Frail US Dollar Tops the Agenda At G-7 Summit

As industrialized nations meet, the US worries about its currency and trade frictions

WHEN leaders from the world's richest democracies begin a three-day meeting in Naples on July 8, the United States will have largely set the agenda. The other Group of Seven partners - Britain, Canada, France, Germany, Italy, and Japan - will likely be, as they usually are at these summits, in a reactive mode.

While always in a position of relative strength, the US is even more empowered than in recent years. It has registered more growth, generated more jobs, and realized the fastest export gains of the entire group.

But US policymakers are confounded by trade frictions and a currency that's falling too far - two areas in which they will have trouble advancing their interests among the G-7.

Topping the meeting's agenda is the precipitous drop in the US dollar. The greenback's decline has been attributed to a host of reasons - including lack of foreign investor confidence in the Clinton administration's policies ranging from North Korea to a burgeoning US trade deficit.

Robert Rubin, head of the White House's National Economic Council, counters that the administration's record reveals a successful blend of foreign and domestic economic policies. He cites passage of the North American Free Trade Agreement last fall, the White house decision in May to renew most-favored-nation trade status for China, and the wrap-up last year of a new global trade accord.

Others say the dollar's fall is due to market uneasiness about US debt and overspending, something G-7 policymakers should help redress. US Deputy Treasury Secretary Lawrence Summers credits the G-7 with already influencing US fiscal policy.

``The shared understanding developed in the G-7 process over time, that the US budget deficit was a serious problem, was, I think, one of the things that led to the historic actions of last year'' in which the White House and Congress agreed on a deficit-reduction package.

But Henry Owen, a senior adviser to Salomon Brothers who served as coordinator of foreign economic policy and as a manager of summitry during the Carter administration, contends that ``it's simply a big fiction that the budget deficit was cut a lot.'' Reductions were made in the defense budget, but the domestic items that make government outlays explosive were left untouched, he says.

Others, who view the G-7 forum as a chance to pressure Japan to liberalize its markets, blame that country's huge trade surplus as inevitably resulting in a weaker currency for the deficit country.

Former US trade official Clyde Prestowitz, president of the Economic Strategy Institute in Washington, asserts the main reason for the dollar's decline against the Japanese yen is Japan's $130 billion current account surplus, about half of which is rooted in a trade surplus with the US, while the other half comes in mostly dollar-denominated trade with other countries.

The persistence of Japan's large trade surplus - which Mr. Prestowitz calls a source of national pride to Japanese business - is most troubling to US policymakers. US Treasury officials continue to implore Japan to step up government spending and avoid interest- rate hikes in order to stimulate demand for imports. But little relief is in sight. Japan's government just changed hands for the fourth time in little over a year. And as Washington tries to gear up the G-7 to push Tokyo to open its markets, the newly installed Socialist Prime Minister Tomiichi Murayama may likely stall such developments.

THE G-7 anxiously awaits Clinton's delivery of congressional passage of the new General Agreement on Tariffs and Trade (GATT). The White House has been fighting legislative opponents who threaten to break the stride toward successful passage of the accord.

``I have the chancellor of the exchequer from England, I have the finance minister of France, I have the finance minister of Germany all calling me and saying: `Is it possible that the United States would not ratify GATT?' '' says US Treasury Secretary Lloyd Bentsen. ``I tell those finance ministers, `It'll pass.' ''

The G-7's collective resolve to implement the trade accord by its January start-up date ``would advance virtually every aspect of the world's international economic agenda,'' says Jerry Jasinowski, president of the National Association of Manufacturers. ``It would inject a stabilizing rudder into an ocean of disquieting economic information, calm the currency markets, and send the message that there is a clear path for integrating the big transition economies - Russia and China - into the global trading system.''

Washington, the main catalyst for aid to Russia, is taking a go-slow approach this year. Russia, which will assume a seat in the G-7's political discussions in Naples and weigh in on issues such as sanctions against Iraq and Libya, money-laundering, and Bosnia, expects no G-7 economic help, according to a Russian official preparing for the summit. Mr. Bentsen says that ``amplification of assistance to Russia [will be] predicated on continuing reform.''

The most tangible economic support for ex-Soviet nations is likely to be for Ukraine, whose economy is in ``dire need'' of aid, according to US officials. Additionally, the summiteers will examine ways to replenish a fund to help close down perilous nuclear power reactors. ``There is a very strong desire among the G-7 to work with the Ukraine to figure out a way to enable them to close down Chernobyl,'' says Joan Spero, undersecretary of state for economic and agricultural affairs.