Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: TUESDAY, June 27, 1995                   TAG: 9506270063
SECTION: BUSINESS                    PAGE: B-6   EDITION: METRO 
SOURCE: Associated Press
DATELINE: WASHINGTON                                  LENGTH: Medium

U.S.-JAPAN TRADE TALKS REACH LAST-DITCH EFFORTS

If Japan and the United States launch an all-out trade war - no longer considered unthinkable - some believe the battle between the world's two largest economies could trigger a worldwide recession.

Economists concede that would be the doomsday scenario. But even the most optimistic say such a fight would reduce economic growth and have worldwide repercussions, although most believe that Japan, already at risk of dipping into recession, would suffer more than the United States.

``Both countries are playing with fire,'' said Robert Hormats, a vice president at Goldman Sachs in New York. ``You can't have a trade dispute of this magnitude between the two biggest financial powers in the world without an impact on other areas.''

Of course, last-ditch talks that began Monday between U.S. Trade Representative Mickey Kantor and Japanese Trade Minister Ryutaro Hashimoto could yet produce an agreement before U.S. sanctions on Japanese luxury cars take effect at 12:01 a.m. Thursday.

But if those discussions don't succeed - and prospects are cloudy at best - then analysts said U.S. policymakers should start working on contingency plans to deal with the fallout from what threatens to become the biggest trade dispute since the 1930s.

The first shoe to drop could well be counter-retaliation by Japan, where officials met last week to discuss imposing their own punitive tariffs. High on the hit list are two of America's biggest sellers in the Japanese market - food and aircraft.

If Japan does retaliate, that would fit the classic definition of a trade war, in which sanctions by one country are met by counter-retaliation by the other nation.

The Japanese, however, might choose to retaliate in another way. Some believe Japan's recent rejection of President Clinton's call for a tougher economic embargo against Iran was just such a retaliation. And they suspect that Japan's hard-line stance in a fight with Federal Express over expanded landing rights could be another spillover from the bitter auto dispute.

There also has been a rumor clouding U.S. financial markets that the Japanese might stop buying U.S. Treasury bonds. That would put upward pressure on American interest rates as the government would be forced to pay more to sell its debt.

Even if Japan doesn't seek retribution in bond markets, economists warn that markets, fearing further hostilities, are likely to remain jittery if the U.S. sanctions go into effect.

The economists believe the biggest threat to the U.S. economy will come from any further weakness in the dollar, which could make inflation worse in this country by making imports more expensive and could keep the Federal Reserve from cutting interest rates to fight off a potential U.S. recession.

The economic fallout in Japan would be even worse. The Japanese economy is already teetering on the brink of another recession, with its exporters hurt by a yen that has gained 15 percent in value against the dollar just since the first of this year.

Weakness in the world's second-biggest economy would be coming at a time when there are growing signs of a slowdown in the United States and Europe. It would not take much, analysts warn, for such a slowdown to spiral into a global recession.

Another victim in an all-out trade war would be the World Trade Organization. The United States, which fought hard to create the new global referee for global trade disputes with expanded powers, is now being universally condemned for bypassing the WTO with its threat of unilateral sanctions.

``As is often the case when you have these kinds of fights, there are no winners,'' said Allen Sinai, chief economist at Lehman Brothers in New York.

Given the bleak prospects, the pressure should be growing for both countries to compromise and reach an 11th-hour agreement, as they have done so often in the past. But many analysts fear that entrenched positions on both sides make such an outcome less likely this time.

``On any grounds of economic rationality, the wisest course would be for a settlement. But this fight has more to do with politics than economic rationality,'' said David Wyss, an economist at DRI-McGraw Hill.