Navigating With Care

By Stephen Koepp

Skeptics already call it the "lame-duck summit" because so many of the participants are in the waning stages of their elected tenures. There is also worry about lameness of another kind, a fear that the heads of the world's leading industrial democracies may be powerless to make the kind of daring compromises demanded by a perilous imbalance in world trade and by the threat of global recession. Indeed, there are plenty of signs that a gondola ride through troubled waters lies ahead for the leaders of the U.S., Japan, West Germany, France, Britain, Italy and Canada when they gather in Venice for their 13th annual economic summit next week.*

The most frustrated leader of all may be Ronald Reagan, who is hobbled by the Iranscam tangle and the increasing welter of problems arising from the U.S.'s foreign and domestic indebtedness. Not only the President but also the U.S. itself are widely seen as weaker abroad, a perception that is reflected in a declining American ability to lead the way on international economic issues. That fact may reflect one of the major challenges of the summit: How can allies long accustomed to U.S. leadership find solutions to their economic problems at a time when the U.S. is becoming, at best, first among equals?

The danger of coming away with no answer to that question, however, may prove to be the best spur to productive talks at the three-day session. The No. 1 worry for the seven leaders is the rising potential for global recession along with a painful end to five years of sustained economic growth. To help prolong that expansion, the leaders must try to make stronger commitment to resist the lure of protectionism, which is beginning to cast a dangerous pall over world trade. Another summit priority will be taking further steps to ease the international debt crisis, which is simmering once again with the decision by Citicorp and other big U.S. banks to set aside billions of dollars for anticipated Third World loan losses.

The low expectations attendant on the Venice gathering are in sharp contrast to the high hopes that preceded last year's Tokyo summit meeting. At that session, which President Reagan cheerfully reviewed as the "most successful of the six I have attended," Treasury Secretary James Baker helped to win endorsement of an ambitious plan to control the volatile relationship between the U.S. dollar and other currencies through tighter coordination of economic policies (see box). The agreement was easy to reach, but the goal proved difficult to accomplish: despite a spate of follow-up meetings among economic leaders, market forces sent the dollar on a roller-coaster plunge in relation to the Japanese yen and the West German mark.

The goal of the Venice meeting -- to boost global economic growth -- calls for fundamental, and thus more difficult, changes in disparate national economic policies. Even so, financial markets turned optimistic last week as the summit meeting neared. On Wall Street, the Dow Jones average of 30 industrial stocks rose 48.37 points over the previous week, closing at | 2291.57. The U.S. dollar staged its strongest rally of the year, rising about 2% against the yen and the deutsche mark in two days. Experts wondered, however, whether the financial markets could continue to pay such handsome returns in the face of dismal economic growth. Warned a French senior economic official: "This is simply not sustainable. Something will have to give."

Despite the urgency of economic concerns, only a portion of the Venice summit will be devoted to economic issues. The leaders will blanket as many pressing issues as possible. First among them will be Soviet Leader Mikhail Gorbachev's challenging proposal to remove short- and intermediate-range nuclear weapons from Europe. Other conversations will probably focus on the defense of Persian Gulf oil traffic following the attack on the U.S. frigate Stark, the international war against drugs, the fight against the AIDS virus, and terrorism.

Despite a grand Venetian setting, this year's summit agenda calls for more work and less public ceremony for the participants. President Reagan will travel every morning by covered motor launch across the Venetian lagoon from the plush Hotel Cipriani, where he will stay, to the tiny Isola di San Giorgio Maggiore, situated directly across from the famous Piazza San Marco. The formal summit talks will take place in the bay-windowed, dark-paneled library of a 17th century Benedictine monastery on the miniature island. Security will be so tight that the traditional photograph of the summit leaders will be taken in a monastery courtyard, rather than at the lagoon's edge. The summiteers will eat well, as in the past, though the U.S. President may enjoy his meals the most: menus are studded with such Reagan favorites as risotto and rib roast.

Less pleasant sensations may come when the leaders contemplate the wilting international economy. Growth in the industrial world this year is expected to be a limp 2%, down from 2.5% last year. The rate of expansion of world trade is also expected to slow to 2.5% this year, down from about 3.5% in 1986.

At the heart of the slowdown is the world trade imbalance, in which the U.S. figures so crucially. Washington's trade deficit last year was $170 billion, in contrast to $149 billion in 1985 and $9.5 billion a decade ago. Japan and West Germany, on the other hand, piled up surpluses of $101 billion and $63 billion respectively last year. But there are glimmers of hope. The decline of the U.S. dollar by roughly 20% against other major currencies during the past 18 months has started to ease the American deficit somewhat. One especially heartening sign: the U.S. trade deficit for the first three months of 1987 was $38.3 billion, down slightly from the previous quarter.

Nonetheless, any dramatic correction of the trade imbalance will reduce U.S. imports from Japan and West Germany. That prospect could easily have the side effect of pushing the economies of both U.S. allies into near recession. West Germany's economy has shown no growth for two straight quarters, while Japan's has slowed to a paltry 2% rate.

A principal U.S. objective at the summit will be to persuade the trade- surplus countries to pump up their economies, save less and become bigger consumers of domestic and imported goods and services. Prime Minister Yasuhiro Nakasone of Japan and Chancellor Helmut Kohl of West Germany can be expected to listen with concern in Venice, and then to argue, as they have in previous sessions, that they are already doing as much as possible without causing important dislocations at home.

Those arguments are sincere. In January Japan's central bank dropped its equivalent of the U.S. discount rate to 2.5%, the lowest level in modern history. Last week the Nakasone government also unveiled an emergency economic expansion package made up of $34.8 billion in additional public spending and $7 billion in tax cuts. As one consequence of the pump priming, so much construction activity is taking place in Tokyo that the Japanese capital is running short of carpenters. West Germany, on the other hand, has been more reluctant to expand its economy. Officials in Bonn stubbornly believe that inflation, though currently nonexistent, could rise quickly with any additional economic stimulus because the country's factories are already running at 85% of capacity, the highest level in this decade.

In years past, the U.S. might have been able to overcome such resistance with relative ease. But now the U.S. is strikingly dependent on foreign economic support in its surprising role as the world's largest debtor. At the end of 1986, the U.S. had more than $200 billion in net foreign liabilities, double the total of the previous year. Says Robert Hormats, a senior partner for the investment firm Goldman, Sachs and a former U.S. Assistant Secretary of State: "This may be the first summit at which the U.S. has to come to grips with the fact that a debtor country can't call the shots as convincingly as a surplus country."

The U.S. has piled up much of its external debt in order to finance its debilitating federal budget deficit, which hit $221 billion last year and is expected to show only a moderate decline to $175 billion in 1987. The non- American participants in Venice undoubtedly will point out to Reagan, as they have before, that the U.S. deficits are working against global economic growth. Says Hormats: "Our domestic policy is not credible in their eyes." But the President is unlikely to make sweeping deficit-reduction promises, since he remains a rock-solid opponent of any U.S. tax increase.

Reagan will not be alone in being unable to commit his country to a dramatic change of course. Japan's Nakasone, whose popularity at home has slipped dramatically in recent months, will leave office in October. France's President Francois Mitterrand, a Socialist, and his Premier Jacques Chirac, a conservative, may face each other in elections next year. Italian Prime Minister Amintore Fanfani is serving only as interim leader until a government can be formed after elections on June 14. A notable exception to the lame-duck trend is Britain's Prime Minister Margaret Thatcher, who faces an election on June 11 but is expected to win handily.

A major test of the Venice meeting's success will be how specifically the leaders oppose protectionism. In the past year the allies have issued plenty of vague anti-protectionist statements, even while behaving very differently. Only last week President Reagan declared that retaliatory tariffs imposed on April 17 against $300 million worth of Japanese electronic goods will remain in force for the time being. Reason: Tokyo has failed to stop its semiconductor industry from selling wares on world markets at prices below the domestic cost of production. But the leaders may produce a strongly worded agreement in Venice to reduce the staggering crop subsidies that cost consumers in industrial countries an estimated $100 billion last year.

In case the summiteers were about to forget it -- an unlikely prospect -- Latin American leaders warned them once again last week of the renewed urgency of the Third World debt problem. Meeting in Montevideo, the Presidents of Brazil, Argentina and Uruguay, whose countries collectively owe some $165 billion, called on the Venice participants to lower interest rates on Third World debt. Urgency of another sort is being provided by major U.S. banks, which have dramatically slashed their anticipated profits this year in order to cover expected loan losses on that debt. The movement that began two weeks ago, when Citicorp added $3 billion to its bad-debt reserves, continued last week when Chase Manhattan set aside $1.4 billion to cover losses.

Those actions could lead to a virtual suspension of additional commercial- bank lending to the debtor countries. That prospect might in turn increase the urgency of any summit talks about debt solutions. Nakasone for one, will probably be pressed for more details on the Third World bailout plan that his country announced with great fanfare in April. The scheme calls for Japan to lend at least $20 billion to developing nations over the next several years.

After the Venice meeting is over, international currency markets are likely to issue their own judgment on the value of the talks. The world's currency traders are a nervous lot. If they see no international commitment emerging from Venice to solve the U.S. trade imbalance and related issues, traders and investors may decide that the best answer is another dramatic decline in the dollar's value. If that occurs suddenly, painful adjustments will affect everyone. Says Rimmer de Vries, chief international economist for Morgan Guaranty Trust: "The markets would force the issue with all their ruthlessness and lack of mercy." That is a very good reason for the summiteers to navigate with care during their sessions alongside the Venetian waterways.

FOOTNOTE: *Those attending (from left to right in drawing): Acting Italian Prime Minister Amintore Fanfani, German Chancellor Helmut Kohl, French President Francois Mitterrand, Japanese Prime Minister Yasuhiro Nakasone, Canadian Prime Minister Brian Mulroney, President Reagan, British Prime Minister Margaret Thatcher.

With reporting by Jay Branegan/Washington and Christopher Redman/Paris, with other bureaus