A Strategy Laced With Contradictions : Trade: Asia, Latin America are becoming world economic engines. To benefit, the U.S. will have to be less critical of different political systems.

President Clinton has enthusiastically embraced a free trade strategy that not only runs counter to the policy preferences of many in his party, but also to some of his own earlier pronouncements.

Passage of the North American Free Trade Agreement, completion of the GATT negotiations and the meeting of Pacific Rim leaders under the auspices of the Asia-Pacific Economic Community collectively represent a reaffirmation of the longstanding U.S. commitment to an open trade and payments system. That this agenda was largely defined by Clinton’s Republican predecessors and frequently attacked during last year’s presidential campaign as counter to the country’s interests only underscores the considerable political distance that the President has had to travel.

Clinton is certainly not a closet Republican or even a traditional free-trader. Rather, he seems to have convinced himself that the best way to break out of the structural constraints that are limiting job creation and wage growth in the American economy is to expand exports. Export-related jobs are higher paying and more skill-intensive; in recent years the export sector has been one of the most dynamic parts of the economy. Clinton’s strategy is to build on the industrial and financial restructuring of American industry by opening new markets, lowering barriers and challenging other countries to cooperate or face retaliation.

His gamble is that the strategy will create more jobs--and create them more quickly--than it will displace, thereby securing an important part of the Democratic political base that is instinctively opposed to trade liberalization. This is more new-wave mercantilism than textbook free trade, where open markets were an end in themselves.

The risk is that exports and export-related jobs will not increase rapidly enough to satisfy the many Americans whose sense of economic vulnerability was so evident during the NAFTA debate. The weakness of traditional markets in the rest of the industrial world--much of which is still mired in recession--the strength of the dollar against European currencies and the export surge over the last five years all work against quick results from Clinton’s trade strategy.

Moreover, the Clinton Administration has yet to come to grips with the twin problems of Japan and China. Together, the two countries accumulated a $70-billion trade surplus with the United States in 1993, which in all likelihood will rise in 1994. These imbalances almost guarantee that “China bashing” will join “Japan bashing” as a popular Washington sport, one that does little to advance national economic or foreign-policy interests.

The conflict with China in particular presents a dilemma for Clinton’s new mercantilism. On the one hand, the Chinese market is enormous, with total imports this year of more than $90 billion and real economic growth likely to continue to averaging 10% for years to come. On the other hand, Clinton’s core constituencies include aggressive critics of China’s human-rights performance as well as of that country’s increasing penetration of the U.S. market. The same people who would have defeated NAFTA would cut the economic and commercial ties with China.

Clinton’s real accomplishment in passing NAFTA--one that may produce the key to successfully dealing with China and other trade conflicts--has been to establish, in concrete political terms, that more American workers and companies benefit than lose from free trade. While that assertion is elementary economics, it is a newly rediscovered political fact reflecting the reality that the United States is finally becoming a serious exporting country.

Although U.S. exports have long been the world’s largest--occasionally surpassed by Germany when exchange rates fluctuated wildly--until recently trade has accounted for a relatively small fraction of U.S. production and jobs. This has now changed. In 1970, exports of goods and services accounted for only about 6% of America’s total economic output; in 1993 exports will reach 11% and total trade will exceed 20% of gross domestic product. This transformation explains the otherwise inexplicable emotionalism of the recent NAFTA struggle. For the first time in U.S. postwar history, trade-policy debates affect a substantial portion of the economy; there are more winners and more losers.

Curiously, the GATT agreement has elicited less enthusiasm among business than NAFTA and may be of less immediate consequence, even though GATT rules apply to more trade and more countries. To some extent the GATT deal is a crisis averted: Failure would have risked trade wars and upset international money markets, probably leading to an unacceptably strong dollar.

But success has few dramatic consequences, certainly compared with the original ambitions of the negotiators and the innovations embodied in NAFTA. The Uruguay Round may have been the last set of multilateral trade talks to be dominated by the “old” issues of agriculture, textiles and multilateral tariff cuts, and the first effort--largely unfulfilled--to establish global rules for services, investment flows, intellectual property and other “new” issues that are more central to the current realities of international commerce. The next round of negotiations, which may have to come sooner than most politicians would want, will have to be devoted to these issues if the real promises of Clinton’s newly energized interest in international trade are to be realized.

The recent Asia-Pacific Economic Community meeting in Seattle is potentially more central to Clinton’s mercantilist strategy than GATT or even than NAFTA. The world’s fastest growing economies are in East and Southeast Asia; the region has the highest savings rate and the potential to self-finance even more dynamic growth in the next years. Access to the markets of greater China, Korea, Indochina and the rest of Asia, and the opportunity to build the infrastructure of that rapidly developing region, represent the best way to accelerate U.S. growth and quickly create jobs.

But a U.S. trade strategy focused on Asia has, first, to compete directly with Japan and, second, to overcome the U.S. habit of mixing politics and economics.

Many American politicians, liberal as well as conservative, instinctively believe that it is appropriate to impose domestic political criteria on trade relationships and to resort to trade sanctions to punish U.S.-defined rogue countries. Whether seeking to impose trade restrictions on Iran, lecturing the Chinese leadership about human rights or commenting on Mexican democracy, the Clinton government has shown a willingness to advance a political agenda that potentially conflicts with the drive to secure markets and create export-related jobs.

The need to resolve this conflict is vital to Clinton’s strategy, and not just in Asia. The next phase of the international economy is increasingly going to be dominated by North-South flows in the same way that the past 40 years have largely been about West-West flows of capital and goods essentially within the industrial world. The so-called emerging markets of Asia and Latin America, and eventually of the former Soviet Union, are already becoming the engines of the world economy or, at least, the sources of incremental growth and trade. For the United States to take advantage of this shift will require learning to live more comfortably, and less critically, with different political systems.

Thus, President Clinton’s new international economic strategy is not yet fully formed and is still laced with contradictions. Yet, if he can complete it, resolve the contradictions and sustain the political momentum that passed NAFTA, then he will have made a lasting contribution to his country’s ability to cope with and to benefit from the new world economy.