High Hopes for a Smooth Trip

By George Russell

Economic summit meetings are always part consultation and part ceremony but, all too often, mostly ceremony. Every year the venue changes, but the format is the same. The heads of the world's leading industrial democracies (the U.S., Japan, West Germany, France, Britain, Italy, Canada), joined by representatives of the European Community, gather somewhere pleasant for two to three days of talks in the name of greater economic cooperation. They meet often and dine well in private, with time out for photo opportunities. A communique laden with truisms is released. Then the luminaries disperse to follow whatever divergent policies they please.

Maybe not this year. As President Reagan and his aides prepare to fly this week to Bali for a meeting of the Association of Southeast Asian Nations, and then to Tokyo for the twelfth annual summit, on May 4 to 6, the excursion augurs well to be both a practical and a ceremonial success. The reason: as they nudge their economies through a fourth year of sustained growth, the industrialized countries are showing a capacity for cooperation unmatched in recent years. Looking ahead to the three-day conclave in Tokyo's imposing Akasaka Palace, the imperial guesthouse, officials from all participating countries caution that ugly problems could still dampen the summit mood. Among other things, the leaders will be preoccupied with their differing responses to international terrorism in the wake of the U.S. attack on Libya. Nonetheless, a French official predicted that "overall, it could be an exceptionally optimistic and harmonious meeting."

If so, much of the credit will go to U.S. Treasury Secretary James Baker. In 14 months, Baker and his deputy Richard Darman have greatly modified the Administration's previous go-it-alone international economic policies. In September, Baker engineered an agreement with the finance ministers and central bankers of other major nations to push down the value of the U.S. dollar, especially in relation to the Japanese yen. His goal was to cut U.S. imports, spur American exports and head off protectionism in Congress. In recent weeks Baker has been successfully urging other governments to join with the U.S. in reducing interest rates (see chart). That stimulative policy, along with falling oil prices, is expected to help the industrial democracies achieve an average growth rate of 3.3% in 1986, up from 2.7% last year, while inflation hovers at 3.5%.

The sunny economic forecast is clouded, however, by a slowdown in international trade, which grew by only 3% last year, after a robust 9% expansion in 1984. Efforts to boost trade this year could be hurt by growing protectionism. In Congress last week, President Reagan barely defeated a challenge in the Senate Finance Committee, when rebellious legislators fell one vote short of the majority needed to block impending negotiations on free trade with neighboring Canada. Meanwhile, the U.S. and the European Community are holding talks in an effort to resolve an argument over restrictions on American agricultural exports to Spain and Portugal. The U.S. has threatened to retaliate with tariffs and quotas on such imports as French wine and Belgian chocolate. Warned a senior American official: "We are dangerously close to kicking off a trade war."

The explosive issue of agricultural protectionism will almost certainly get a summit airing for the first time. In addition, the U.S. will underline its support at the summit for a worldwide conference on trade liberalization under the 90-member General Agreement on Tariffs and Trade. A GATT round would do little, however, to reduce the huge U.S. trade deficit, which reached $148.5 billion last year. That gap can be closed only if other countries boost their growth rates and absorb more American imports. Complains a senior Administration official: "We have played the locomotive for the past three years, and we have helped everybody else."

Washington's arguments for expansion will be aimed in particular at Japan and West Germany, which are expected to run trade surpluses with the U.S. this year of about $50 billion and $10 billion, respectively. Though Japan's projected 1986 growth rate of 3.25% and West Germany's 3.5% compare favorably with America's expected 3.5% pace, Washington thinks that these trading partners should be moving even faster. Says a U.S. official: "You'd think a country like West Germany, with unemployment around 9%, would want more growth." With inflation close to zero in both countries, he adds, they can easily afford to stimulate their economies.

Another topic on the summit agenda is the volatility of currency exchange rates. Last week, as the U.S. dollar hit a post-World War II low of 166.65 yen, both U.S. and Japanese officials were worried that the greenback's devaluation may have gone too far. The Japanese feared that their export industries would be severely damaged. Federal Reserve Chairman Paul Volcker was concerned that the dollar's slide might discourage the flow of foreign capital into the U.S. and thus cause difficulties in financing the budget deficit, as well as drive up American interest rates.

Treasury Secretary Baker may try to secure summit approval of a far-reaching plan to stabilize currencies through closer monetary and economic cooperation within the group of countries (the U.S., Britain, France, West Germany, Japan) that already confer regularly and in secret on exchange rates. That initiative would require Italy and Canada to join the so-called Group of Five, and invitations will almost certainly be issued in Tokyo.

The U.S. will undoubtedly bring up the Baker plan: the Treasury Secretary's October 1985 initiative aimed at helping Third World nations grow out of their crippling debt burdens. Baker's proposal calls for handing out additional dollops of public and private bank financing to the debt-ridden less developed countries in return for specific commitments to put their economic houses in order. So far, response from bankers to the initiative has been lukewarm.

Reactions to what the U.S. has to say at the summit will probably vary greatly. Both British Prime Minister Margaret Thatcher and Canadian Prime Minister Brian Mulroney will probably be supportive of President Reagan at Akasaka. Italy's Prime Minister Bettino Craxi is expected to be in a cooperative mood because of his country's progress in reducing inflation. But the person who is likely to be most interested in orchestrating unity at the meeting is Japanese Prime Minister Yasuhiro Nakasone. His government faces parliamentary elections in the summer, and the prestige of a problem-free summit would add to his already considerable domestic stature.

Nakasone is acutely conscious of his country's $52.6 billion international trade surplus. While visiting Reagan in Washington three weeks ago, the Prime Minister seemed to promise that Japan would stimulate its economy to boost imports. But at the same time, Japanese officials are trying to bolster the country's exports through intervention in the currency markets. Says Bank of Japan Governor Satoshi Sumita: "We strongly hope the market will stabilize." Despite those politely phrased misgivings, the official Japanese presummit position, from Foreign Ministry Spokesman Yoshio Hatano, is a bland assertion that "the economic conditions in the summit countries are good. We should try to maintain and promote this situation."

West German Chancellor Helmut Kohl's misgivings may be more forcefully expressed. West German officials appear to believe in contrast to the U.S. view, that their country's current anticipated growth rate is plenty. Two weeks ago, the West German Bundesbank declined to follow Washington as the U.S. cut the rate charged by the Federal Reserve to member banks from 7% to 6.5%.

As has happened before, the big questions about unity at the meeting may revolve around French President Franc,ois Mitterrand. This year France's position at the summit is cloudier than ever because of the installation in March of Conservative Jacques Chirac as Socialist Mitterrand's Premier. Chirac has decided to put in an appearance at the meeting, throwing the protocol-conscious Japanese into a tizzy. One compromise: Chirac will show up at Akasaka only after the opening state dinner, thus avoiding a major problem with head-table seating.

More substantial difficulties with the French will involve the agricultural trade issue, among others. Says an official in Paris: "We fear an attempt to put the European Community's agricultural policy on trial." The French agree in general, however, with the notion of a more cooperative approach to international exchange rates and monetary policy. Indeed, they claim with some reason to have pioneered that stand as far back as 1983. Thus the French may find themselves for once on the same ideological side as the U.S. As one French official puts it, "The Americans are no longer the most stubbornly free-market oriented. The West Germans and the British are."

President Reagan might argue that he was never all that stubborn. At five previous summits, Reagan's charm was an important unifying influence, even when his free-market stands led to ideological splits among the allies. But now that the U.S. has assumed a new, pragmatic role in economic summitry, the Great Communicator may prove to be even more beguiling in Tokyo. --By George Russell. Reported by Jay Branegan and Christopher Redman/Washington

With reporting by Jay Branegan, Christopher Redman/Washington