Decision may be biggest reverse to global free trade

How do tariffs work? Tariffs are levies applied on imported goods by governments. They serve to drive up the price of the imported goods in the home market, usually to make them less competitive than similar domestically-produced products.

All countries and trading blocks such as the EU use them to a greater and lesser extent as a tool for economic and industrial policy-making.

Why are steel tariffs so important?

The US decision to impose a 30 per cent import tariff on most types of imported steel is arguably the single biggest reverse in the post-second World War move towards global free trade. Since the General Agreement on Tariffs and Trade was initiated in 1948, the developed world has worked to remove barriers to international trade.

The approach is based on the economic theory of comparative advantage, which holds that countries should concentrate on what they can produce most cheaply and exchange them for goods that other countries can produce more cheaply.

What is the role of the World Trade Organisation in all this?

The post-war drive for free trade culminated with the establishment of the World Trade Organisation in 1995 and an agreement by its members to reduce tariffs on manufactured goods by one-third.

The Geneva-based body works to reduce tariffs and lower trade barriers as well as resolving disputes between members over trade issues. It is expected to have a central role in mediating in the current dispute.

Is the United States no longer in favour of free trade?

As one of the driving forces behind the WTO and the world's biggest exporter, the United States would be considered a relatively low-tariff nation. But it does operate a fairy restrictive system of import quotas, which limit the amount of cheaper imports that can be imported.

The Bush administration appears to feel it cannot afford to let a large part of its uncompetitive steel industry go to the wall in the face of cheap imports. It is gambling that the EU and other affected countries will baulk at a full-blown trade war.