Sluggish World Markets Cloud Election Outlook

DESPITE presidential election year promises of economic change, economists question just what the winning candidate can do unilaterally to alter the American economy's course.

In the interrelated world of finance and trade, the United States is vulnerable to swings in interest rates, markets, and money supplies abroad. Currently, the relationship lacks stimulus as the world's largest economies - America's largest export markets and capital sources - are sluggish. Their combined growth rate will be 1.8 percent this year.

Reflecting their own domestic dynamics, foreign countries' government policies and private-sector developments often work against US economic needs.

Such is the case with Europe's high interest rates, which lure foreign investors away from the US and discourage Europeans from investment and spending, or the sharp drop in Japan's stock market and asset values, which dampens the market demand for American goods and services and limit Japanese capacity to invest and extend loans to the US.

The Bush administration credits US export strength as the single largest contributor to American economic growth. "Our merchandise exports have increased by almost $195 billion over the last five years, and every billion dollars in exports supports almost 20,000 new jobs," says US Secretary of the Treasury Nicholas Brady.

Mr. Brady underscores that "global growth through exports leads to more jobs," but the US trade position has weakened in recent months. Despite the lower value of the dollar, which makes US goods and services more affordable abroad, recession in formerly robust markets has hurt US sales. Months after Japan's Prime Minister Kiichi Miyazawa pledged to address his trade surplus with the US and then prime his economy's pump with substantial government spending, Japanese consumer and business spending is slow .

That's bad news for the US, whose largest single trading partner outside North America is Japan.

Labor economists are wary of efforts to create bigger and broader markets, such as the Bush administration's feverish efforts to forge a free-trade agreement with Mexico, a country that has consumed 17 percent more US goods every year for the past five years. While the White House points to the 600,000 American jobs that rely on that trade, the ALF-CIO and other groups are sounding alarms about the steady stream of US firms that are relocating in Mexico to take advantage of low-cost workers.

In order to trigger more borrowing and spending by domestic consumers, US policymakers continue to pressure the Federal Reserve Board to lower interest rates. But today's near-historic low rates are doing little to spur economic activity in the US, now bogged down with nagging unemployment and low consumer confidence. Even US investors are turning to international markets in search of higher returns.

While the US government relies heavily on foreign financing, US investors are busy exporting their funds to Europe to help finance European budget deficits. Prudential Securities economist Greg Smith says higher European rates are more alluring to "interest-starved US investors."

GERMANY'S Bundesbank, Europe's dominant central bank, continues to put its inflation fears and rate hikes above the objections of European partners and the US. At international forums, US officials lobby the Germans for lower rates to no avail.

"The most important effect of Germany's central-bank policy on US financial markets will be to keep short-term US interest well below long-term US interest rates," Mr. Smith says. "It is long-term interest rates that must compete with markets around the world in order to attract the capital to finance our budget deficit."

Leslie Alperstein and Andrew Schwartz, political analysts for New York-based NatWest investment-banking group, have examined the importance of the nation's chief executive in forging lucrative commercial ties internationally. They forecast that if Bush is not reelected in November, the US will "lose some important Bush relationships."

They cite close ties with Saudi Arabia's King Fahd (to whom Bush sold billions of dollars worth of armaments), Mexico's President Carlos Salinas de Gortari ("this relationship has translated itself into one of the most revolutionary trade agreements ever negotiated"), Canada's Prime Minister Brian Mulroney, and China's Premier Deng Xiaoping (as former envoy to China, Bush favors extending most favored nation status over sanctions).

President Bush's leadership in the coalition against Iraq during the Gulf war has had a dramatic impact on the world economy, according to Michael Boskin, chairman of the White House Council of Economic Advisers.

Had Saddam Hussein invaded Saudi Arabia, "he would have controlled two-thirds of the world's proven oil reserves," and industrialized economies around the world would have suffered enormous shocks, he says.

At the same time, Mr. Boskin says he recognizes that the future of America's most important contributor to economic growth - exports - is largely out of Washington's hands.