Japan and Europe dropped threats of tit-for-tat trade retaliation after US President George W. Bush scrapped controversial steel tariffs ahead of schedule, risking a political backlash at home.
Despite possible political damage ahead of next year's presidential election, Bush offered little to cushion the blow to US steel makers and workers, who accused the Republican president of "capitulating to European blackmail."
In announcing the decision on Thursday, Bush did say he would keep in place an existing system to licence and track steel imports so that he could "quickly respond to future import surges that could unfairly damage the industry."
PHOTO: AP
Minutes after Bush's about-face, the EU suspended plans for retaliatory sanctions against US$2.2 billion in US goods, including politically sensitive products such as citrus fruits from Florida.
Japan also said it would drop a threat to impose retaliatory tariffs on US$458 million of US goods, but added that it wanted to make sure the US tracking system did not impede trade.
"We hope that the United States will continue to abide by World Trade Organization [WTO] rules and play a leading role in maintaining free trade," Japanese Chief Cabinet Secretary Yasuo Fukuda told a news conference on Friday.
China, whose own steel market is booming, may also abandon its own retaliatory tariffs of up to 26 percent on some steel products imposed last November, industry analysts said.
The US steel tariffs, which Bush imposed in March last year, were to officially end at midnight Thursday, instead of March 2005 as initially planned.
Bush said that thanks to the tariffs, US steel companies were again well-positioned to compete both at home and globally.
"These safeguard measures have now achieved their purpose, and as a result of changed economic circumstances it is time to lift them," Bush said in a statement read by a spokesman.
The decision should help improve trans-Atlantic ties marred by divisions over the Iraq war and averts a spat with Japan, Washington's key Asian ally, at a time when the two need to cooperate on a crisis over North Korea's nuclear arms program.
It also avoids fraying US-Japan ties as Tokyo considers when to send non-combat troops to Iraq, where two of its diplomats were slain last Saturday.
Eliminating the tariffs could also help allay market concerns that Bush was relying on protectionism to shore up the US job market as he seeks re-election.
Critics said it would have been inconsistent for Bush, who ran as a champion of free trade, to flout the WTO decision while chiding China to meet its WTO obligations.
"The system has shown it can be respected," a visibly delighted EU Trade Commissioner Pascal Lamy said in Brussels.
The reversal could, however, spark a backlash against Bush in the battleground steel-producing states of Ohio, Pennsylvania and West Virginia as he seeks re-election next year.
The United Steelworkers of America union, representing nearly 1 million active and retired steelworkers, derided Bush's "complete lack of mettle in calling the WTO's bluff" and said it would appeal to Congress for protection.
The decision came less than a month after the WTO ruled that the tariffs violated global trade laws.
"Our trading partners obviously engaged the administration in a game of guts poker," said Steelworkers president Leo Gerard. "Instead of telling them to `bring it on,' the president blinked."
In an attempt to mollify the steel industry, the White House pledged to enforce anti-dumping laws and said it would press US trading partners to cut subsidies for steel producers.
Analysts said, though, that there was little domestic upside for Bush.
"I would have thought playing tough with the Europeans would have been better politics," said Greg Mastel, chief international trade adviser for Miller and Chevalier, a law firm specialising in trade issues.
Although unhappy with the decision, several US steel executives said they would make do without the tariffs.
In Tokyo, analysts said removing the tariffs would have a mildly positive impact on Japan's steel makers, whose profits have started to pick up thanks to cost cuts from restructuring and price rises sparked by booming demand from China.
In China itself, companies including industry leader Baosteel said the US decision would make it easier for steel makers to sell into the US market.
"Consequently there will be less supply on the Chinese market and that will push up prices here," a Baosteel executive said.
However, some analysts said it could prove a double-edged sword if Beijing dropped its own retaliatory tariffs, inviting a flood of imports and undercutting prices.
Soo Jung Kim, a spokeswoman for South Korean steel giant POSCO said: "This is optimistic from a Korean point of view as it means more Korean steel exports will go to the States."
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