LIKE MOST PEOPLE, I used to believe that free trade helped create prosperity and peace, and that protectionism betrayed consumers to special interests while leading to international conflict. I now believe protectionism is essential for prosperity within nations and harmony among nations. Competition among firms is a good thing, but competition among societies is dangerous.

The problem with free trade is simple: The world has an endless supply of subsistence- wage labor, and we have learned how to make both basic and sophisticated goods in poor, developing countries. Without trade barriers, rich countries are bound to suck in cheap imports from low-wage countries, destroying the domestic industries that used to make those products. There will never be enough new "high tech" jobs to employ those who lose more traditional jobs. Therefore, unrestricted trade would eventually destroy the economies of all the high-wage, developed countries.

What we really need is not free trade (which we don't have anyway), but a better "managed" trade system. In particular, we ought to stop waiting until a domestic industry is on its knees before signaling others who are building up an export capacity that the market won't be there for them.

We also ought to start recognizing that protectionism and trade expansion are quite compatible with each other. Witness the 1970s: protectionism grew in that decade, and world trade in manufactures tripled.

Finally, we should begin facing reality. The reality is that, in one way or another, at least 75 percent of the free world's trade is already "protected" or "managed," meaning that it is subject to quotas, export subsidies, barter arrangements and a long list of other direct government restrictions.

This has long been true for raw materials and food, which account for half of world trade, and services like shipping, which account for 12 percent. It is also increasingly true for manufactured goods, the sector involved in of most trade disputes. Officials of the General Agreement on Tariffs and Trade (GATT) estimate that at least a third of trade in manufactures is managed, which means another 12 percent of total trade under the protectionist umbrella.

World steel, for example, is organized into what amount to three cartels -- the American, the European and the Japanese -- that coordinate among themselves through price and quantity agreements. Fifty developing countries, as well as Canada and Australia, manage automobile trade through "local content" rules -- which require a specified portion of local production as a condition of importing -- while the Atlantic nations limit the number of cars that can be imported. "Voluntary restrictions" are also proliferating in consumer goods and high-tech, big-ticket items like power stations, jetliners, telecommunication and most military hardware are restricted via national procurement ("buy American") rules and local content deals.

Atop of all this, we are seeing more export- targeted industrial policies, export subsidies, and restraint on imports via safety and other regulations.

Nevertheless, it remains fashionable in the industrial world to trumpet the free trade ideal. The result is not merely hypocrisy, a plentiful international commodity with which we have all learned to live rather nicely. The more serious consequence is that protectionism is practiced in ways producing minimum benefits to domestic industry, maximum disruption in trade flows and constant bickering among trading partners.

Without realizing the enormity of what they are saying, otherwise sensible people in effect are calling for slashing wages enough to compete with workers in a South Korea or Mexico, lowering health, pollution and other protections to reduce business costs and other, similar measures. This would be tantamount to our giving up, as a society, the freedom and autonomy to pursue our basic values. In fact, free trade would probably lead to dramatic economic disruption and create large numbers of economically useless people. It might take a police state to enforce it.

How can such dire consequences flow from an arrangement which, by common consent, contributed so much to prosperity since World War II? What is so different now?

One answer is that for the first time in modern history, standard manufactures are being produced everywhere on the globe -- and, importantly, in nations such as Japan, South Korea and Mexico with centrally guided economies. This would not matter much if these quasi-market economies were still small relative to the older industrial countries: The benefit to consumers of cheap imports would outweigh adjustment costs.

Indeed, this arrangement caused no significant problems for 25 years after World War II. In those days, only the old industrial countries were capable of producing modern industrial goods. The exception was textiles, which from 1962 on were governed by an international protectionist regime, now called the Multifiber Arrangement.

The joint monopoly of the Atlantic countries allowed them to set the cost of production -- wages, working hours, regulations, taxes, etc. -- autonomously, provided they all moved more or less in step. Common values, free trade unions and the play of democratic politics led to similar, costly solutions to the dilemmas posed by industrial capitalism.

Not all these solutions were optimal (and trade was a useful instrument for correcting excessive business or labor power). But the result was a historically unique and humane society.

Now, however, the quasi-market newcomers have captured one-fifth of world manufacturing export markets, and they have become the price setters in a growing range of activities. In these circumstances, adjustment becomes more generalized, rapid and painful. In fact, it isn't even possible.

Would we be able to "adjust" wages to an international standard? A classical law of economics says that if both goods and industrial capital can move freely in the world we get, in effect, a single world labor market, even without a single worker crossing a frontier. But for as long ahead as we can see, the free international market "price" for labor -- given the tremendous labor surpluses in the world -- is around a level of bare subsistence.

No doubt some adjustment in relative wages is useful -- although the fact that pay in high-tech Silicon Valley is half that in older smokestack industries should give pause, as should the news that the miserable Philippines is cutting wages, by decree, to regain international competitiveness.

But no cut in real wages could go deep enough to make rich-country workers competitive again. These workers live in a high- cost economy requiring dollar wages 10 times as high as the Philippines merely to survive. Clearly, one cannot simply integrate, through trade and international production, high-cost, relatively full-employment economies, with unbalanced low-wage economies.

Free traders would argue that the dilemma does not exist. Among Reaganites and Atari Democrats alike, there are some who would abandon traditional manufactures and concentrate on high-tech activities. Implicity, this is an argument for recreating, at a higher level, the kind of technological monopoly which the advanced nations only recently enjoyed in virtually all manufacturing. In these sheltered, high-value industries, the argument goes, high wages will continue to be paid, while the whole economy enjoys the benefits of cheaper imports.

The argument is wrongheaded. The market for satellites, bioengineered pharmaceuticals or semiconductors will provide new jobs, but not nearly enough for the people thrown out of work in older industries. The United States, Western Europe and Japan, which are all rushing into the same high-tech niches in the international division of labor, are only likely to end up with expep,nsive overcapacity.

The move to high-tech may be desirable in itself, but it is not a solution to the trade dilemma. At best it will shift protection from a North-South dimension to one increasingly among the industrialized nations.

In the meantime, the goods people buy will remain stubbornly banal: carpets and golf clubs, TV sets and can openers. The way these items are produced is increasingly high- tech, too. But if the final consumer goods are not made in the country, this entire superstructure of sophisticated "inputs" into the production process -- including the much- vaunted services -- will weaken as well. Foreign producers will simply turn to closer suppliers of these goods and services.

Moreover, it is an unconsciously racist mistake to believe that it is the natural order of things for brown people to make simple things like shirts or toys while the highly skilled work force of the advanced countries makes complicated things like machines or computers. In fact, with the state-of-the-art capital equipment now available to them, the best workers in the Third World, who make up its industrial work force, can easily outperform the least educated persons in advanced countries who are their competitors.

On top of this, advances in production technology, notably automation, are rapidly reducing the need for craft-type skills, leaving unskilled workers at one end and technicians' jobs at the other, with little in between. Sophisticated engineering products like ships, airplanes, and machine tools, as well as steel and chemicals, are now being exported from developing (and East bloc) countries. The recent announcement by Atari itself, that it will shift production to Taiwan and Hong Kong at the expense of 1,700 Californian jobs should help put to rest the notion that we can escape our dilemma by the high-tech road.

There is a cruel irony here that we have to worry about impoverishing or simply discarding a substantial part of our population at the dawn of a new industrial revolution which should make all of us richer. But unless we maintain, and indeed increase, our ability to manage our economic affairs in tune with domestic requirements, the new technologies will simply destroy work.

In the last century, from 1873 to 1896, Europe went through a recession at a time of technological breakthroughs in steelmaking, electricity, chemicals and other areas. Despite the cornucopia of potential wealth at that time, wages stayed depressed and unemployment rose, leading to imperialism and an arms race in a desperate and futile attempt to resolve social tensions and the overproduction crisis. During those years Bismarck resisted a law forbidding factory work by women on Sundays with the argument that this would damage German export competitiveness and hence raise unemployment. The current revival of 19th century classical economics is painting us in the same corner.

Then as now, protectionism, which is usually seen as a political cop-out to powerful interest groups at the nation's expense, shows the working of the invisible hand of politics bringing some sense to the rigid application of ideology.

The usual historical reference to protectionism, of course, is to the 1930s and the Great Depression, but that comparison is not nearly as valid as commonly believed. In the 1930s, economic antagonisms were superimposed on serious security conflicts among the main trading "partners." Today, the economic welfare of all non-communist countries, including the developing countries, is a strong political goal of all free world nations. Moreover, existing trade links, investments and debts all militate against curtailing the earning power of trading partners. Protectionism, except in an extreme case like Japan, does not mean autarchy in manufactures.

What, then, are some of the solutions? Some have focused on the need for more stable monetary exchange rates among advanced countries to prevent the periodic "surges" of imports that cause avoidable problems. In the short run, a dearer yen would help, but a cheaper dollar would simply increase the U.S. surplus with Europe.

In general, the relatively liberal trade regime between Europe and America is sustainable. It implies competition among firms, not societies. Yet in sectors like steel where governments intervene heavily, there is no logical alternative to outright market sharing. When the market is deliberately blocked as a coordinator, something must take its place.

What is a special case in Euro-American relations is the general case when trading with Japan. We should continue to welcome Japanese goods for our consumers and to provide a competitive stimulus to our enterprises (although competition in third markets already sees to that). But we should do it on our terms and not simply adjust passively to Japanese industrial strategies. Direct investment and other forms of technology transfer must increasingly take the place of the exchange of goods.

The sooner we abandon free trade rhetoric and clearly signal to Japan our limits of tolerance, the less the chances for conflict and panic protectionism later. This would make it easier for Japan to adjust its investment strategies to reality, and it would provide greater incentives for American firms to engage in risky investments at home.

The same applies to developing countries. The World Bank and others who urge an increasing number of countries (including such giants as India and China) to follow an export-led growth strategy are giving cruel and irresponsible advice. Production capacities are built up with scarce resources, which then stand idle when the West, inevitably, slaps on restrictions. Yet we have lent huge amounts of money on the promise of markets: The ability of developing countries to earn foreign exchange remains crucial.

How can our need for protection be squared with Third World needs for growing revenues? The most general answer must be: by improving their terms of trade. This means they must get a better return for what they sell. But how can this be done?

Price discipline is already a normal feature in Japanese trade and East-bloc trade with Western Europe. India and China, fearing ruinous competition and self-exploitation as they enter world markets, are said to have initiated talks on avoiding such competition. Southeast Asian nations, in cooperation with Brazil and Mexico, could perhaps agree to raise prices. But given the competition for market shares among these countries, self-exploitation would probably remain the rule.

It would be preferable for Western countries to raise duties on imports from Third World nations high enough to avoid market disruption in the West -- and then give this new renevue back to developing countries. This would give resources to these countries to tackle the long-neglected problems of internal development, and especially of agriculture and related industries.

The choice we face is between good intentions that promise ruinous results and policies that face up to the realities of the new global economy.