Clinton’s Task: Adjust to Third World’s New Clout : Trade: Policies obsessed with Western Europe and Japan won’t prepare us for future economic rivalry with China, Mexico and India.

Bill Clinton’s obsession with America’s First World rivals could lead him to mistakenly fight the last economic war when we need to prepare for the next.

Although barely noted by the academics around the President-elect, the economic key to the 1990s may not lie in relations among the “Triad” competitors--Japan, Western Europe and the United States--but in adjusting to the inexorable economic rise of what used to be Third World countries. Last year, for example, overall growth in the developing nations neared 6%, three times the rate for the stumbling Triad.

This phenomenon covers large regions of the developing world, notably the East Asian countries of South Korea, Taiwan, Thailand and Singapore, which enjoyed economic growth at double-digit rates throughout the ‘80s. More recently, rapid economic expansion has spread to several Latin America countries and to the Indian subcontinent. Last year, for example, Chile’s economy grew by roughly 10%. Mexico’s has expanded at around 4% annually since 1989. India has, on average, grown at nearly 5% a year since the late 1980s and, despite its recent turmoil, is expected to swing back to similar rates of growth in 1993.

More important, the surge of Third World growth rides atop powerful long-term demographic trends. As the populations of the industrialized countries age and as their work forces stop growing, or even decline, the labor pool in such developing countries as South Korea, China and India are expected to expand at roughly twice U.S. rates and at four or more times those of Europe and Japan.

But the shift to a post-Triad world has as much to do with brains as numbers. Since the 1970s, many developing countries have been nurturing human capital at rates far exceeding their population growth. In 1970, these countries accounted for fewer than one-third of the world’s college graduates; by the late 1980s, they boasted more than half of them.

Even more critical, many developing countries are moving ahead in such crucial disciplines as the sciences, engineering and software programming. Mexico, for example, produces as many scientists and engineers as France; South Korea turns out more such highly skilled personnel than any country in Europe, save for Germany. India and China each educate more scientists and engineers than Germany and France combined. Students from developing countries, mostly from Asia, also account for nearly two-fifths of all U.S. doctorates in engineering.

As a result of this growth in brainpower, the developing world is gaining in such advanced business sectors as semiconductors. The costs of running a semiconductor plant in East Asia, with its large supplies of skilled labor and favorable business climate, are about 20% less than in Japan or in the United States, nearly one-third less than in Europe.

India, which has 50% more software engineers than Japan and more than twice as many as Germany, has spawned a burgeoning software industry--ranked No. 1 in the world for cost-efficient product development in a recent World Bank survey--that employs more than 300,000. India-based companies develop software programs, chip designs and computer specifications for such leading U.S. firms as Texas Instruments, Hewlett-Packard and Sun Microsystems.

The shift to the post-Triad world, of course, does not mean that the First World is in imminent danger of surrendering its high standard of living. Nor does it mean that prosperity is about to reach the many economically marginal nations of the Third World. But the shift is large and broad-based enough to shake the economic foundations of the global economy during Clinton’s term.

The most powerful influence will come from East Asia. Largely impoverished backwaters only 25 years ago, East Asian countries now boast levels of literacy higher than in the United States and send more of their children to college than any of the major European nations or Japan.

Even more awesome has been the rise of Chinese Confucianist mini-economies --Taiwan, Hong Kong and Singapore--that are rapidly displacing the Japanese as the leading investors in most of Southeast Asia. They also account for four-fifths of the money moving into coastal China, the world’s fastest-growing industrial region. Barring a political setback, China’s economy, according to the World Bank, could surpass Germany’s to become the world’s third largest by the end of a second Clinton term.

Clinton and his advisers would be greatly mistaken to overlook the formidable new economic and foreign-policy challenges posed by these emerging powers. For starters, the President-elect’s economic planners should brush up on the mentality of cash-rich Chinese investors, who already hold the world’s largest cache of foreign currency reserves and may prove far more capable of supplying capital to the United States in the 1990s than either the Japanese or Germans. Taiwan, for example, has recently replaced Japan as the world’s biggest foreign buyer of U.S. Treasury notes.

But perhaps the biggest post-Triad adjustment will be trade. Already, the looming battle over the North American Free Trade Agreement seems likely to overshadow any comparable row with Europe or Japan. In much of U.S. industry, and especially union halls, “Made in Mexico” is rapidly replacing “Made in Japan” as the label to be feared.

Clinton’s tentative approach to the trade agreement, which includes Canada, should become the permanent model for his dealing with the post-Triad powers--demanding fairness and access to key markets. For Clinton, the historical lessons should be clear. The half-heartedness of the Reagan and Bush Administrations’ efforts to pry open Japan’s markets during the 1980s not only contributed to a loss of confidence in Republican economic leadership, but also partly explains the current slowdown in U.S. exports there. A similar timidity by Clintonians toward expanding economic powers such as China, with which the United States already has a $16-billion trade deficit, Mexico or India could prove equally disastrous.

To avoid that unhappy outcome, Clinton’s trade strategy should aim to further open these countries’ markets to U.S. producers, while developing policies at home that encourage innovation, productivity growth and more exports. Already, the East Asian and Latin American markets have become critical to many U.S. exporters, particularly in high-priced consumer and capital goods, as our Triad partners, Japan and Europe, have suffered economic slowdowns. Between 1986 and 1991, for example, U.S. exports to Mexico almost tripled; last year, they expanded at three times the rate of exports to the Triad countries.

Similar growth in U.S. trade with non-Japanese East Asia is evident. Between 1980 and 1990, U.S. exports to Singapore, Taiwan and Hong Kong rose 160%, three times the overall rate of U.S. exports. Together, these three Chinese ministates now represent a larger market for U.S.-made goods than any single European nation.

Preparing U.S. industry to take advantage of these expanding markets may well prove more critical to American success in the 1990s than refighting the old tariff and subsidy battles with Western Europe and Japan. Making the United States fully competitive in the rapidly growing markets in the post-Triad world should be Clinton’s new crusade.