Representatives from 39 nations have reached "agreement in principle" to ease the world's glut of steel by cutting production by about 10% over the next decade. But the agreement isn't binding, and it doesn't eliminate the risk of a serious trade war between the U.S. and other big steel exporters. U.S. trade officials contend that the world has an excess production capacity of 200 million tons of steel per year. European officials say the number is about 100 million tons, but virtually all countries agree that the glut of unwanted steel is huge and responsible for the 30% collapse in world steel prices last year.

U.S. trade officials predict that domestic steel capacity—now 125 million tons—will drop by about 16 million tons by the end of 2002. The European Union estimates that mergers will cut capacity by about 13 million tons. South Korea, one of the world's biggest and most competitive producers, will cut three million tons and Japan has proposed four million tons worth of cuts. But, most other countries are reluctant to make specific predictions for their own industries.

Using a mixture of gentle persuasion and thinly veiled threats, Trade Representative Robert Zoellick and other U.S. trade officials recently pressed steel-producing countries around the world to lower output by closing inefficient and unprofitable factories. The gentle persuasion came in the U.S. emphasis that "market-based" reductions would be better than government-ordered factory shutdowns. The unmistakable threat in the background, though, is President Bush's imminent decision on whether to impose heavy penalties on steel imported into the U.S.

The U.S. International Trade Commission has recommended tariffs of up to 40% on imported steel products. But that threat hasn't been well received by steel buyers at home or by steelmakers offshore. European officials have vowed to fight any tariffs in the World Trade Organization. In fact, the European Union's top negotiator warns that the U.S. is dangerously close to inciting a spiral of trade sanctions. "Those who have their finger on the trigger of protective actions carry a huge responsibility," says Peter Carl, the European Commission's director general for trade.

European Trade Commissioner Pascal Lamy has described the U.S. plan for steel tariffs as "blatant protectionism" and promised to retaliate in some form. European steelmakers are pressing the European Union to threaten trade sanctions of their own—from a nonsteel trade dispute—to convince the U.S. to abandon plans to protect its steel industry. The World Trade Organization has found in favor of the EU on a trade case involving tax breaks for U.S. exporters. That opens the way for the EU to impose as much as $4 billion in trade sanctions and gives the EU leverage in the steel tariff controversy.