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. Last Updated: 07/27/2016

Europe's Hour to Lead on Free Trade

With its heated rhetoric and threats of retaliation, the trans-Atlantic fight over U.S. President George W. Bush's decision to raise tariffs against imported steel may look like just another trade dispute. But Pascal Lamy, trade commissioner for the European Union, is using the steel spat to make the EU the new rule maker for international trade.

His effort marks a role reversal of historic proportions in world politics. Fifty years ago, there was a country that, when it came to international trade, put the welfare of the world economy ahead of its own. That country was the leading economic power of its day, and its ideas about economics and finance determined the direction global policy would take; it was, of course, the United States.

The United States is still the world's leading economic power. But what happens when the hegemon's chief loses sight of the global picture and becomes distracted by internal matters -- like securing the votes of steel states? Someone else, with different ideas on how the global economy should be organized, might fill the vacuum. Lamy, one of Europe's most strategy-minded politicians, is hoping to do just that.

The Europeans are taking great care to play by the rules in the steel dispute. The EU is keen to ensure that even stiff European retaliation is fully justified under World Trade Organization rules. It hopes that U.S. action, by contrast, looks as much as possible like a temper tantrum.

Not that the Europeans are above street-level politics. The EU has already prepared an attack plan in the form of a carefully chosen set of countervailing tariffs -- covering 316 products, from motorcycles to orange juice, worth more than $2 billion -- designed with the U.S. electoral map in mind. If, as many people believe, Bush adopted the steel tariff in large part to secure steel-state votes in 2004, the Europeans are ready to try to show that the steel tariff can also result in lost votes in states where people are hurt by Europe's targeted retaliation. The EU plan will not go into effect until other tactics have failed, in particular anti-tariff cases brought before the WTO by the EU and others against the United States. But Lamy has his plan ready just in case.

Clearly Lamy is hoping that, one way or another, the administration will find that the steel tariffs are all pain and no gain. If it does so, he will be ready with an ingenious, and very European, proposal that would go far beyond safeguarding metal-working jobs. Lamy well knows that trade discussions can rapidly get bogged down in detailed discussions that, while they may provide arcane entertainment for industry experts, leave little room for sweeping strategy. He is interested, however, in leveraging the steel quarrel into a different kind of opportunity, as can be glimpsed in a letter he sent to his U.S. counterpart, Robert Zoellick, in mid-February.

As Lamy notes in his letter, the root problem is the global overcapacity of steel production and resulting stiff competition. Bush is raising tariffs to shield U.S. industry temporarily from competitive pressures so that it can restructure. The big steel companies face heavy "legacy costs" -- promises of pension and health-care payments.

In his letter to Zoellick, Lamy proposes a fund that "could meet legacy costs associated with the definitive closure of production facilities, help steel workers retrain and promote economic development in regions where steel plants were cutting capacity or closing."

This fund, Lamy noted, could be financed by a 2 percent levy on steel sold in the United States, whether domestic or imported. Lamy emphasized that Europe wants to assist the U.S. steel industry in restructuring to avoid collapse. But at the same time, Europe wants the steel tariff removed. U.S. acceptance of this approach would show that there are other ways for governments to affect industrial policy beyond throwing up occasional tariffs.

Most experts agree that the U.S. steel tariff probably violated WTO rules. The Bush administration is already facing a high-profile loss in the WTO's decision that corporate tax breaks for U.S. exporters were against the rules. (It is now up to the U.S. Congress to adjust the tax code to pass muster with the WTO and thereby avoid sanctions.) Another loss would be embarrassing for a country that has placed the Doha round of trade negotiations at the center of its international economic policy.

More important, U.S. actions seem to betray the United States' free-trade legacy. In the formative years of the General Agreement on Tariffs and Trade -- precursor to the WTO -- the United States was willing to make significant sacrifices to strengthen the free-trade system. But the United States was also the rule maker because the system was, after all, its creation. The Europeans, on the other hand, were the source of major violations and tensions in the system.

Now the tables are turned. Europe is far from being the poster boy of international trade, as witnessed by its attempts to keep out Latin American bananas a few years ago. But what is different now is that the United States is willing to be a violator of trade rules -- and that Europe is willing to seize the opportunity to become rule maker itself.

How? Europe, by the way it frames its complaints to the WTO, will get to structure the nature of the case. That, in turn, will play a huge role in determining the nature of implementing rules. In an area like world trade, where much of the "case law" remains to be determined, this amounts to substantial power.

In the weeks to come, it is important to remember that the bottom line for Lamy and the EU is not steel. It is nothing less than wresting the leadership of world economic regulation from the United States. U.S. violations of WTO rules are the route by which Europeans can assert their interpretation of those rules. By playing the good global citizen, Europe aims to become the world's pacesetter. That is one goal that all the 15 EU countries can agree on.

Stephan Richter is publisher of The Globalist, a daily online magazine about the global economy. This comment appeared in The New York Times.