President Bush on Thursday lifted virtually all tariffs he imposed on foreign steel in March 2002, a decision that could have a political impact in some critical states as he seeks re-election next year.

But the president softened the blow on the domestic steel industry by announcing new measures designed to protect against unfair foreign competition.

Bush's decision had an immediate impact on European officials. The European Union trade chief lifted a threat of retaliatory sanctions against the United States on the issue of foreign steel.

The president said the tariffs had been imposed to give the domestic industry critical time to modernize and to protect jobs. "These safeguard measures have now achieved their purpose, and as a result of changed economic circumstances, it is time to lift them," Bush said in the statement read by White House spokesman Scott McClellan (search).

"I strongly believe that America's workers can compete with anyone in the world as long as we have a fair and level playing field," the Bush statement said.

U.S. Trade Representative Robert Zoellick (search) said that the situation facing the U.S. steel industry has improved greatly since Bush imposed the tariffs. Sales of domestic steel and company profits are up dramatically.

"Not only is the industry much stronger today than it was 20 months ago, but the economic circumstances ... have changed," Zoellick said.

Earlier Thursday, Bush told reporters that his decision was based on philosophy that free trade is the best course for the country.

"The decision I make will be based upon my strong belief that America's consumers, the American economy, is better off with a world that trades freely and a world that trades fairly," Bush told reporters Thursday during an Oval Office photo session with Jordan's King Abdullah II (search).

"I acted to give the steel industry time to adjust. I acted in time for us to say to the world that we will trade but we want to trade in a fair way," Bush added.

Avoiding a Trade War

The administration acted to avert a threatened trade war with Europe and other big trading partners. Those nations had vowed to retaliate with punitive tariffs on American products unless the steel tariffs were removed.

The World Trade Organization (search) had ruled the tariffs must be lifted and the 15-nation European Union threatened retaliatory sanctions against $2.2 billion of American products if the tariffs weren't lifted by Dec. 10.

Japan and South Korea also said they were considering retaliation.

The EU carefully chose its target list to cover a range of products from oranges to pajamas that would inflict maximum political pain in key swing states that Bush is hoping to win in next year's presidential race.

Bush had to choose between angering businesses in those states or steelmakers in West Virginia, Pennsylvania and Ohio, also considered crucial to his re-election chances.

A study by the U.S. International Trade Commission (search) last September concluded the tariffs had accomplished many of their goals in getting the domestic steel industry to consolidate and restructure. The Bush administration believes the tariffs have helped the steel industry get back on its feet.

The tariffs were also a diminishing benefit, politically. The Steelworkers Union (search) has already endorsed Democratic Rep. Richard Gephardt (search) of Missouri for president, and the higher cost of steel was drawing complaints from the manufacturing sector, which Bush is anxious to see make its own recovery. Bush will promise to monitor steel imports to make sure they don't surge again.

The tariffs were imposed when the domestic industry was staggering from a string of bankruptcies and thousands of lost jobs that the industry blamed on a surge of foreign imports.

To ease the impact, Bush announced he was continuing early reporting requirements that had been imposed when the tariffs were levied in 2002 to detect any big influx of steel into the United States.

The reporting program requires steel importers to apply for import licenses, giving the government a quicker way to detect possible import surges than waiting for Customs Service data when the steel arrives at U.S. ports.

The administration also pledged aggressive use of U.S. anti-dumping laws should imports surge once the tariffs are lifted, and to continue pursuing global negotiations aimed at reducing subsidies.

Those talks, under way since 2002, so far have yielded little, and many trade experts don't hold out much hope that other countries will agree to U.S. demands in this area, given the political power their own steel industries wield.

At the White House, a key discussion on the steel issue occurred Tuesday night when Bush met in the Oval Office with Vice President Dick Cheney, Commerce Secretary Don Evans (search) and Zoellick. Bush had just returned from a fund-raising trip to Pittsburgh, where he encountered last-minute lobbying from the steel industry urging him not to lift the tariffs.

Bush raised $850,000 for his re-election campaign at the fund-raiser, where one of his hosts was Thomas J. Usher, chief executive of U.S. Steel Corp., the nation's largest steel producer. Usher met with Bush to urge him to retain the tariffs.

Brink Lindsey, a trade expert at the Cato Institute (search), a Washington think tank, said the package the administration was assembling to replace the tariffs amounted to little more than a fig leaf for the domestic industry.

"The existence or nonexistence of an import monitoring system is not going to make that much difference," he said. "And the pledge on more international talks is lip service as well. The talks haven't gone very far and they are not likely to go very far."

Evans is scheduled to discuss the steel tariff issue on Fox News' "Your World with Neil Cavuto" on Thursday.

Fox News' Wendell Goler and The Associated Press contributed to this report.