US tariffs violate rules, WTO says

Repealing the steel tariffs, which have driven down the volume of steel imports while driving up prices on everything from cars to tanker ships, could provoke a backlash against President Bush in three steel-producing states that are crucial to his re-election bid.

"The Europeans know this is difficult for the president politically," said Lael Brainard, a senior fellow at the Washington-based Brookings Institution. "And the president's decision will probably be made on political grounds."

The WTO's Appellate Body, the Geneva-based agency's highest court, upheld a previous ruling that struck down the US argument that tariffs were needed to help its struggling steel industry to consolidate and remain competitive in the face of cheap imports. It also declared discriminatory and unlawful an exemption the US made for Mexico and Canada, its partners in the North American Free Trade Agreement.

In a statement, the office of the US Trade Representative said it disagreed with the WTO's decision and would study its report. The White House will have five days to lift the tariffs after the WTO formally adopts its ruling, scheduled for early December. Otherwise, the EU will impose its own duties on US goods -- from Harley-Davidson motorcycles to textiles -- bound for Europe.

"It would be like defusing a time bomb," said Anthony Gooch, a spokesman in Washington for the European Union, which filed the suit along with such steel giants as Japan, Brazil, and South Korea.

The dispute over steel duties, which were introduced in March 2002, is the latest in a series of confrontations looming between the United States and its trading partners ahead of a trade summit in Miami later this month.

The EU is preparing another package of sanctions following its October 2001 victory in WTO court over a provision in US tax law that allows US companies tax exemptions on income generated overseas. Washington, in turn, has filed a complaint against the EU for its effective ban on genetically modified crops. In July, the US threatened to suspend negotiations for a bilateral free trade agreement with Egypt after Cairo said it would not support the US suit against the EU.

Politics on both sides of the Atlantic are at the heart of the rancor, analysts say. Trade has been a high-profile subject in the brewing presidential race as the economic recovery has so far failed to produce a sustained rebound in employment. Some economists blame the drought on the exodus of blue-collar and some white-collar jobs to developing markets overseas, as well as the dumping into the US of foreign products at unfairly low prices.

The Bush administration's decision to levy tariffs on steel, which have been gradually reduced from their initial level of 30 percent, was warmly received in Pennsylvania, West Virginia, and Ohio, key rust-belt states and looming battlegrounds in next year's presidential election. The duties were deeply unpopular in Illinois and Michigan, however, home to automobile manufacturers, which are major steel consumers.

A study by the Institute for International Economics in Washington calculated the duties cost steel users more in lost jobs because of tariff-inflated steel prices than steel producers gained. Employment among steel users has declined by 6.2 percent since the tariffs were imposed and the benchmark steel producer price index has risen by 7.6 percent, according to the report.

Economists said the Bush administration may respond to the WTO ruling with a half-measure, which would likely be met with new litigation that could prolong the dispute well beyond the presidential election.

"A clean removal of tariffs would be a big positive, a spark for what is a pretty gloomy atmosphere," said Gary Clyde Hufbauer, who co-authored the report compiled by the Institute of International Economics. "On the other hand, the White House may try to finesse the issue. This could go on for another year."

Stephen J. Glain can be reached at glain@globe.com.