AFL-CIO President Lane Kirkland yesterday accused the Reagan administration of having a fairy-tale approach to international trade that could end in tragedy for the American worker.

"The administration views the world as it appears in a book, but not as it really is," Kirkland told a joint Senate subcommittee in attacking what has been called the administration's "survival-of-the-fittest" trade policy.

That policy was described last week by Murray Weidenbaum, chairman of the Council on Economic Advisers, who told the subcommittee that the administration "needs to learn to say 'No'" to faltering domestic industries seeking federal aid and protection in inter-national trade.

Kirkland termed the administration's approach a form of "Social Darwinism that had its heyday during the period of the Robber Barons." If the administration stays on its present course in trade matters, "it should be willing to tell the American people how many jobs they are going to lose," the labor leader said.

Kirkland speaking on the third and final day of testimony before the Senate subcommittee on international trade and the subcommittee on international finance and monetary policy, said that the United States needs a "fair trade" rather than a "free trade" policy, because no other major trading nation practices "free trade."

"Other nations do not apologize for pursuing their national interest. Yet the U.S. is under constant assault when suggestions are made to move in the U.S. national interest," Kirkland said in calling for tougher enforcement of U.S. trade laws and international trading agreements.

Kirkland also urged the elimination of "incentives U.S. firms now have to invest abroad" in the alleged pursuit of cheaper labor. "Firms that go abroad for cheaper labor should not be given [federal] subsidies to do so," Kirkland said.

But Edmund T. Pratt Jr, chairman of the President's Advisory Committee on Trade Negotiations and of the private Emergency Committee for Economic Trade (ECAT), told the panel that overseas investment by American firms should be encouraged because it provides economic benefits and jobs at home.

"The importance of international investment to the U.S. economy is often overlooked," said Pratt, who added that "the United States balance of payments benefited in 1980 from U.S foreign direct investment by a net of $28.2 billion."

"Without those foreign investment earnings, the United States' balance of payments would be in catastrophic condition," Pratt said. He said U.S. investments/exports last year also provided jobs for 3.7 million to 5.5 million American workers.