(FORTUNE Magazine) – America's trade policy--which has revolved around the concept of free trade for 50 years despite periodic outbreaks of protectionist fever--is nearing an important potential inflection point. Presdent Clinton has stayed close to the course set by his immediate predecessors: That means using threats of trade sanctions and tariffs to force other countries to allow U.S. companies access to their markets (a tactic that's come to be known as "fair trade"). At the same time, it means fighting hard for the broad principles of free trade through continued support of multinational institutions like the World Trade Organization and by negotiating treaties with other countries (like NAFTA--the North American Free Trade Agreement--which Clinton pushed through Congress in his first year in office). His big challenge this year is to pass fast-track legislation, which essentially enables the White House to negotiate trade agreements. If he fails--and there's heavy opposition, especially in the House of Representatives--progress toward free trade will stop, and U.S. trade policy is likely to drift for the remainder of his administration.

Backed by intense lobbying from the U.S. automakers and airlines, among others, opponents of free trade are putting pressure on Clinton's biggest weak spot: Japan. For the first seven months of this year, America's trade deficit with Japan stands at $31 billion, up 16% from the same period in 1996. Though economists generally agree that the trade deficit between two nations is unimportant and that America's overall trade deficit has more to do with its savings (low) and investing (high) than with trade rules, in this case politics trumps economics. Why should we let the Japanese sell more to us than they buy? cry the protectionists. Clinton's critics are pushing the Japan hot button for all it's worth.

The administration recently reacted by slapping a $100,000 fine on every vessel from Japan's three major shipping companies that has docked in an American port since Sept. 4. The first trade sanctions that the U.S. has imposed on Japan in over a decade, this little-noted initiative is certainly the most aggressive move against Japan since Clinton's reelection. In addition to the port tax, Treasury Secretary Robert Rubin and his deputy, Lawrence Summers, have made a series of statements suggesting that Japan deal with its continuing economic funk by stimulating its domestic economy. The not-so-implicit warning: If Japan tries to export its way out of trouble--what it's tended to do in the past--there'll be trouble.

In another get-tough-on-trade initiative, the Clinton Administration in early October accused Australia, Canada, the European Union, and South Korea of unfair trade practices. This is the first step in a legal process that makes them possible targets of future U.S. trade sanctions.

This isn't the first time in recent history that a president has responded to a protectionist groundswell by resorting to nickel-and-dime trade maneuvers that seem at odds with the larger goals of free trade. After the back-to-back recessions of the early 1980s produced a virulent strain of protectionist, anti-Japanese sentiment, the Reagan administration beat up on the Japanese pretty regularly, persuading them to voluntarily restrain their exports of steel, semiconductors, and automobiles.

One reason for the current sound and fury over bilateral trade is that the Administration needs to burnish its image as a tough negotiator in order to disarm the protectionists. Clinton has a far more important trade battle to fight on Capitol Hill right now.

The fast-track legislation that Clinton is seeking would enable the Administration to negotiate trade deals by itself and then present them to Congress for a yes-or-no vote. Every President since Gerald Ford has had the authority to negotiate trade agreements via this efficient political tool, and with good reason: By the time a proposed trade agreement reaches Congress, it's already months--if not years--in the making, sometimes involving negotiations with dozens of other nations. It is impractical to renegotiate such a treaty if Congress wants to rewrite it. Clinton's fast-track authority expired in 1994.

Less than two weeks after his administration imposed the shipping sanctions on Japan, Clinton asked Congress to renew his fast-track authority, while incorporating minimal environmental and labor standards favored by the unions and environmentalists. This attempt to please everyone failed. On Sept. 29, Clinton reached a "compromise" with Congress that effectively wate red down the standards in the hope of getting "clean" fast-track legislation approved. The next day House Speaker Newt Gingrich declared fast track in "deep trouble" because Clinton hadn't mustered enough support among Democrats--the very people the standards were supposed to please.

What would the defeat of fast-track legislation mean for the U.S. position on trade? For one thing, Clinton would have to shelve his plan to extend the principles of NAFTA to South America and Asia. ("Fast track has become a referendum on NAFTA," says Dan Griswold, a trade expert at the Cato Institute.) Far worse, it would preclude any major trade initiatives to the end of the century. If the next president were an ardent free-trader like George Bush Jr., the failure of fast track might be remembered as an aberration. But if Clinton is succeeded by a protectionist like Dick Gephardt or by someone with no fixed views on trade, it could seem, in retrospect, a fateful step away from free trade.

REPORTER ASSOCIATE Lenore Schiff