The European Common Market's nine member nations are urged to take a radically liberalized trade policy toward Japan in confidential proposals scheduled for approval by the EEC's executive authority early next week.

The recommendations are bound to be controversial, coming at a time of stepped-up European political and business concern over the threat posed by Japan's export drive. The latest instance of this are the fears voiced to EEC officials Wednesday by the Common Market's car industry over the massive upsurge in Japanese auto imports. This increase reflects both expanded production and a shift in exports from American to European markets. e

In the new European policy stance, EEC officials identify protectionist measures in countries such as Italy, France and the United Kingdom as "a source of growing resentment in Japan quite out of proportion to the economic importance to us of these restrictions." They also seek once and for all to lay to rest the ghost of economic ostracism still felt in Japan because of European trade protection measures specifically directed against it.

Instead of trade protection, which the report terms "20 years out of date," Europe should be offering Japan the same degree of "partnership" as in its links with the United States, the report asserts. But this much-needed partnership, which "stretches from political questions to the practice of technical cooperation," currently is "hindered by the maintenance of national protectionist measures" in Europe, argues the memo.

European protection singling out the Japanese for special treatment includes trade safeguard clauses in France, the United Kingdom and the Benelux countries, import quotas on items such as cars in Italy and television sets in France, and orderly marketing arrangements in a variety of sensitive sectors.

The report is the brainchild of EEC External Relations Director Sir Roy Denman, and is supported politically by top EEC officials Etienne Davignon and Wilhelm Haferkamp. It counsels removal of such discriminatory protection in exchange for parallel concessions by Japan in areas such as leather and foodstuffs.

"In return for the phasing out of our quantitative restrictions, we could get not only the removal of a festering sore in EEC/Japan relations, but aslo improved access in terms of tariff and quota concessions, and increased EEC exports," the report argues.

According to some forecasts, the EEC could have a $6 billion trade deficit with Japan this year, and a major gripe in the community is that the Japanese are more responsive to U.S. trade concerns than to Europe's.

But the European Commission, which is the EEC's executive authority, holds that defensive reactions to Japan's export potential will be counterproductive. Maintaining existing barriers, let alone creating fresh ones, simply will erode the competitive edge of key European industries and ultimately will lead to greater, not less, unemployment, claims the report.

Indeed, the commission clearly is preparing to get tough with individual European countries which flout the liberal stance it is adopting. The report says that countries with discriminating trade measures could find themselves having to answer for their actions before the European Court of Justice in Luxembourg.

There is no doubt that the report will cause concern among some of Europe's embattled industries. Already the auto industry, in a protest made to Davignon on Wednesday, pointed out that Japanese auto imports increased by 23 percent during the first five months of the year.Other sectors nervously watching this increased penetration of Japanese imports in Europe include shipbuilding and consumer electronics.

EEC officials are aware of these fears, noting that "businessmen are very nervous." But in answer to the question, "Is this the best moment to increase their anxieties?" the report holds that "problems do not get any easier by being postponed." At the same time, European policy-makers allow that in certain particularly sensitive areas such as color TVs, the Japanese should show restraint for a while to enable Europeans to regroup to better face international competition.