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A New World Disorder?


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A NEW WORLD DISORDER?

George Bush likes nothing better than to trumpet his vision of the post-cold-war era. But when he arrives in London on July 14 for his annual meeting with leaders of the seven largest industrial nations, the President will have to confront the fact that his new world order may not be too orderly. The agenda for the London economic summit is suddenly overflowing with political challenges.

Bloody civil strife in Yugoslavia will cast one shadow over the meeting. And with his pointed admonition to "stay tuned," Bush is clearly keeping open the option of another military move against Saddam Hussein, perhaps a U. S. air strike against Iraqi nuclear facilities. But those hot spots are just the begin-ing. Bush's biggest problem could wellbe the political and economic impact of the summit's most celebrated walk-on, Soviet President Mikhail Gorbachev.

Indeed, the Soviet Union's role in the meeting is dramatically complicating things for Washington. Most important, the diminished military threat from the Soviets denies Bush a tool for whipping the Group of Seven allies into line on economic issues. "In the past, it made sense to solve economic and trade differences to avoid imperiling the overall security alliance against the Soviet Union," says C. Fred Bergsten, director of the Institute for International Economics. "Now, the end of the cold war really increases the risk of economic conflicts."

And there are plenty of conflicts--particularly over trade. The worst fear is that the London summiteers will repeat the "go-your-own-way" approach that marked last year's meeting in Houston. Then, allies glossed over disagreements on cutting farm subsidies--a dodge that backfired six months later when the Uruguay round of multilateral trade talks broke down because of the issue. "We're all haunted by Houston," says a senior Canadian official. This year, the outlook for resolving the farm subsidy conflict is no brighter.

STUBBORN RATES. Nor can the G-7 leaders take much comfort in the prospects for world growth (chart). Bush will assure the summit that the U. S. has pulled out of its 11-month recession. But Washington will remind its allies that the global economy will remain sluggish unless they decide to pitch in--preferably with interest-rate cuts.

That campaign got an unexpected boost on July 1, when the Bank of Japan cut its discount rate a half-point, to 5.5%. The move reflected Governor Yasushi Mieno's concern that the latest Tokyo Stock Exchange scandal risks further undermining Japan's sagging equity market. Even more important, Mieno wants to be sure that Japan's nearly five-year growth spurt continues. Still, chances for more rate cuts soon are dim. "Mieno isn't trying to stoke the fires of the economy," says economist Paul A. Summerville of Tokyo's Jardine Fleming Securities Ltd. "He's just trying to keep them warm."

Japan's modest action isn't likely to placate Treasury Secretary Nicholas F. Brady, who wants Germany to follow suit. With inflation rising and the mark falling as reunification outlays explode, the Bundesbank has steadfastly refused to cut interest rates. But with several European countries already in a slump, Washington fears that continued tight money will undercut U. S. exports, which are fueling the American recovery. Says a senior U. S. official: "High European interest rates dictated by Germany aren't very good for world growth."

With little unity in store on the economic outlook, the last thing the summiteers want is a major distraction. But that's precisely what they'll get when Gorbachev rolls into London for a July 17 meeting with the G-7 and a private lunch with Bush. Gorbachev will be "the eighth member of the London summit," says Kazumasa Kusaka of Japan's Ministry of International Trade & Industry. The result in his view: Western leaders "will spend disproportionate time" groping for a unified approach toward the Soviet leader, who plans to renew his call for money and technical advice.

The White House isn't thrilled about Gorbachev's scene-stealing potential. To deflate some of his demands, Bush will challenge the Soviets to show that they're serious about rebuilding their shattered economy. Those close to Gorbachev say he'll respond by promising to create a market economy, including private property rights. He'll agree to liberalize foreign-investment rules. And Soviet officials say he will bring a list of defense factories ready to convert to civilian production with the help of Western companies.

'NO MONEY.' Those promises won't get Gorbachev much. At Bush's insistence, the G-7 will probably limit aid to specific help for a few targeted projects, including energy development, assistance in rebuilding the country's food-distribution system, and the conversion of those defense factories. Moscow can also expect associate membership in the International Monetary Fund, which could pave the way for IMF technical advice.

What cash does flow to Moscow will come largely from Europe. The U. S. is willing to allow the European Bank for Reconstruction & Development to open its spigot a bit--but not to the tune of billions, as the French and Germans would like. The West may also set up a currency-stabilization fund to help moderate Soviet inflation next year, when Gorbachev plans to turn the ruble into a convertible currency inside the Soviet Union. Even so, there's no chance that the sums will approach the Marshall Plan scale proposed by a Harvard-Soviet team (page 26). "The West is saying, `This is a beautiful program, start fulfilling it,' " says Oleg I. Ozherelyev, personal economic adviser to Gorbachev. "But there is no money."

The Administration hopes that the horse-trading will at least give Gorbachev the political boost he needs to press for reform at home. "It's not that Gorbachev wants to leave London with a check," says one senior U. S. official. "But he needs to be able to say that if Moscow moves to radical reform, the West will be there to back it up."

Gorbachev's high profile in London will almost certainly muffle the pleas for help from Eastern Europe. The U. S. had hoped to use the meeting to pressure Western Europe into importing more farm products from the East. But the European Community, true to its stance in the Uruguay round, is resisting. There isn't much hope that restrictions will be lifted on textiles or steel, either. "It's just bad luck that their exports are precisely in industries that are very sensitive," says a top EC aide.

In the end, little may be settled at the London summit. Indeed, with foreign policy dominating the meeting, Western leaders won't have much time to devote to economic discussions. That may leave the G-7 wondering if Bush's new world order isn't as contentious as the old one.

THE G-7'S

FIVE BIG

CHALLENGES

GORBACHEV

The Soviet leader's presence risks skewing the summit away from the economic agenda and toward Moscow's reform woes. Meanwhile, the G-7 lacks consensus on conditions for providing Gorbachev help

EASTERN EUROPE

Gorbachev's problems could sidetrack discussions on ways to advance privatization in Moscow's former satellites. Efforts to ease trade barriers may also suffer

INTEREST RATES

Treasury Secretary Brady wants G-7 partners--particularly Germany--to spur expansion with interest-rate cuts. But Germany, beset by unification woes, won't budge. And a U.S. recovery may undercut Brady

EXCHANGE RATES

Europeans fret that the strong U.S. dollar will feed inflation and force interest rates up. But the U.S. won't accept a firmer lid on the greenback

TRADE

Failure to shift the Uruguay round of multilateral trade talks out of neutral could jeopardize the global trading system. Leaders need a breakthrough on U.S.-Europe farm subsidy issues

DATA: BWBill Javetski, Mike McNamee, and Douglas A. Harbrecht in Washington, with Rose Brady in Moscow, Blanca Riemer in Paris, and bureau reports


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