The EU trade commissioner Pascal Lamy is flying to Washington for two days of crucial trade talks ahead of the G8 summit of world leaders next week.

Pascal Lamy: EU will retaliate on steel

Tensions are rising between the world's two biggest trading blocs despite the agreement last year to begin a new round of world trade talks.

The biggest issue is the decision by the US to impose tariffs of up to 30% on a range of European and Asian steel imports.

But the EU and the United States are also at loggerheads over US tax breaks to its companies for foreign sales, and big increases in US farm subsidies.

Mr Lamy will meet key Congressional leaders on Thursday and the US Trade Representative, Robert Zoellick, on Friday.

Steel deal

The US claims that the tariffs are necessary to protect its steel industry from unfair competition abroad, and restore its health after a string of bankruptcies.

The EU claims that the US steel tariffs are illegal under World Trade Organisation rules, and has complained to the WTO about the move.

And it is also threatening to introduce counter-sanctions of its own against a range of US products worth around $350m (378m euro), including orange juice and textiles.

In a move to ease tensions, the US has exempted 107 specific niche steel products of importance to foreign producers from the tariffs, and is promising to look at submissions for hundreds of further exemptions.

Although these amount to less than 5% of the steel subject to tariffs, they represent a highly lucrative sector for many European steel companies.

The US is due to announce its final list of exemptions on 3 July, and the EU says it will decide on retaliatory tariffs by 19 July.

Tax subsidies

Mr Lamy will also discuss the EU's complaints about the tax subsidies given to US companies for their foreign exports.

The WTO has already ruled that the US tax laws which exempt foreign profits from tax are illegal under world trade rules, and rejected one attempt by the US Congress to reform the laws.

Now the EU trade representative will meet US House of Representatives Ways and Means Committee Chairman Bill Thomas to discuss plans for further reforms.

Mr Thomas has said that he will try and introduce a bill by August in the House of Representatives to comply with the ruling.

But the proposal faces more opposition in the Democrat-controlled Senate, where Senator Max Baucus, chairman of the Finance Committee, is reluctant to take action during an election year.

The EU will be granted the right to impose up to $4bn worth of trade sanctions against US products by the WTO in July, but Mr Lamy says he will not use the powers if he sees progress in Congress over the tax subsidies.

Farm bill

In addition to these trade disputes, concern is mounting in Europe that the US is backing away from commitments made at the Doha trade talks to open its markets further to developing countries.

The EU has pledged to reform its agricultural subsidies to prevent unfair competition with developing country products, and it was dismayed when the US voted to increase its farm subsidies substantially over the next five years.

Unless progress is made on resolving these trade disputes, the ambitious plans for a further round of global trade liberalisation may founder.

And that is bound to be high on the agenda of the world leaders as they gather in Canada next week to examine the prospects for a world economic recovery.