GATT’s Promise Can Only Be Realized If Followed by Tough Regional Policies : Trade: With U.S. business the possible big winner, Clinton must reward those companies leading the way, not return to Democratic politics-as-usual.

Once the wine and self-congratulatory rhetoric have dried up, the United States must soberly face up to the harsh realities of the new international trading system it helped create. Far from guarantee ing a world of unparalleled prosperity, the General Agreement on Tariffs and Trade is like a Reader’s Digest version of international trade, oversimplifying fundamental economic imperatives in ways that may harm U.S. interests unless extensively supplemented with enlightened bilateral and regional policies.

From the start, the myriad special interests and political considerations attached to the seven-year negotiations virtually guaranteed imperfections in the final agreement. Many critical concerns were explicitly dropped at the last minute to meet the Dec. 15 deadline, including three absolutely crucial to California’s economy: Europe’s commercial-aviation subsidies; semiconductor-design protections, and U.S. media access to world markets. Such headline-grabbing shortcomings conceal even more fundamental trade issues that are not part of the GATT framework at all.

U.S.-Japan trade relations, for example, are about to enter their most dangerous period in recent memory, but GATT will play almost no role in resolving the developing tensions. Japan’s huge $50-billion surplus with the United States--by far the largest among U.S. trading partners--has resisted years of remedial efforts and remains the most striking symbol of the gap between the Clinton Administration’s rosy trade rhetoric and the reality of intractable, often staggering international economic inequities.

Despite enormous political risks, the United States is gambling on a policy that could cause Japanese exports to explosively rise at the expense of already struggling U.S. manufacturers, a possibility ironically made even more likely by the structure of GATT. In recent weeks, the Clinton Administration quietly let Japan’s currency slip by nearly 10% of its value against the dollar to reduce pressure on Japanese industry and permit the nation’s coalition government to enact its much-ballyhooed, but generally insubstantial “reform” program.

The implicit quid pro quo is that Japan’s leaders will reflate their lackluster economy--and stimulate worldwide demand--by increasing public spending. Unless dramatically restructured, however, increased Japanese public spending will almost certainly benefit disproportionately the country’s domestic firms, in effect functioning as a huge subsidy that will provide Japan’s producers with substantial competitive advantages, especially when combined with the cheaper yen.

Worse still, since GATT will all but eliminate the kinds of voluntary trade restraints that provided breathing space for key U.S. manufacturers--like semiconductor and auto-parts makers--to approximate Japanese standards, the bilateral trade deficit in such highly contentious sectors as cars, which alone accounts for 75% of the U.S.-Japanese deficit, could rapidly worsen.

All this may occur in a political context in which Japan has grabbed the moral high ground by making concessions on rice imports in GATT, putting the United States on the defensive as trade inequities grow. If the promise of jobs and rising living standards latent in U.S. free-trade strategies are to be realized, GATT cannot be allowed to substitute for dynamic U.S. bilateral and regional trade policies.

Similar dangers exist in the domestic arena, where some in Washington urge a return to more traditional Democratic concerns in the apparent belief that the predicted $200-billion “GATT bonus”the amount of U.S. demand optimists predict will be stimulated by GATT--will automatically accrue to the benefit of American workers and businesses without further efforts. America’s strength in international markets, however, is predicated on the continued vitality of precisely the entrepreneurial, adaptive businesses most likely to bear the brunt of the Administration’s proposed social policies.

Unnoticed by many observers, including top Administration economic officials, the global economy is undergoing an epochal shift in which American producers can emerge as the big winners. In the 1970s and ‘80s, the bureaucratic businesses and labor unions that dominated the U.S. economy were outflanked by nimble German, Japanese and other national producers that developed creative, flexible alliances between larger and smaller firms and sustained high-value-added, high-skill manufacturing capabilities.

U.S. companies hardly acquitted themselves well in response to this competition. They often resorted to ruthless and self-defeating wage-and-price sweating, relocation blackmail and appeals for government subsidies or protectionism.

But in the wake of decades-long layoffs, bankruptcies and other forms of “restructuring,” U.S. business is becoming more adaptive than its rivals. Not only did many U.S. companies learn the quality-control and intercorporate practices perfected by their overseas rivals, but the U.S. economy, virtually alone among major economic powers, managed to sustain an entrepreneurial culture that continuously created new enterprises to replenish the nation’s industrial base as the older one retrenched.

To realize the promise of GATT-induced liberalized trade, the United States will have to foster its emerging competitive strengths--the companies, workers and other domestic institutions that reward creativity and adaptability, avoid stagnant bureaucracies, don’t seek short-term, ineffective quick fixes and aren’t looking for federal bailouts. Yet, when the Clinton Administration defines its own economic priorities, its impulse is to adopt policies that perversely harm precisely those parts of the economy that are poised to benefit the most from GATT.

Among the current slate of troubling strategies are a return to an activist, ‘60s-style antitrust policy that has already disrupted nascent industrial-network development and manufacturing collaboration; a health plan that rewards uncompetitive firms at the expense of growth companies; further refinements of an already anti-urban tax structure that strips money from wealthy individuals and industrial regions--the primary capital sources and locations for start-up companies--and feeds Wall Street speculators, and a defense-conversion strategy that puts billions of dollars into the companies and labor organizations that offer the least chance for new job creation and product development.

At root, GATT is a symbol, albeit an important one, of a global commitment to more or less allow flows of international wealth to be governed by free-trade principles. Coupled with the right domestic policies and a vigilant trade strategy, it can become the foundation for a global economy in which the United States will be a powerful, if not the dominant player. The Clinton Administration has only to demonstrate that it can fashion a consistent follow-up strategy to reap the rewards of this new economy.*