Why Washington Backed Down At The Midnight Hour

"I used to think if there was reincarnation, I wanted to come back as the President, the Pope, or a .400 baseball hitter. But now, I want to come back as the bond market. You can intimidate everybody."

--Presidential Adviser James C. Carville, quoted in The Agenda, by Bob Woodward

There's no need to explain Carville's words to U.S. trade negotiators. The market's shadow dogged their every move last month, as they stared across the table at their Tokyo counterparts, hoping to hammer out the biggest Japanese market-opening agreement in history.

When the breakthrough came Oct. 1, there was relief but no euphoria. A face-saving compromise allowed both sides to declare victory. The financial markets were calmed. But the deal will do little to reduce the $60 billion trade imbalance between the world's two largest economies.

Japan agreed to "significant increases" in government procurement of foreign medical technology and telecommunications but with no timetables and no definition of "significant." Both sides extended negotiations for another 30 days on opening Japan's market for flat glass. Tokyo also agreed to end a skewed deregulation of its insurance industry, which U.S. underwriters claimed was crimping even their 2% of the market. On autos and auto parts, which account for 60% of the U.S. trade deficit, little progress at all was made. And U.S. Trade Representative Mickey Kantor backed away from the so-called Super 301 section, the toughest provision of U.S. trade law.

"A REALITY." American business praised the results as a step forward--but not a major improvement. "You are going to see this kind of outcome from now on," says C. Michael Aho, senior international economist for Prudential Securities Inc. "The sword the U.S. brandishes is a lot duller than it used to be."

If anything, the deal looks strikingly similar to one that Bill Clinton refused to cut with former Prime Minister

Morihiro Hosokawa last February. But that was before investor jitters over the collapse of the so-called framework talks sent the dollar plunging against the yen, upset international bond markets, and helped send U.S. interest rates upward. Now, concedes one senior Administration official, financial markets have become powerful players in trade: "It's simply a reality now, and it isn't going away."

Up until the last moment in the Japan talks, the Administration had threatened to resort to Super 301. But participants on both sides say Japanese negotiators repeatedly raised the consequences of more friction between the U.S. and Japan, pointing out that frightened markets could propel the yen through the roof. Tokyo also repelled the U.S. push for numerical signs of progress by stressing the widespread disdain Asian countries have for what they see as "managed" trade. In the end, the Clintonites backed down. The logic: With midterm elections looming, why set off another financial crisis?

An unsatisfactory end to this round of talks with Japan is just the start of Clinton's troubles on the trade front. On Oct. 5 the House postponed a final vote on the General Agreement on Tariffs & Trade deal until Nov. 29--well after the midterm election. And the President is heading to world trade conferences in Indonesia in November and Miami in December without "fast-track" authority to limit congressional meddling in future trade deals. Suddenly, "Clinton's trade policy in general is in trouble," says Willard Workman, vice-president of the U.S. Chamber of Commerce.

The situation is bitter fruit for Clinton's trade warriors, who came into office vowing to be more assertive in trade policy than the Reagan and Bush Administrations--particularly with Japan. "We took a larger step than some people thought we would take," says National Economic Council head Robert E. Rubin. In the end, though, the Clintonites may have been willing to take on Tokyo, but they couldn't tough it out with the financial markets.