By Philip Blenkinsop

BRUSSELS (Reuters) -The United States and the European Union agreed on Monday not to escalate their dispute over U.S. steel and aluminium tariffs, averting steep EU tariff hikes while the two sides launch formal talks on addressing excess global capacity largely centered in China.

The European Commission, which oversees EU trade policy, said on Monday it would suspend for up to six months a threatened June 1 doubling of retaliatory tariffs on Harley-Davidson motorcycles, American whiskey and motorboats, and refrain from slapping tariffs on more U.S. products from lipstick to sports shoes.

But the United States will maintain its tariffs of 25% on steel and 10% on aluminium despite the announcement. Those duties also apply to imports from China, India, Norway, Russia, Switzerland, Turkey, Japan and South Korea among others metals-exporting countries.

In a joint statement, Brussels and Washington said that as allies and market-based economies, they could promote high standards, address shared concerns “and hold countries like China that support trade-distorting policies to account.”

The discussions would seek solutions before the end of the year to the issue of global steel and aluminium overcapacity, although a Commission official said a resolution of the tariff dispute should come much sooner.

A month ahead of a visit to Brussels by U.S. President Joe Biden, one EU diplomat said it would have been “terrible optics” if the bloc had raised tariffs on Harley Davidson bikes and products of other U.S. firms.

Bernd Lange, head of the trade committee of the European Parliament, said the United States needed to come to a EU-U.S. summit with a “tangible” commitment to reciprocate the EU gesture. Otherwise, tariff hikes would be justified.

U.S. METALS TARIFFS STAY

Former President Donald Trump’s administration cited U.S. national security grounds as the basis for its metals tariffs – measures that steelmakers such as Thyssenkrupp and Voestalpine have said hurt them.

The EU denies that its exports pose any security threat and responded by placing its own tariffs on 2.8 billion euros ($3.4 billion) of U.S. products, including motorbikes, whiskey and orange juice. They will also remain in place.

The suspension of further tariffs was greeted as a step in the right direction, however, by European Aluminium, the U.S. Distilled Spirits Council and Harley-Davidson Inc, whose shares rose more than 8% to a three-year high.

The American Iron and Steel Institute said it hoped U.S.-EU discussions could work toward substantive solutions, while maintaining trade measures. It also said China was not the sole cause of overcapacity and that import surges had come from every region.

Some U.S. steel industry executives say that European governments also must commit to stop propping up domestic steelmakers with subsidies and state investments.

“We cannot support any approaches that do not provide measurable positive results” to strengthen U.S. employment, the United Steelworkers union said in a statement. “The EU is an important ally, but in the past, it has been part of the problem, not part of the solution.”

The EU had urged the United States to suspend its metals tariffs for six months, mirroring the four-month suspension the two sides agreed in March in their aircraft subsidy dispute.

The U.S. Trade Representative’s office and Commerce Department did not respond to requests for further comment on the joint statement.

The Commission has said the U.S. tariffs affect 6.4 billion euros of EU metal exports and that it would “rebalance” the remaining 3.6 billion euros after three years, or after a favourable ruling by the World Trade Organization, where it is challenging the U.S. tariffs.

($1 = 0.8221 euro)

(Reporting by Philip Blenkinsop; Additional reporting by David Lawder and Andrea Shalal in Washington, and Kanishka Singh and Aakriti Bhalla in Bengaluru; Editing by Giles Elgood, Barbara Lewis and Peter Cooney)

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