Houston Summit: Can Big 7 Avoid A Split Into Blocks?

WHEN the leaders of the seven major industrial democracies gather in sun-fried Houston Monday, they will face a radically altered world. ``It is really the first of the post-cold-war economic summits,'' says Robert Hormats, who helped prepare economic summits from 1975 to 1982 and is now vice chairman of Goldman Sachs International, an investment banking firm.

In the 1970s, economic summits dealt mostly with inflation, slow growth, recession, and the energy crisis. In the '80s, the main issues were third-world debt, exchange-rate matters, and international payments imbalances.

In Mr. Hormats's view, one overriding concern for the summits of the 1990s will be to prevent centrifugal forces from dividing the Western world.

``The concern here is that as the compelling drive of the Soviet threat ... no longer forces the Western allies to work together, the economic issues could begin to pull them apart,'' he says.

The Berlin Wall has tumbled since the Group of Seven's last annual session started on July 14, and West Germany's mark became the currency of East Germany last Sunday, starting an economic union that is expected to become political next year.

The Soviet Union is now a candidate for Western aid.

``Whereas last year Western economic aid to the Soviet Union was unthinkable, now in the minds of many it is urgent,'' says Michael Mandelbaum, a senior fellow at the Council on Foreign Relations.

In effect, the United States has approved observer status for the USSR in the General Agreement on Tariffs and Trade (GATT), beginning the process of joining the noncommunist economic system. In May, the US relaxed its curbs on the sale of high-technology goods to an ``Eastern bloc'' that is no longer a real bloc.

The USSR's East European allies are struggling with a switch from communism to capitalism, from party dictatorship to democracy, from economic stagnation to prosperity. Members of Comecon, the economic arrangement of the Soviet Union and its East European allies, have agreed to move toward a market-based system of free trade.

When they met in the Palace of Versailles last year, the Seven (US, Japan, West Germany, France, Britain, Italy, and Canada) sent China to the doghouse for its violent crackdown on pro-democracy demonstrators. New loans to China were suspended. Diplomatic relations were cooled. Only recently have the Seven tentatively moved to reinstate China into their good graces.

In Houston, the US will try to give a shove forward to one key potential source of economic unity, the Uruguay round of trade negotiations under GATT. The talks are scheduled to reach a conclusion by year-end. But success is far from a foregone conclusion.

C. Michael Aho, director of economic studies at the Council of Foreign Relations, worries that the 12-nation European Community (EC), because of its 1992 unification effort, might prevent the round from obtaining substantial results, particularly in the trade of farm goods.

``If the EC blocks progress ... the pressures for the existing multilateral trading system to fragment into regional trading blocs could become overwhelming,'' he says.

Indeed, Mr. Aho believes the emergence of some form of regional blocs is probably inevitable in the 1990s. Success in the current trade negotiations would help keep relations among American, European, and Japanese trade blocs benign rather than belligerent.

Another crucial issue at the Houston summit and summits to come will be bringing the East European nations, the Soviet Union, and many of the third-world countries into the international economic system in a more participatory way, Hormats says. These countries must share both responsibilities and benefits of that system.

He expects the EC and Japan to use the summits ``to encourage the United States to continue to play a responsible role despite the end of the cold war and despite its budget and current account, trade deficits.''

Hormats says Japan and the US should utilize summits to ensure that the EC continues to look outward even as it develops its single market by 1992 and makes trade deals with countries belonging to the European Free Trade Agreement (including Austria, Switzerland, Sweden, Finland, and Iceland), and the nations of East Europe. And Europe and the US should encourage Japan to play a greater role in the global economic and political system.

Meeting in Dublin, June 25, the EC leaders agreed in principle to provide economic assistance to the Soviet Union. But they stopped short of committing themselves to a specific program or price tag.

West German Chancellor Helmut Kohl and French President Fran,cois Mitterrand have promised to bring up the Soviet aid issue in Houston. Mr. Bush has reportedly dropped his negative attitude on direct aid to Moscow, though he may not offer US money because of budget problems and opposition in Congress.

West Germany has a special interest in using aid to the Soviet Union as an encouragement to remove its troops from East Germany.

Hormats suggests the US participate in supporting housing at home for Soviet troops taken out of Eastern Europe. This could encourage their withdrawal and eventual demobilization after disarmament talks conclude, he contends.