President Reagan was bluntly challenged today on the continuing high level of U.S. interest rates, which West German Chancellor Helmut Schmidt said were causing "suffering" in other countries of the world.
Reagan, anticipating a chorus of European complaints about interest rates as the seventh economic summit convened, tried to mollify the concern by blaming the high rates on his predecessor, Jimmy Carter, and saying that it was not deliberate U.S. policy to continue them. At the same time, U.S. Secretary of State Alexander M. Haig Jr. took a tough line on Western trade with the Soviet Union, an issue that promises to be one of the most divisive items of discussion at the summit.
Both the economy and the East-West trade issue were raised directly with Reagan in consecutive face-to-face sessions with Schmidt and French President Francois Mitterrand this afternoon. The two European leaders expressed concern about the impact of high interest rates, and Mitterrand said he hoped they would moderate by the end of the year.
Speaking of the Reagan-Mitterrand meeting, the first for the two leaders, Haig told reporters that he was "inpressed as an observer with their cordial relationship." Reagan and Mitterrand agreed to meet again in Willamsburg, Va., this fall, Haig said.
On the opening night of the summit, the president dined privately with the heads of government of Japan, Britain, West Germany, France, Italy and Canada at the rustic Chateau Montebello, 62 miles west of here. Gaston Thorn, president of the European Common Market, and interpreters were the only others present.
A White House aide, speaking from notes that he said Reagan had made in preparation for the dinner meeting, said that the president intended to appeal "for unity, cooperation and understanding" from the leaders of the other industrialized nations.
"He will indicate high interest rates are not a part of U.S. policy and will not be used as a weapons against other countries," he said. "They were inherited and reflect the high rates of inflation and high deficits he faced when he took office.
"The United States will be firm and steady in its own economic course, and the president believes this course will lead to a reduction of inflation. As inflation abates, interest rates will go down."
The statement of what Reagan was supposed to say was made this afternoon by White House spokesman David R. Gergen, on the condition that his name not be used then, and reflects the position that the U.S. representatives intend to take at the summit. But in a later briefing tonight, White House counselor Edwin Meese III said Reagan never made the statement to the other leaders that Gergen had predicted. Meese also said that the issue never came up at their private dinner. Instead, Meese said, the problem of U.S. interest rates discussed at a separate dinner meeting of economic ministers.
Administration officials have been giving this hopeful forcast for several months and had hoped to have something other than a prediction to show for their contention when the summit convened. But interest rates have not responded to the administration's expectations.
An indication of the impatience on the other side of the Atlantic about this issue came from Schmidt, interviewed on "Issues and Answers" (ABC, WJLA) today just before the summit began.
"The economies of many countries in the world are suffering from the high interest rates in the United States, which, in some way or other, smaller countries have to follow," Schmidt said, "and it's not a great incentive for economic activity . . . We are not interested in cutting down our economic activities even more severely. What we are interested in is bringing about economic activity, bringing about more employment without letting inflation go uncontrolled."
Schmidt said that the world should not expect too much from the summit meeting, which four of the leaders, including Reagan, are attending for the first time. He said the main benefit of the three-day meeting would be that "the leaders of the great industrial democracies [come] to know each other personally."
On another issue, the chancellor denied that neutralism was increasing in West Germany, but added: "There is some anxiety about the political climate for the world deteriorating, which, of course, does make a great difference to Germans, given the fact that 16 million Germans are living on the other side of the curtain, as you used to say."
Haig, appearing in a separate interview on the same ABC program, said that a main concern of the Reagan administration was to avoid building Soviet military strength through the export of sensitive goods and technology.
Such trade, Haig said, gives the Soviets the ability to increase "the use of armed force to effect historic change."
"I think what we should do at the summit is enlarge these concerns by focusing on . . . East-West trade issues to be sure that we are not in the classic sense providing the Marxist system the rope through which to hang the Western world," Haig said.
Schmidt sharply contested the idea that two-way trade between European countries and the Soviet Union is militarily strengthening the communist nation.
He pointed out that West German trade with the Soviet Union is relvatively small, "on the order of our trade with little Switzerland." Moreover, he said, "We need a certain amount of trade to maintain the human communications."
Schmidt then bitingly turned aside Washington's concern that a natural gas pipeline from Siberia to West Germany and France woul make those Western democracies seriously dependent on the Soviets for an important energy source.
"There are some critics in the United States who tell me we shouldn't buy natural gas from the Soviet Union, but they haven't offered me American natural gas, you see," Schmidt said. "And there is the Atlantic, an ocean, between us. where as the Soviet Union is rather nearby."
In discussing East-West trade issues with Schmidt, President Reagan, according to Haig, said that European dependence on Soviet natural gas might be reduced if "alternative sources" could be developed. Haig added that no specific substitutes were discussed, "but we're talking about coal, peaceful nuclear power, and gas and fuel oil."
The sharpness in Schmidt's comments about U.S. concern over the growth of Soviet-European trade presaged what many officials believe is likely to be the greatest disagreement here. They anticipate that Europe is in no mood to go along with U.S. protest on this issue, but Haig's comments today indicated that the U.S. is not likely to back down.