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China's Boom Creates a US Trade Dilemma

DESPITE President Clinton's assurances in January that Europe remains a priority second to none, he and his senior advisers remain convinced that Asia holds the key to America's economic future. But United States options in the region are being hemmed in by the weakening of Japan and the momentum of China.

The Clinton team has been especially caught off guard by unexpected fragility in Japan. A year ago, even though Japan's financial bubble had burst and its economy had slowed, the incoming administration took for granted long-term Japanese economic preeminence in Asia. This prospect prompted Mr. Clinton to take the offensive on the trade front, pressing for measurable opening of Japan's restricted home market that could be reviewed every six months at the summit level. This high-pressure strategy had great appeal for Clinton, whose views on competitiveness were shaped in an era of apparent Japanese invincibility. A hard line by the US promised to reduce politically sensitive imbalances, force much-needed change inside Japan, and underscore new American economic priorities in the post-cold-war era.

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Now, in the wake of a deadlocked summit meeting between Clinton and Japanese Prime Minister Morihiro Hosokawa, it is clear that US negotiators should have geared their strategy to a Japan much weaker than they had anticipated. Politically, the fall of the ruling Liberal Democratic Party has opened up an extended period of turmoil. Economically, Japanese industrial over-capacity, the strong yen, and low consumer confidence have combined to make the current recession the deepest and longest in 50 years.

In this turbulent setting, Tokyo is looking to reform from within, resisting the very external pressure that was once welcomed as a catalyst for change. The leaders of a newly vulnerable Japan have rejected US-managed market opening proposals out of hand. A weaker Japan may actually find it easier to stand up to the US than would a seemingly unstoppable Japan.

The tactical quandary that Japanese weakness poses for the Clinton administration is whether to retreat from its high-pressure stance on trade or to risk further escalation later this year. The larger strategic dilemma being debated is whether a frontal attack on Japan's market should remain a top priority or whether Japan can be outflanked competitively with other economic partners in Asia. While there are no definite answers, the political forces at work in an election year suggest that Clinton cannot afford to back down on his short-term trade demands.

In the meantime, Chinese economic dynamism has further narrowed Clinton's room to maneuver. Initially, the administration thought it had considerable leeway to restore the balance between US commercial interests in China and the US stake in Chinese political reform. China's heavy reliance on the US market, and its need for a counterweight to Japanese influence, seemed to provide enough leverage to link Chinese progress in human rights to continuing access to the US market.

Over the past year, however, China's stunning gains in growth and productivity, its ready access to capital and know-how from overseas Chinese, and its mushrooming $29 billion trade surplus with the US have altered the power equation. On one hand, US interests in participating in China's economic development and addressing the bilateral deficit loom larger than ever for Clinton and his advisers. One senior administration official stunned a small international group recently with an off-the-record estimate that China would surpass Japan within a decade to become the single most important bilateral economic relationship for the US.

China's leaders are taking an increasingly self-confident stance vis-a-vis Washington. Beijing seems convinced that US threats to deny most-favored-nation treatment on human rights grounds are hollow. Chinese leaders fully expect the Clinton administration to find a way around the upcoming June deadline for suspending MFN status if China fails to improve its human rights record. The real danger, according to US trade strategists, is that China could overplay its hand.

Looking ahead, the worst outcome for a Clinton administration committed to economic engagement in Asia would be confrontation with both China and Japan. To be sure, Washington will try to keep all options open. But if Clinton is forced to choose, the odds are that he will tilt toward China. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts by mail to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.

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