Market woes heat up trade protectionism debate. `Conference' or `veto' in Reagan strategy

Beware of Smoot-Hawley. That is likely to be a rising cry in Washington in the weeks ahead. The Smoot-Hawley tariff act of 1930 sparked a trade war and was one of the factors blamed for the Great Depression.

As negotiations over the budget deficit gather momentum on Capital Hill, the Reagan administration appears poised to step up its fight against trade protectionism as still another threat to stability in the world economy.

White House officials indicate that the President may highlight the theme this week as administration aides pursue efforts to reshape the omnibus trade bill now in House-Senate conference.

``The trade deficit is something that also has a tremendously significant impact on the markets and the protectionist legislation passed by the House and Senate certainly have contributed to the unease in the markets,'' a White House official says. ``Congress needs to be mindful that things have changed in [recent] days and it would be a fundamental mistake to repeat the Smoot-Hawley experience.''

On Capitol Hill, however, questions linger about whether the administration will pursue a ``veto'' strategy on the issue or, in light of market developments, adopt a ``conference'' strategy of bipartisan cooperation. Lawmakers note that, without such cooperation, the President may find himself without the authority needed to begin another round of multilateral negotiations aimed at liberalizing global trade. If a bill does not emerge intact this year, 1988 politics is certain to put off the exercise until 1990.

White House officials acknowledge the divisions of opinion in the administration over trade strategy. But they say the administration will work with the relevant congressional committees to forge an acceptable bill, while still holding out the threat of veto.

``Our position has not changed,'' says Alan Woods, the US deputy trade representative. ``We are working with Congress in the hopes of getting a nonprotectionist trade bill. If at the end of the day it proves to be a bill that does not meet these concerns the President would veto it. ... We think the markets support that concept.''

As part of the pressure on Congress, the administration is also drumming up support in the Senate to be able to sustain a presidential veto of the trade bill if the legislation is not to Reagan's liking.

``We think we can come up with 34 names now [the number required to override], and we're trying to expand the list,'' a White House aide says. ``There could be something over 40.''

The massive, 1,000-page trade bill encompasses banking, energy, commerce, agriculture, and trade issues. House and Senate passed versions of the bill must now be reconciled.

The administration objects to many provisions of the legislation, including those that take away some of the President's discretionary power over trade matters and require him to retaliate against unfair trade practices.

The House version includes the so-called Gephardt amendment that mandates that the President take action against nations with large trade imbalances that display a pattern of unfair trade practices.

But the turmoil in world financial markets is affecting thinking in Congress. To help calm the markets, the House-Senate conferees have already given preliminary support to provisions that would allow US negotiators a free hand in the Geneva talks to reduce tariffs worldwide and reduce other trade barriers. US Trade Representative Clayton Yeutter hailed the action as ``a significant step forward.''

Meanwhile, the administration faces still other trade legislation it does not like. The Senate recently approved amendments to make foreign participation in federally funded airport projects contingent on reciprocal opportunities for US companies abroad.

The amendments, sponsored by Sen. Frank Murkowski (R) of Alaska and attached to several bills, including the Airport and Airways Reauthorization Act, were triggered by the reluctance of Japan to permit US companies to participate in the $8 billion Kansai International Airport project.

Senator Murkowski maintains that his basic amendment is not protectionist but ``simply addresses reciprocity.''

``We must have access to foreign markets in the same manner that foreign companies do here,'' he says.

Administration officials say they share the objectives of the amendments but prefer that decisions on reciprocity reside with the executive not the legislative branch. A Commerce Department team was in Japan last week trying to negotiate an agreement over the Kansai project. While it did not succeed, the talks were due to continue in Washington yesterday.

Trade protectionism is not as critical a factor in the financial markets as the fiscal deficit. But economists point to the importance of curbing protectionist moves that could ignite trade conflicts and further erode the US trade position.

``The danger of protectionism is that it will make everything more expensive for the American consumer and that other countries will retaliate so that we get into a competitive protectionist war rather than competing to open up trade,'' says Alice Rivlin, former director of the Congressional Budget Office.