Paris, Saturday, February 27, 1999

For the Sake of Free Trade, Asia and Europe Need to Be Strong

By Gerald Segal International Herald Tribune

LAUSANNE, Switzerland - As some Asian economies begin the long climb out of recession, the crisis that began in July 1997 becomes as notable for what did not happen as for the devastation it caused.

For the senior officials and specialists concerned with Asia-Europe relations and the global economy who met recently under the auspices of the Evian Group in Lausanne, the most striking nonevent has been the absence of major trade protectionism in the developed world. But to the embarrassment of many Europeans, the credit for maintaining the vitality of the global economy is almost entirely American.

As Asians try to export their way out of recession, the annual U.S. trade deficit has risen to $280 billion, from $146 billion in 1996. The 11 euro zone countries continue to run a steady trade surplus of about $100 billion a year. Europeans may sneer at the low U.S. savings rate, but Asians have gone quiet on the subject. They know it is the openness of the U.S. economy that keeps the global economy growing.

The second nonresult of the Asian crisis is the absence of a global recession. There has clearly been a contagion effect in emerging markets around the world, but the North Atlantic economies that account for two-thirds of global gross domestic product are still growing. The precrisis hype about Pacific Asia as the engine of future global expansion raised concerns that an Asian crisis would lead to crashes in the United States and the European Union. This has not happened.

Instead, we see the United States sustaining its longest peacetime era of economic expansion. European growth is patchier, but as Germany's deceleration shows, problems have far more to do with the failure to engage in domestic structural reforms than any Asian effect. As France, Spain and the Netherlands demonstrate, many other European countries are doing very well.

Yet there is a worrying non-event for both Europeans and Asians: the absence of their much-touted ability either to replace American leadership with their own, or to create a stronger Asia-Europe axis.

Europe's euphoria about the euro changing the global balance of power has been tempered by depressing realities since the launching of the single currency in January. European growth is hindered by structural rigidities and the independence of the European Central Bank, which gives little opportunity for fiscal or monetary stimulus. The absence of a genuinely common foreign and security policy means that Europe still lacks a leader.

Asia also lacks leadership. So long as Japan, which accounts for two-thirds of GDP in Pacific Asia, remains in recession, it is in no position to lead a meaningful Asian recovery. China, whose growth rate continues to contract, is even less well placed to lead.

The Association of South East Asian Nations has long been the intellectual shaper of debates about Asian cohesion and identity. But because of financial turmoil and the economic slowdown in the region, it has lost confidence in its ability to articulate a vision of the future. Under such circumstances, it is not surprising that those who are concerned about keeping the global economy open are worried by the weakness of Europe and Asia.

A strong Europe and Asia committed to openness are vital to keeping the United States committed to open multilateralism. Yet as U.S. trade deficits balloon and European and Asian rhetoric about American ''hegemonism'' gets louder, Washington will be increasingly attracted to unilateralism. As a result, U.S. legislation aimed at punishing errant trading partners, and belligerent U.S. postures in World Trade Organization negotiations will become more pronounced.

The current flirtation of Europe and Asia with restricting trade in the booming business of genetically modified food is an especially worrying example of how delicate the balances of forces in favor of free trade are. The United States, along with Australia, Canada and Argentina, account for more than 90 percent of trade in genetically modified food. Europeans and Asians, who find it hard to compete, are exaggerating scientific worries to hobble their competitors.

The fact that U.S. economic success seems to be increasingly built on strengths in the information and innovation economy of the future makes more disputes of this kind likely - just as negotiations are to begin this year at the World Trade Organization on a new Millennium Round of cuts in a wide range of barriers to global trade. Unless Europe and Asia are able to keep the United States committed to open multilateralism, the Asian crisis may yet produce nasty results.

The writer is director of studies at the International Institute for Strategic Studies in London and Director of Britain's Pacific Asia Program. He contributed this comment to the International Herald Tribune.