How trade war would hurt us all

PRESIDENT George Bush is in London to talk about two wars: the shooting war in Iraq and a looming trade war between the US and most of the industrialised world.

He is not getting an easy ride from the British public on either count - and for good reason. Britain is not only America's main ally in Iraq, it is also America's single largest trading partner. In a trade war, everyone loses, but Britain would lose more than anyone else.

That is why the issue is undoubtedly on the agenda in talks between Bush and Tony Blair. Bush's White House advisers are divided over whether to keep the tariff he slapped on steel imports two years ago or to abolish it as the World Trade Organisation has told him to.

Meanwhile, the European Union is threatening a trade war if the tariff is not withdrawn, and the mood of British business seems to be squarely behind this approach.

Monday's claim by CBI director-general Digby Jones that Bush has been urging US companies to pull back jobs from Britain to America underlines the growing suspicion British businessmen have of US trade policy.

The steel tariff was a blatant move to protect the ailing US steel industry. To many in Europe, it is merely a symptom of a deeply protectionist streak in the White House, which is struggling to cope with a huge outflow of jobs from America.

The truth, however, is that a trade war would be extremely damaging to the economic relationship between Britain and the US. The US imports £28bn of industrial and manufactured goods a year from the UK - more than from any other country. At the same time, Britain imports £25bn worth of goods from the US, so the relationship is remarkably balanced.

Britain sells £22bn in services - mainly banking, insurance, consultancy and the like - a year to the US. Its investments there amount to $218bn (£128bn) or about 16% of total foreign investment in the US - considerably ahead of any other country.

But the headline figures do not show just how interconnected trade and business is between the two countries. For instance, the City of London contains more US banks than America's own financial centre, New York. The capital would be considerably poorer without all those high-paying US bank jobs, tax revenues - and cash that the bankers spend to live here.

There are 5,600 US companies operating in Britain - indeed, about 40% of all US investment in Europe comes straight to the UK. Ford, for example, is owned by the American motor giant but the management and workforce of Ford UK are overwhelmingly British.

There are at least 1,700 British companies in the US. Twenty of the 100 largest foreign companies in the US are British, compared with 15 from Japan and 14 from Germany. They include Vodafone, GlaxoSmithKline, Royal Bank of Scotland, Tomkins and Diageo.

For some of these companies, even the distinction between British and American ownership is becoming blurred. The Organisation for International Investment, a trade body of foreign companies operating in the US, recently pointed out that many overseas companies have more than 30% of their shares in US hands. They include BP, Unilever, Invensys, ICI, Scottish Power and Tate & Lyle.

The two countries are connected by history and language. But Britain also has a business culture that is closer to that of the US than any other country. So is the CBI's suspicion that Bush is trying to tilt the table in America's favour justified?

The US President was elected on a platform that sounded to many people more isolationist than that of his predecessor. But just as his foreign policy has turned out to be anything but isolationist, he has also taken little overt action to throw up trade barriers.

The US steel tariff was introduced as a temporary measure allowed under WTO rules, and the US administration now accuses the WTO of operating a double standard by applying rules against the US that it does not against other countries. The White House argues that the sheer size of the US trade deficit shows there is no protectionism.

Yet Bush is under pressure at home to raise more barriers to preserve jobs in the US. This is why Jones's claim that the President is pressuring US companies to repatriate jobs from Britain sounds credible.

It seems unlikely, however, that US chief executives will pay much attention to their President's urging. In the end, they answer to their shareholders. If they employ people in Britain, it is because it will make their companies more money than employing people in the US. And, anyway, this President may be gone within a year.

In the end, the exchange rate is likely to affect US-British trade more than tariffs and trade rules. While talking about a strong dollar, America is quietly allowing its currency to sink against other major currencies, making its exports more competitive and imports more expensive. For British exporters, at least, a weak dollar should be a much bigger long-term worry than supposed US protectionism.

Vote-winning key to Bush's next move

GEORGE BUSH'S decision to impose trade quotas on Chinese textiles imported by the US is an ominous sign that the protectionists are winning the day. Yet there are also signs that Bush would like to scrap the steel tariff, which has become a political headache.

He imposed it after US steel companies complained they could not compete with more efficient foreign manufacturers and the strong dollar that made the imports even cheaper.

But he had not bargained on US steel consumers being forced to lay off workers to compensate for the higher raw material prices. As the US economy continues to stutter, jobs are the political hot potato going into next year's election.

When the World Trade Organisation declared the tariff illegal earlier this month, the European Union decided to help the President make up his mind by threatening sanctions in industries that could destroy jobs in parts of the US where Bush support was vulnerable.

There is, therefore, still a chance he may lift the steel tariff despite the protectionist stance of the textile quotas. The limit on textile imports, in contrast to that on steel, is unlikely to undermine many American jobs.

In the end, the President's mind will be made up mainly by electoral considerations - which means jobs in the US. If Britain and Europe can persuade him that a trade war will hurt his electoral chances, he will probably kill the steel tariff.