U.S. to Seek Cooperation on Global Economic Ills : Summit to Grapple With Trade, Currency Issues

The 12th annual economic summit meeting, coming after the Reagan Administration has executed a 180-degree shift in its economic dealings with the rest of the world, represents a high-stakes game of diplomatic poker for the United States and its most important allies.

On its surface, the summit that opens here today will be full of pomp and formal banquets, all washed down with countless toasts to a new era of global economic cooperation. But a harsher economic reality will confront the seven leaders: disruptive currency fluctuations, looming trade wars and massive international economic dislocations.

The Reagan Administration, after several years of relying on the “invisible hand” of unfettered free markets to guide the world’s economy, recently abandoned its go-it-alone approach and has tried to foster much closer economic policy coordination among nations.

Baker Takes the Lead

With Treasury Secretary James A. Baker III taking the lead, the United States last September engineered an international agreement to bring the high-flying dollar down to Earth. Since then, it has persuaded Japan and Germany to join in reducing worldwide interest rates and begun to lay the groundwork for a possible new monetary system to stabilize floating exchange rates.

The legions of lesser officials who choreograph the annual summit meetings with all the stylized precision of a Kabuki play are hoping that the new era of economic good feeling will prevail as President Reagan meets for three days with his counterparts from Japan, West Germany, France, Britain, Italy and Canada.

They are relying on collapsing oil prices and evaporating inflation to ensure that there will be no last-minute objection to efforts to begin a new round of trade talks in September and smooth the way to a relatively uncontroversial summit statement on economic issues.

“The degree of agreement among the seven countries is substantially greater than ever before,” said W. Allen Wallis, under secretary of state for economic affairs. “That’s a good sign, but it should make for a less interesting meeting.”

But it was only under the threat of gathering storm clouds that the Reagan Administration abandoned its laissez-faire international economic policy. Outside the Administration, economists recognize that U.S. officials are promoting global economic coordination in large part because they believe that the United States has the most to gain.

“Jim Baker is a master of the hidden message,” said A. Gary Shilling, a leading Wall Street economic consultant. “Economic ‘cooperation’ implies it is all sweetness and light between us and our trading partners, but that’s wrong. What (the treasury secretary) is really saying is, ‘Cooperate or else.’ ”

The U.S. trade deficit, which hit a record $148.5 billion last year, is only slowly beginning to shrink, and Congress is still clamoring to protect dozens of additional industries from the rigors of international competition.

Last month, for example, the Senate Finance Committee came within one vote of torpedoing impending Administration negotiations to expand trade with Canada because of lawmakers’ fears that they might undermine Maine potato growers, northwestern lumber mills and other regional interests. Only a full-scale White House lobbying effort prevented the committee from insisting that Congress have an opportunity to amend any trade agreement negotiated by the Administration.

Ominous Warning

U.S. trade concerns have recently shifted from Japan to Europe, where a potentially explosive conflict over European farm subsidies and American agricultural price supports has escalated to the point that a senior Administration official warned ominously last month, “We are dangerously close to kicking off a trade war.”

Beyond the agricultural sector, industries like energy and mining are straining under falling world commodity prices. Among the other threatening economic dislocations: U.S. manufacturers are still struggling to overcome the lingering effects of the strong dollar on their ability to compete internationally. Europe is grappling with high unemployment, Canada is particularly vulnerable to plunging oil prices and all the other summit nations are worried that their U.S. markets will shrink as the dollar drops.

Lawrence Krause, an international economist at the Brookings Institution in Washington, commented: “The trade atmosphere is very difficult. Indeed, one could call it foul.”

Baker Takes Steps

Last summer, in an attempt to clear the air, Baker’s Treasury Department began to explore ways of speeding up the decline in the value of the dollar, which had already begun to fall from last February’s peaks. The goal was to make U.S. goods cheaper abroad and foreign products more expensive in the United States--both of which should help to shrink the trade deficit and so stem the rising tide of protectionism in the United States.

“You’re going to see protectionist pressures coming back full-bore,” Baker said recently. “The advocates of restrictive trade policies are already raising the decibel level on Capitol Hill.”

The discussions initiated by Baker culminated in last September’s heralded agreement at New York’s Plaza Hotel, where finance ministers and central bankers from five nations disclosed their intention to intervene in currency markets if necessary to weaken the dollar and push up the value of foreign currencies, particularly the Japanese yen and German mark.

“The markets were keeping the dollar at such an inflated level that it was a speculative bubble just waiting to be pricked,” said C. Fred Bergsten, director of the Institute for International Economics in Washington.

Dollar Falls in Value

Since September, the dollar has fallen about 20% against most major currencies and about 42% against the Japanese yen, to a postwar low. Although the falling dollar so far has only marginally improved the U.S. trade deficit, it has already set off howls of protest among Japanese business groups that fear losing lucrative U.S. markets.

“Last year’s problem for economic policy makers was the strength of the dollar,” said Alan C. Greenspan, chief economic adviser to President Gerald R. Ford and now a New York economic consultant. “This year’s is going to be the weakness of the dollar.”

So far, the Japanese government, seeking to avoid ruffling any feathers as this year’s summit host, has done little more than express concern about the dollar, which bought only about 170 yen last week. But the dollar’s collapse may be close to the limits of political tolerance in Japan.

“Only God knows what exchange rates will be,” Japanese Finance Minister Noboru Takeshita said in a published interview last month. Asked if the dollar could fall to 150 yen, Takeshita bluntly replied, “God will not allow that to happen.”

Why, then, did Japan and three of the other summit nations--Britain, France and West Germany--agree to help the United States devalue the dollar at all?

U.S. Pressure

“The U.S. held them up at the barrel of a gun,” said Lewis E. Lehrman, head of Citizens for America, a White House-sponsored lobbying group for conservative causes. “They knew that if they didn’t accept Baker’s plan, Congress was on the verge of approving the most protectionist legislation since Smoot-Hawley,” the high-tariff bill passed in 1930 that helped to prolong and deepen the Great Depression.

Beyond the coordinated effort to bring the dollar down, wide swings in currency values have prompted the Reagan Administration to begin searching for a way to stabilize exchange rates and impose a more organized system of coordinating economic policies with Europe and Japan. The Administration now argues not only that an overvalued dollar contributes to major trade imbalances but also that exaggerated ups and downs in the dollar, by undermining business’s ability to predict the outcome of investments, undermine many kinds of economic activity. Moreover, the huge swings in currency values contribute to serious trade imbalances and cause havoc in major industries without regard to underlying economic realities.

Conference Studied

In his State of the Union address earlier this year, Reagan requested that the Treasury Department report to him by December on the feasibility of an international monetary conference.

Just before leaving on his Asian trip, the President said he planned to pursue a discussion on monetary policy at the summit, to see if there “is something that we can do to stabilize (exchange rates) and quit having this volatility and the ups and downs.”

Officials are not talking about returning to a system of fixed exchange rates. Some experts suggest that nations should work to keep their currency values within predetermined “target zones,” but critics object that such a system would break down at the first sign of international economic stress. About all the exclusive priesthood of specialists in international finance can agree upon at this point is that the current floating rate system is not working very well.

“The world economy is too important to be left to the vagaries of international capital movements,” said Geoffrey Bell, a New York-based international economic consultant. “But correcting a wrong doesn’t necessarily get you to the right system.”

Bell’s View Backed

Many others echo Bell’s belief.

“There’s a growing consensus that we have to change the system,” said Bergsten of the Institute for International Economics, “but there is no consensus on how we should change it.”

The debate revolves around a kind of chicken-or-egg question: Should the major industrialized countries first agree to set the value of their currencies within target zones to force themselves to coordinate economic policies? Or should they establish a limited regime of policy consultations in hopes that such a strategy will bring exchange rates into a more appropriate alignment?

“If policies are in harmony, target zones are unnecessary,” said the Brookings Institution’s Robert Solomon, former chief international economist for the Federal Reserve Board. “If policies are divergent, they won’t work.”

Surrendering Autonomy

For any new system to work, the United States and other countries would need to give up a measure of autonomy. Instead of pursuing exclusively domestic goals--such as running big budget deficits to stimulate rapid economic growth--they would have to take into serious consideration the international effects of their economic actions.

Some scholars believe that international considerations should take precedence over domestic ones if the United States expects to remain competitive in the struggle for economic advantage.

“Economic dynamics have decisively shifted from the national economy to the world economy,” economic analyst Peter F. Drucker, a professor of social science at California’s Claremont Graduate School, wrote in the latest edition of Foreign Affairs magazine.

West Germany and Japan “both make the country’s competitive position in the world economy the first priority in their policies--economic, fiscal, monetary, even social--to which domestic considerations are normally subordinated,” Drucker added. “And these two countries have done far better--economically and socially--than Britain and the United States these last 30 years.”

West Germany Balks

West German officials, perhaps because they feel that any international monetary system would limit their independence to make their own economic policy, have spearheaded the opposition to following the United States down the path to greater monetary cooperation. German officials also fear that any such move would increase the pressure on them to expand their economy more rapidly than they want.

Indeed, that is just what the Reagan Administration, echoing similar complaints from officials in President Jimmy Carter’s Administration in 1978, has in mind. It wants the German economy to grow faster so that German consumers can absorb a greater share of the world’s output and German manufacturers can sell more of their goods domestically and rely less heavily on U.S. markets.

“When a country like Germany is running perhaps a negative inflation rate and yet has unemployment at 9%, maybe they ought to give some consideration to going along with the interest rate reduction that the United States and Japan accomplished,” a senior Administration official complained at a background briefing.

Lower interest rates make money more easily available, and the resulting spending and capital investment stimulate economic activity.

U.S. Standing Firm

Whatever happens at the summit, though, it is unlikely that the United States will give up its slow, painstaking effort to overhaul the monetary system in hopes of reasserting greater leadership in international economic affairs.

“Germany and Japan have been constantly manipulating their exchange rates as an instrument of trade policy,” said Lehrman, an advocate of returning to a gold-based fixed exchange rate system. “The U.S. has now put them on notice that we, too, are going to manage our currency rates to become competitive again.”