Wall St., Weak Dollar Aid Clinton at Summit

PRESIDENT Clinton is taking some big gambles as he prepares for the upcoming G-7 economic summit in Halifax, Nova Scotia. This is the price of trying to build a position of negotiating strength on a foundation of United States economic leadership that has rarely looked more fragile.

The borrowing requirements imposed by a $4 trillion US national debt and unending trade deficits clearly have eroded US credibility. The dollar has lost more than 25 percent of its value against the Japanese yen and German mark since Mr. Clinton's inauguration. Constraints on US financial resources have never been tighter. Congressional resistance to the recent bailout of Mexico show that public support for US international economic engagement has reached its lowest ebb in decades.

Robust markets, dollar's decline help the US

But the White House is betting that the president can hold his own at Halifax if US financial markets remain strong, the dollar stays weak, and the volatile capital markets of emerging economies become more transparent. Clinton is betting that Wall Street highs and dollar lows can continue to go hand in hand. Most observers view robust financial markets and a weak currency as conflicting indicators of US economic strength. The White House, however, is counting on both to play to US advantage.

The rally in stocks and bonds underpins the White House case that there is no fundamental dollar problem requiring an adjustment in US policy. The drop in long-term interest rates provides proof that Washington is putting its economic house in order.

Meanwhile, Clinton's team sees the rise of the yen and D-mark as a major contributor to the rally on Wall Street. A weaker dollar has given US firms a competitive edge. Low inflation, even in the face of increased import costs, has reenforced this edge.

Danger of a winner-take-all duel

Clinton hopes that the weak dollar will also provide decisive leverage in the US trade showdown with Japan. The White House is gambling that Japan's front-line auto exporters, hobbled by a domestic downturn as well as the super-strong yen, will yield to US demands for a greater share of the Japanese market for parts and vehicles. The strategic calculus of Clinton and US trade representative Mickey Kantor is that the threat of a protracted trade conflict should maximize near-term pressure on Japan by keeping upward pressure on the yen. The administration hopes to break the deadlock on US terms before Clinton meets Japan's prime minister face-to-face at the G-7 table.

But Clinton's reliance on Japanese vulnerability could easily misfire. Despite the threat to impose 100 percent tariffs on Japanese luxury autos, Tokyo has shown no sign of conceding to US pressure. If Japan opts to raise the stakes by throwing the conflict into the newly established World Trade Organization, Halifax will not yield the early "voluntary" solution that the Clinton team is looking for. Rather, the US could find itself locked in a winner-take-all duel over adherence to international trade rules that could badly damage the WTO.

Clinton's most pragmatic bet at Halifax is that market discipline rather than government intervention holds the key to global financial stability. The summit will focus heavily on how to prevent future meltdowns like Mexico's. Here Washington has argued against any sweeping new initiative that increases the role of governments as lenders of last resort. While going along with the creation of a modest emergency plan, the White House puts primary emphasis on the need for monitoring measures that will greatly increase the flow of data from emerging markets to investors worldwide.

This minimalist approach, which is likely to prevail in Halifax, highlights the reality that private capital flows have overwhelmed the financial resources of all governments. The White House has no practical alternative but to adjust US strategy accordingly.

At a time when systemic challenges loom especially large, the White House feels compelled to define US interests more narrowly and to pursue them more assertively than ever.