Europe, Japan Risk Increasing Global Protectionism, Baker Warns IMF

Treasury Secretary James A. Baker III on Wednesday warned that failure of the Europeans and Japanese to “adjust their economies and attitudes” could unleash a flood of global protectionism and isolationism.

Baker’s comments moved the simmering debate over international interest rates and the value of the dollar squarely into the political arena and indicated that the Reagan Administration would continue to push hard for economic policy changes by the major trading partners, particularly West Germany and Japan.

Baker’s remarks, contained in an address to the joint annual meeting of the International Monetary Fund and the World Bank here, follow the inability last weekend of the seven major industrial nations to settle disputes over trade, interest rates and exchange rates.

“Our commitment to free but fair international trade should not be underestimated, but neither should the forces of protectionism,” Baker said.

The Administration is disappointed that Bonn and Tokyo have refused to take steps to stimulate their economies and increase imports of American goods to help reduce a swollen U.S. trade deficit.

“Some of these countries appear to be taking steps to enhance growth, although not as rapidly as the trade imbalances may necessitate,” Baker said, referring pointedly to Germany and Japan. “Moreover, troubling forecasts suggest that some nations’ growth may slow over the course of the next year.”

German and Japanese officials dispute Baker’s reading of their economic data and have refused to take expansionary steps, such as reducing interest rates, because they fear inflation and overheated growth.

Disagreements over growth rates and domestic policy have been at the heart of discussions among the major trading partners before and during this week’s IMF-World Bank meeting. The talks have been described as part of the process of economic policy coordination agreed upon at last May’s economic summit in Tokyo.

“The problems we seek to address through this evolving system are difficult, complex and, at times, the cause of discord,” Baker said. “This dissonance is to be expected. Indeed, it is a sign of any pluralistic governing process.”

A senior U.S. official, who refused to be further identified, elaborated on Baker’s comments in a press briefing. He chided the Japanese for not doing enough to speed up domestic growth and said the Germans “have not been as responsive as we would like” to U.S. demands that it reduce interest rates and revamp domestic labor, financial and tax structures to increase consumer spending and business investment.

German Finance Minister Gerhard Stoltenberg argued Wednesday that Germany’s economy is growing fast enough. “Artificial stimulation of demand would set the stage for the next stabilization crisis. The developing nations would be the hardest hit,” he told the 10,000 officials and bankers from 151 countries attending the IMF-World Bank meeting.

Stoltenberg also said a further decline in the value of the dollar could lead to inflation and higher interest rates and could damage the U.S. economy. He told journalists that he would like to see exchange rates stabilize for several months to give time to assess the effect of the weakening of the dollar on world trade balances. A reduced value of the dollar makes the price of American goods cheaper abroad and the price of foreign imports more expensive in the United States.

“While we all have to follow the situation closely, it is essential to avoid drifting back to short-term economic fine-tuning,” the German minister said.

In his speech, Baker expressed satisfaction with the provisional agreement between Mexican officials and commercial bankers on a $6-billion loan package. He said the loans, part of which are conditioned on the performance of the Mexican economy, were evidence that a Third World debt initiative that he announced a year ago was working.

Baker called on banks and international agencies to increase their lending by $10 billion a year in exchange for indebted nations adopting free-market economic policies.

“This is an important, concrete example of the banks’ willingness to support the strengthened debt strategy,” he said.

Baker said the World Bank, the IMF and debtor nations have made progress in moving away from corrupt and state-dominated economies.

But, he added, “more can and should be done to strengthen the private sector, reform tax policies, improve domestic capital markets, liberalize trade and reduce capital flight.”