TRADE WAR: Blair Joins Global Attack on `Unjustified' Tariffs ; European and Asian Leaders Prepare to Impose Tit-for-Tat Sanctions after American Move to Protect Steel Industry

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TONY BLAIR issued a strongly worded rebuke to George Bush over the steel trade war yesterday, as concern grew that his "special relationship" with the American President had faltered.

The European Union, warning that the trade war could engulf the world, prepared to retaliate against America over the imposition of tariffs on European steel exports.

Mr Blair condemned the decision to impose tariffs of up to 30 per cent on steel imported into the United States as "arbitrary and unjustified" and promised immediate action to protect British industry.

Labour backbenchers warned that the tariff row would fuel the rebellion over strikes against Iraq. Fifty-one Labour MPs have signed a Commons motion expressing "deep unease" at Mr Blair's support for the US on the issue.

In Brussels, the European trade commissioner, Pascal Lamy, accused America of "wild west" tactics. Pledging retaliation, he said that it was his right to protect European industry and jobs. Asked whether such a reaction from Brussels might spark a damaging round of tit-for- tat trade sanctions, Mr Lamy replied: "That danger exists."

Condemnation came from national leaders including the German Chancellor, Gerhard Schroder, who described the decision as "unacceptable" and "against free world markets".

Not only is the EU planning to respond to the US measures, but it will have the opportunity to levy massive trade sanctions against America next month in a separate trade dispute.

Measures taken by the EU are likely to hit other exporters such as Japan and South Korea, who also face exclusion from the American market and want to sell more to the EU. Unless voluntary deals can be struck, that could plunge the world into a fresh round of protectionist retaliation and strain the global trading system.

Mr Lamy was blunt in accusing the Bush administration of flouting the rules. "The steel market worldwide is not the wild west where everybody just does what they like," he said. "There are disciplinary rules."

The commissioner denounced the US measures as "political, not economic", alluding to the forthcoming mid-term elections in America.

The EU says it will be the biggest victim of the US measures because it accounted for more than 25 per cent of imports of high- added-value steel products hit by the highest 30 per cent tariff. Last year, total estimated steel exports to America were 4 million tons.

Mr Lamy's fightback will consist of several elements. The EU will challenge the US measures in the World Trade Organisation, a process that may take 18 months to resolve. Meanwhile, the authorities in Brussels are preparing to draft measures to prevent cheap steel, now blocked from America, being diverted into Europe. A compensation claim from the US may be made.

Next month, the EU will have the option of imposing sanctions against the US in a separate trade dispute that the EU has won. On 29 April, the WTO will decide the amount of sanctions that the EU can impose on America in a row over foreign sales corporations, a system that allows tax concessions to American exporters.

Because the sums at stake are enormous, between $1bn and $4bn, the EU has until now hinted it will soft-pedal on sanctions while America changes its law. That position may no longer be sustainable.

Nick Clegg, the trade spokesman for the Liberal group in the European Parliament, argued: "I do not think there is any incentive for Europe to acquiesce in any way with what is blatant American protectionism. …