House official. Bush, like his father before him as well most of the Republican Party, is an instinctual free trader. As a candidate he promised “to end tariffs and break down barriers everywhere.” But he took a rhetorical detour whenever he campaigned in America’s steel country, promising not to neglect steel the way the Democratic Clinton Administration had. Because of the unusual U.S. Electoral College system, Bush campaign advisers understood that scratching out even a bare majority in states such as Pennsylvania and West Virginia could win the White House. Bush didn’t take Pennsylvania, but he scored an upset in West Virginia. And now he’s trying to lock in those political gains for his re-election campaign in 2004.

But Bush’s tariffs aren’t all about craven political advantage. The U.S. steel industry is in genuine need of help. Europeans argue that the U.S. steelmakers can’t claim they are the victims of a surge of imports, because steel imports into the U.S. actually declined by 21% in 2001. (Europe, on the other hand, saw a spike in imports.) But much of this decline can be attributed to the economic shock following the terrorist attacks, and to the fact that the global steel industry saw tariffs coming and pulled back accordingly.

And America’s integrated steelmakers are still reeling from 1998, when the Asian economic crisis sent a flood of cheap steel to U.S. shores, boosting imports by a third. More than 30 manufacturers have declared bankruptcy since then. The steel industry used just 76% of its productive capacity last year, compared to 84% in 2000, when imports were higher. Thousands of American steelworkers — most of whom live far from any other industry besides the local mill and don’t enjoy a European-style social safety net — lost their jobs amid an economic boom.

But European analysts and economists — and, frankly, not a few American ones as well — question whether Bush’s solution fits the problem. Europeans mills, for their part, haven’t been dumping — that is, selling steel for less than it costs to make — on the U.S. With the strong dollar and some 200 anti-dumping measures already propping up steel prices in the U.S., they didn’t need to. “The Europeans could sell their stuff in the U.S. for $300 per ton, compared to $210 per ton in Europe,” says Peter Fish, managing director of steel consultancy MEPS in Sheffield, England. The real trouble with Big Steel is that it is one of the world’s highest-cost producers; before tariffs, it costs 18% more to make cold-rolled coil in the U.S. than in Europe. And even with the new tariffs and shipping, Merrill Lynch analysts figure the Koreans will still almost match American costs.

To be fit for global markets, American steel needs to restructure, not only downsizing plants but cutting costs and merging inefficient operators. What’s stopping them is a huge of overhang of some $13 billion in “legacy costs,” including pension benefits for workers long since taken off company payrolls. The burden grows as the business shrinks. Europe handled a similar problem years ago with a dose of social democracy — some of those subsidies Zoellick complained about went toward softening the blow of plant closings and job losses as the industry privatized. Europeans wonder why the Bush Administration can’t come up with its own restructuring plan. “We understand the concerns of American producers about legacy costs and pension liabilities,” Patricia Hewitt, Britain’s Secretary of State for Trade and Industry, told TIME. “But those are issues the American government could have addressed without getting European steel producers to pay the price.”

The resentment one may detect in Hewitt’s tone threatens to color just about every aspect of U.S. relations with, well, everyone else. The tariff row may not prove enough to damage the coalition against terror, but it certainly turns back the progress toward freer, fairer markets begun last year at the wto meeting in Doha, Qatar. Says Hewitt: “The success of the Doha round will be more difficult as other governments see the U.S. talk free trade, but walk protectionism.”