THE HOUSTON economic summit starting tomorrow, where Japan will play an unprecedented, high-profile role, dramatizes the shift from the Cold War preoccupation with military power to a new global economic struggle in which the United States is steadily losing ground.

Despite this shift, and in marked contrast to its cooperation with Moscow in shaping a new Europe, the Bush administration is ignoring the equally important new opportunity now emerging to restructure its obsolete Cold War policies in Asia.

Washington spends an estimated $42 billion a year to maintain its 135,000 military personnel in the Far East, plus another $50 billion on its closely meshed Indian Ocean forces. Soviet proposals for sweeping superpower force reductions in the Pacific and Indian oceans have offered Washington a graceful way to downgrade this costly military presence and focus instead on the growing economic challenge posed by Asian competitors.

But the administration has rejected these overtures out of hand. Defense Secretary Richard Cheney has served notice that the "major portion" of U.S. forces now in the region will remain indefinitely "even if the Soviet Union is not engaged there." This flat rejection of arms control in Asia not only hampers the overall improvement of Soviet-U.S. relations, it also undermines our economic bargaining position in dealing with Japan, South Korea, Taiwan and Southeast Asian countries.

For the last four decades, in return for their military and diplomatic cooperation, Washington has helped Tokyo, Seoul and Taipei build their economic power by accepting trade and investment relationships based on an implicit understanding that U.S. markets would be relatively open while those of its partners would be much more restrictive. Critical American technology and industrial know-how have repeatedly been transferred at low cost in the name of military imperatives. The tolerant U.S. attitude toward the recent Japanese acquisition of prohibited Star Wars technology and disputes over co-production of the Japanese FSX and South Korean FA-18 fighter aircraft are only the latest examples of this behavior pattern.

Tokyo, Seoul and Taipei were quick to milk the security relationship for economic advantage. Until recently, however, Washington, mesmerized by the communist specter, was blind to the shift in economic power. Japan's military "free ride" is a favorite target of American critics. But South Korea's meteoric economic rise has also been accelerated by American economic and military aid and the subsidy provided by U.S. military protection.

Preoccupied with China as a military threat, the United States pumped massive aid into Taiwan to build it up as a counterweight. Taiwan, like South Korea, continued to receive trade concessions under the Generalized System of Preferences until January 1989. Now the island has piled up $71 billion in foreign-exchange reserves. Out of a $109 billion U.S. trade deficit in 1989, Tokyo ($49 billion), Taipei ($13 billion), and Seoul ($6.3 billion) accounted for nearly two-thirds of the total.

Was the subordination of economic interests to geopolitical priorities unavoidable in the context of the Cold War? Whatever history's verdict, Soviet readiness for far-reaching arms control measures now makes it possible for Washington not only to achieve significant budgetary savings, but to put economic priorities first and to strengthen its leverage with the East Asian capitals. In a more relaxed security environment the United States could formulate an integrated national economic strategy without worrying about whether it jeopardizes military links. Moreover, in both Japan and South Korea, looser security ties would relieve built-in tensions now multiplying as a result of differences concerning the nature of the security relationship.

While the U.S. response to the challenge of the Asian economies should come in the economic arena, Washington has in fact been making ever more insistent demands for greater defense "burden-sharing" to offset high U.S. trade imbalances. Yet in Japan -- which devotes only 5 percent of its budget to defense compared to the 25 percent still spent by the United States -- even conservatives accept "burden-sharing" only to the extent that it means spending more on the defense of the Japanese home islands, not on the wider commitment to Pacific defense that undergirds U.S. military policy.

Nationalism is growing in Japan and is likely to take an anti-American direction if the United States fails to keep pace with growing sentiment in favor of a reduced superpower military presence. Defense Secretary Cheney has justified the U.S. presence by warning that "a vacuum would quickly develop" in its absence. But the concept of a vacuum to be filled smacks of the "white man's burden" mentality and casts the United States in the role of a gendarme insuring stability in a region where it is increasingly excluded economically.

Privately, U.S. officials argue that a U.S. presence is needed to prevent Japan from dominating Asia militarily as well as economically -- an argument that breeds resentment in Tokyo.

The Soviet Union, for its part, is linking its regional arms-control overtures with exploration of a deal in which some or all of the Kurile islands, awarded to the Soviets after World War II, would be returned to Tokyo or placed under a U.N. trusteeship in return for Japanese help in Siberia. But any Tokyo-Moscow agreement would presuppose U.S. concurrence in demilitarization of the islands as part of a process of regional tension reduction.

The first step in such a process should be the inclusion of naval arms control in global Soviet-American arms control agreements. The United States should then encourage a Japanese-Soviet territorial settlement, work with Tokyo and Moscow to defuse tensions in Korea and encourage a variety of Asian arms-control negotiations encompassing China and Japan.

In some areas, American policies should be tougher, while in others they should be more flexible. The need for a firmer posture is particularly urgent in the case of military co-development and technology cooperation arrangements. The United States should not propose co-production unless it will clearly get back as much in technology and value added as it gives. Nor should it trade advanced U.S. technology to achieve the goal of compatible weaponry among allied forces. For example, the proposed co-production of the South Korean FA-18 would have to be justified on its economic merits rather than as a gesture to an ally. It could then be determined whether its economic advantages outweigh diplomatic factors during a period when arms-control efforts are contemplated between the two Koreas.

The administration should also abandon such ill-advised "tough" policies as the Structural Impediments Initiative (SII) talks. In fact, the recent agreement with Japan on public-works spending and on procedural concessions relating to supercomputer exports is not likely to reduce the trade deficit substantially. Moreover, by seeking to make the distinctive Japanese economic and social system a clone of the American system, SII risks triggering a dangerous nationalistic backlash.

The SII approach is a natural outgrowth of the presumption that Japan and its Pacific Rim emulators adhere to economic and political principles identical to our own. So long as this fiction is maintained, the size of the trade imbalance with Japan will be incorrectly identified as the underlying problem in Japan-U.S. relations. Yet the U.S. has a large trade imbalance with Saudi Arabia and no trade friction. A more realistic approach would acknowledge that the real threat to the relationship lies in differences in government-business coordination, industrial concentration and market access that make it increasingly difficult for key sectors of U.S. industry to withstand sustained Japanese assaults.

Such a non-moralistic, non-combative approach would emphasize domestic initiatives to revitalize the U.S. industrial base through increased research and development spending and other measures. But it would also presuppose a new foreign economic policy based on reciprocity, designed to assure the survival of key industries facing government-backed foreign competitors operating under different ground rules.

Aerospace, electronics, semiconductors, supercomputers, telecommunications, biotechnology, advanced ceramics and engineered plastics are among such industries. When other countries target these industries through closed markets, subsidized prices and other policies, the United States would make clear that it will sustain them both through positive domestic programs and appropriate countermeasures. In some cases, the United States might decide to make entrance into its market conditional on reciprocity.

Some may call this protectionism. But a look at an actual example of this approach suggests a different perspective. In the belief that a viable airline industry is an important component of national security, the United States negotiates the structure and conditions of the market. Deals specify numbers of destinations and flights and the amounts of landing fees. Competition remains and no one knows at the end of negotiations what share of passengers the U.S. airlines will carry. In practice, market shares fluctuate and passengers have meaningful choices.

Without official acknowledgement, the United States is pursuing reciprocity surreptitiously in the case of supercomputers. In response to below-cost Japanese export pricing and restricted market access in Japan, the U.S. government has pressed MIT and other institutions not to buy Japanese supercomputers. In a new environment, the United States would openly negotiate bidding conditions, numbers of institutions open to foreign bidders and other market parameters in industries targeted by foreign governments.

American dependence on East Asia for debt financing and some types of industrial technology rules out a table-pounding, take-it-or-leave-it approach. By the same token, however, it would be incorrect to assume that the United States is now at the mercy of Japan because Tokyo helps subsidize the U.S. budget deficit by buying Treasury bills and other U.S. assets.

Japanese investments in the United States mean that Japan now shares a substantial stake in continued U.S. economic growth and stability. But acknowledging interdependence need not and should not preclude efforts to maximize our bargaining power by using arms control to reduce U.S. military dependence on Asian economic adversaries. Just as the peculiar psychology of the Cold War helped undermine U.S. competitive power, so the end of the Cold War could become the catalyst for a new American global role keyed to emerging economic and political realities rather than a declining military threat.

Selig Harrison is a senior associate at the Carnegie Endowment for International Peace. Clyde Prestowitz is president of the Economic Strategy Institute. This article is adapted from an article in the Summer 1990 issue of Foreign Policy.