PERSPECTIVE ON THE ECONOMY : Can Clinton Avoid a Trade War? : Elusive prosperity at home may entice the President to circle the wagons, hampering global economic growth.

George Bush’s parting gift to Bill Clinton was an American economy that has finally shaken loose from the lingering recession that plagued the Bush presidency. For the past six months, the U.S. economy has grown rapidly, and the risk of a new downturn is virtually nonexistent. With Germany in recession and Japan stagnant, the U.S. expansion has become the hope of the world.

Unfortunately, the Clinton Administration is likely to find that it is as hard to sustain growth as its predecessors found it was to produce it. And dealing with an economy that cannot grow fast enough--relative to campaign promises, voters’ expectations or global needs--may be as frustrating as coping with an economy that would not grow at all.

The risk is that those frustrations could fuel a new American protectionism that would not only destroy President Clinton but also threaten the already shaky international economic system.

Clinton’s instincts appear to be in the direction of free trade and open markets, as evidenced by his academic training, his choice of economic advisers and his embrace of the North American Free Trade Agreement. This tendency will be reinforced by the natural inclination of any president to champion free trade while other politicians try to protect the interests of their more narrowly defined constituencies. But the weight of domestic and international politics and economics will quickly put the President’s free-trade instincts to test.

The most important factor will be the performance of the American economy. There is considerable chance that the past six months will prove to have been the strongest period of the current economic expansion. American consumers have been spending more than they are earning, which is much less likely to be a permanent feature of the 1990s than it was of the 1980s. Americans borrowed too much during the past decade; they have begun to repay that, or at least have been able to reduce the portion of their paychecks consumed by principal and interest.

The United States, however, is not poised for the sort of sustained expansion presided over by President Reagan. Reagan stimulated the economy with dramatic tax cuts; Clinton has inherited a $327-billion deficit that will certainly rise if remedial action is not taken. Clinton undoubtedly will take such action, with the result that budget policy will be a drag on economic growth for years to come.

Moreover, the economy seems to have lost the dynamism that produced 16 million new jobs during the Reagan years. Even during the ‘80s, the largest American companies reduced their employment by about 4 million; in the ‘90s such companies as General Motors, IBM, Sears, Boeing and Citibank appear to be contracting even faster. In the defense sector alone, the Pentagon estimates that 1 million jobs have already disappeared and another 1 million will be gone before the end of the decade. The ability of small and medium-sized firms to offset these declines is likely to be limited by the continuing weakness of the U.S. banking system.

More fundamentally, the United States consumes too much and invests too little to compete effectively in international markets. Consumption now accounts for about two-thirds of economic activity, while private investment fluctuates around one-seventh of gross domestic product. By contrast, consumption in Japan is slightly more than half of GDP, while investment exceeds one-quarter of that country’s production. As the American population ages, consumption will fall and investment (and savings) will rise, a transformation that Clinton has said he will try to accelerate. This is necessary to re-establish international competitiveness, but in the near term, it will mean slower growth.

All of this may produce an economy in which structural unemployment, traditionally around 4% and now thought to be at least 5%, could rise toward the European level of 10%. This would be particularly painful for a Democratic President who was elected on a populist, pro-union program committed to creating not just jobs, but “quality” jobs.

To make matters worse, the U.S. trade deficit will inevitably rise this year as the recent export boom slows and spending on imported goods rebounds. Since the dollar is undervalued against other major currencies, its recovery will accentuate the deterioration of the trade accounts.

In such a world, the refuge of protectionism--perhaps disguised as industrial policy--could appear politically attractive. Aggrieved American companies will protest and the Clinton Administration will be confronted with new petitions for protection. The recent decision to impose large penalties on imported steel and the expected effort by American auto makers to seek similar duties are likely to be only the first wave of a renewed effort to fend off international competitors.

In this environment, the President and Congress will soon have to decide on the fate of NAFTA and of the Uruguay round of the General Agreement on Tariffs and Trade. NAFTA should fare well, if only because Mexico’s emergence from a decade-long slump is creating demand for U.S. exports--and jobs. In contrast, the hope for a dramatic breakthrough in favor of global free trade in the GATT talks has faded; negotiators will be lucky to salvage an agreement that avoids trade war.

If Clinton is to avoid being overwhelmed by these forces, he must decide on the kind of domestic and international economy he wants. He will have to choose between international cooperation and confrontation, between short-term palliatives and medium-term competitiveness, between current jobs that may be threatened by foreign competitors and jobs that could be created in the future.

His choices are complicated by the legacy of Republican protectionism, the erosion of the U.S. manufacturing base, political confusion in Europe, the reluctance of the Japanese to assume global responsibilities and his own tendency to respond to complaints of traditional Democratic Party constituencies.

This would be a formidable task for any politician, much less one new to the international scene. No U.S. president since Truman has faced as urgent a need to assert international economic leadership. But without a renewed U.S. commitment to achieving sustained global--not just domestic--prosperity, the world economy is destined for trouble.