EDITORIAL\The Chinese dilemma\Doing deals with an old enemy.

THE Clinton administration is in a serious fix over its China policy.

The dilemma has been building for some time, most notably stemming from the brutal treatment of Chinese dissidents. But with Beijing's recent decision to export nuclear technology to Pakistan, the U.S. position is no longer just a matter of humanity; it's one of national security.

The question comes down to this: Does the United States respond to China's undemocratic and potentially dangerous ways by threatening trade embargoes and other economic sanctions - even if such moves undermine our own business interests?

As the administration decides what to do, the U.S. Export-Import bank this week suspended for 30 days new loan guarantees for U.S. projects in China. Although temporary, the stakes are high for U.S. companies like Caterpillar Inc., which plans to bid on the lucrative Three Gorges dam project.

What happens after those 30 days is anybody's guess. What the administration badly needs is a middle-ground policy position - one that somehow balances U.S. business interests and American principles.

We realize it's a tall order. Witness China's truculent and unpredictable behavior involving human rights, its blatant piracy of U.S. compact discs and computer software, and its unresponsiveness to controls on nuclear testing. All these areas would seem to merit more of a response than the overreaction given this week to Cuba, which is of far less strategic importance.

Unlike Cuba, China is very much a part of the world economy. That was made apparent by the U.S. trade deficit with China rising 15 percent last year, to $33.8 billion. Visit a local toy store these days and China's reach will become immediately apparent.

Pat Buchanan and other trade protectionists talk a good case about leveling sharp tariffs against China, but practically speaking, this will only raise prices, damage U.S. business dealings in China, and open the door for other nations to pick up the action.

The dilemma illustrates the price for trading under a global trading tent, and enjoying the economic benefits of its vast, cheap labor pool. And given the huge volume of Chinese products in American stores, U.S. consumers might not be willing to pay the price that economic sanctions would have on the marketplace.

It's up to the administration to better communicate this conundrum with the American people - and then come up with a policy that addresses the reality of China's dictatorial regime, as well as its economic potential.

Without such a policy, Washington will just continue to bury its head in the sand when China acts up, or risk shooting itself in the foot.