Economic diplomacy

Economic diplomacy is a form of diplomacy. Economic diplomacy is the use of the full spectrum economic tools of the state to achieve its national interest. Economic diplomacy includes all the economic activities, including but not limited to export, import, investment, lending, aid, free trade agreements etc.^[1]

Economic diplomacy is concerned with economic policy issues, e.g. work of delegations at standard setting organizations such as World Trade Organization (WTO). Economic diplomats also monitor and report on economic policies in foreign countries and give the home government advice on how to best influence them. Economic diplomacy employs economic resources, either as rewards or sanctions, in pursuit of a particular foreign policy objective. This is sometimes called "economic statecraft".^[2]

Background and definitions

Economic diplomacy is traditionally defined as the decision-making, policy-making and advocating of the sending state-business interests. Economic diplomacy requires application of technical expertise that analyze the effects of a country's (Receiving State) economic situation on its political climate and on the sending State's economic interests. The Sending State and Receiving State, foreign business leaders as well as government decision-makers work together on some of the most cutting-edge issues in foreign policy, such as technology, the environment, and HIV/AIDS, as well as in the more traditional areas of trade and finance. Versatility, flexibility, sound judgment and strong business skills are all needed in the execution of Economic Diplomacy.

a. Scope: International and Domestic economic issues – this includes the “rules for economic relations between states” that has been pursued since the World War II. And owing to the increased globalization and the resultant interdependence among state during the 1990s obliges “economic diplomacy to go deep into domestic decision making” as well. This covers “policies relating to production, movement or exchange of goods, services, instruments (including official development assistance), money information and their regulation” (Bayne and Woolcock (eds) 2007)

b. Players: State and non-state actors – As all government agencies that have economic mandates operate internationally and are players in economic diplomacy though they do not describe them as such. Further, non-state actors such as NGOs that are engaged in economic activities internationally are also players in economic diplomacy (Bayne and Woolcock (eds) 2007). Businesses and investors are also actors in the process of economic diplomacy, especially when contacts between them and governments are initiated or facilitated by diplomats.

Berridge and James (2003) state that “economic diplomacy is concerned with economic policy questions, including the work of delegations to conferences sponsored by bodies such as the WTO” and include “diplomacy which employs economic resources, either as rewards or sanctions, in pursuit of a particular foreign policy objective” also as a part of the definition.

Rana (2007) defines economic diplomacy as “the process through which countries tackle the outside world, to maximize their national gain in all the fields of activity including trade, investment and other forms of economically beneficial exchanges, where they enjoy comparative advantage.; it has bilateral, regional and multilateral dimensions, each of which is important”.

The broad scope of this latter definition is especially applicable to the practice of economic diplomacy as it is unfolding in emerging economies. This new approach involves an analysis of a nation's economy, taking into account not only its officially reported figures but also its gray, or unreported, economic factors. An example might be the new Republic of Kosovo; in that emerging nation, widely regarded as a candidate for "poorest nation in Europe", an enormous amount of economic activity appears to be unreported or undocumented by a weak and generally ineffectual central government. When all economic factors are considered, the so-called "poorest" nations are demonstrably healthier and thus more attractive to investment than the raw statistics might otherwise show.

Emerging economies have learned that they are not flowers and businesses are not like bees; in other words, a nation that wants to attract business must be proactive rather than passive. They must seek out opportunities and learn to bring them home. Tax and other concessions will likely be necessary and in the short term costly. However, creative support of new business opportunities can generate major chances for success. This sort of activity is also a part of economic diplomacy.

The sort of economic diplomacy that utilizes a nation's already-deployed corps of diplomats to promote the nation and seek business opportunities is not traditional, but its effectiveness is apparent. Emerging nations seeking to conserve scarce personnel and financial resources immediately benefit from multitasking. To be sure most diplomats have little business experience but most can be trained to be effective economic diplomats; very often this training is best conducted by private contractors who have the required expertise to be effective. One well-known contractor is the Emissary Transition Group, or ETG, which had made a specialty of economic development instruction.

Three elements

1. Commercial diplomacy and NGO's: The use of political influence and relationships to promote and/or influence international trade and investment, to improve on functioning of markets and/or to address market failures and to reduce costs and risks of cross border transactions(including property rights).

2. Structural policies and bilateral trade and investment agreements: The use of economic assets and relationships to increase the cost of conflict and to strengthen the mutual benefits of cooperation and politically stable relationships, i.e. to increase economic security.

3. International organizations: Ways to consolidate the right political climate and international political economic environment to facilitate and institute these objectives.^[3]

Strategies by state

Brazil

Brazil has made a concerted effort to engage in economic diplomacy with the developing world. Brazil has made it a priority to be a leader in sharing technological knowledge in areas such as education and the all important agricultural sector.^[4]

One example of Brazil's economic diplomacy strategy is the Brazilian Cooperation Agency (ABC), which is affiliated with the Brazilian Ministry of External Relations. The ABC has the mandate to negotiate, coordinate, implement and monitor technical cooperation projects and programs with countries, primarily in the developing world, that Brazil has agreements with. As Brazil States:

"Brazil has been investing in agreements with both developed and developing countries to acquire and disseminate knowledge applied to social and economic development. We have practiced the concept of not simply receiving knowledge from developed countries, but also sharing our own experiences with others in effective partnerships towards development.

South-South cooperation contributes to consolidating Brazil’s relations with partner countries as it enhances general interchange; generates, disseminates and applies technical knowledge; builds human resource capacity; and, mainly, strengthens institutions in all nations involved.

Taking these goals into account, ABC has defined focal partners that include African Portuguese-speaking countries (PALOPs), East Timor, Latin America and the Caribbean. In this context, we have started cooperating trilaterally with developed countries as well.

The ultimate goal of technical cooperation – exchanging experiences and knowledge – materializes reciprocal solidarity among peoples and does not only benefit recipient countries, but Brazil as well."^[5]

The ABC is a primary example of how Brazil is using economic diplomacy to fit into its larger national strategy of providing leadership in the developing world.

China

Economic diplomacy is a central aspect of Chinese foreign policy. During China's remarkable economic rise, it has used economic diplomacy primarily through trade, and the use of carrots as a means to accumulate or attract soft power. This was a part of the broader strategy formulated by think tanks in the PRC during the 1990s titled the new security concept. It is referred to in the West as the period of "China's Peaceful Rise".^[6]

Recently, China has changed its strategic doctrine and begun to use economic diplomacy as a coercive tool. After 10 years or so of a policy based primarily on economic carrots, China has begun to show a willingness to use economic diplomacy for coercive means.^[7] This is evidenced in the September 2010 incident that blocked shipments of rare earth minerals to Japan. Another incident took place in 2012 in the Philippines, where China sent a gunboat in to enforce trade restricts. China's willingness to use bring in warships during trade disputes is reminiscent to an earlier era of American gunboat diplomacy.^[8]

Recent history shows that as China grows more confident, we will see it gradually move away from an economic diplomacy policy of carrots, to sticks.

Wang Yang, 3rd Vice Premier of the Peoples Republic of China

Senkaku Islands dispute

After the widely reported incident near the Senkaku Islands in 2010, over which Japan, China and Taiwan all claim sovereignty, China engaged in coercive economic diplomacy. In response to the dispute, China allegedly blocked all shipments of rare earth minerals to Japan, harming their economy.^[8] Whether this embargo indeed took place is unclear, as Japan saw no decrease in rare earths imports during that time.^[9]

2010 Nobel Peace Prize

In response to the 2010 Nobel Peace Prize going to Chinese dissident Liu Xiaobo from the Norwegian Nobel Committee, China froze free trade agreement negotiations with Norway and imposed new veterinary inspections on imports of Norwegian salmon. This caused the volume of salmon imports from Norway shrunk 60 percent in 2011.^[8]

2012 Incident with the Philippines in the South China Sea

Recently, China has become more assertive in its claim that the South China Sea is part of its territory.^[10] This has caused several disputes with the seven sovereign states who also claim part of the South China Sea as their own territory. In one such dispute, China and the Philippines engaged in a standoff over the Scarborough Shoal in which Navy vessels were sent in. In retaliation to this territorial conflict, China engaged in coercive economic diplomacy by blocking Philippine bananas from entering Chinese ports, as well as slowing down the inspections of apayas, mangoes, coconuts, and pineapples from the Philippines. Philippine businessmen pressured their government to stand down. According to Manila, Chinese Vessels now block the entrance to the lagoon, preventing any Philippine ships from entering,^[8] in another example of China using coercive economic diplomacy.

United States

The United States has a long history of economic diplomacy dating back to the dollar diplomacy of William Howard Taft. The United States was also central to perhaps the most important economic diplomacy event, the Bretton Woods Conference where the International Monetary Fund and International Bank of Reconstruction and Development were created. The United States was involved in one of the more notable acts of economic diplomacy in history with the Marshall Plan.

Though it has always played an important role, Economic diplomacy took on increased importance during the first term of President Barack Obama under the leadership of Secretary of State Hillary Clinton.

During a major policy speech as Secretary of State, Clinton stated that economic statecraft is at the heart of (the American) foreign policy agenda.^[11]

Secretary of State Clinton saw economic development and democratic development as inextricably linked. In her speech she explained the importance of its success: "we happen to believe that our model is not only the best for us; we think it embodies universal principles, human aspirations, and proven results that make it the best model for any country or people. Now, there can be variations on how it’s implemented, but we are in this competition to win it. We want to make clear that it’s not only good for America but it’s good for the rest of the world to pursue democratic and economic reform.”^[11]

Clinton laid out the stakes as such: "If people don’t believe that democracy and free markets deliver, then they’re going to be looking elsewhere for models that more readily respond to their daily needs."^[11]

Secretary Clinton saw pursuing mutually beneficial trade between the United States and other areas of the world as central to the American diplomatic agenda. She went on to detail the American strategy for several significant regions.

Secretary of State Clinton's regional economic diplomacy strategies

On Russia: "Even in a U.S.-Russia relationship dominated for decades by politics and security, we are now focused on helping Russia join the World Trade Organization, and we are putting a special premium on protecting freedom of navigation and a rules-based approach to resource development in places like the South China Sea and the Arctic Ocean."^[11]

On Europe: "Together, America and Europe account for half of the world’s economic output, but just one-third of global trade. We can and we should be trading more. At the Transatlantic Economic Council, too often we re-litigate regulatory differences when we ought to be resolving them and avoiding new ones. And this frustrates companies on both sides of the Atlantic. The Transatlantic Economic Council is the forum where we try to resolve these differences, and I believe harmonizing regulatory schemes between the United States and the EU is one of the best ways we can both enhance growth, enhance exports, and avoid duplicative costs. But if you spend weeks arguing about the size of a jar for baby food, that’s not exactly facing up to the potential of the payoff that comes from resolving these issues."^[11]

Former Secretary of State Hillary Clinton prioritized economic diplomacy during her time at the State Department

On China: "We also need to promote the free flow of capital, too. Investment in both directions, backed by well-enforced rules, is vital to creating growth and jobs here at home. For example, last year, the Kentucky-based company that owns KFC and Pizza Hut, two iconic American brands, actually made more money selling pizza and fried chicken in China than in the United States. But this creates jobs at headquarters in Louisville and it creates jobs as well in China. When Tom Friedman warns that the Chinese will “eat our lunch,” I’m not sure that’s what he had in mind."^[11]

On the Middle East: "Consider the transitions underway in Egypt, Tunisia, and Libya. If we want to see democracy take root, which we do, we have to bring advanced tools to bear to help countries reform economic systems designed to keep autocrats and elites in power. And we know that aid alone, no matter how generous, is not enough. We need a sophisticated effort to integrate the region’s economies, to promote investment, and to assist in economic modernization. This is the logic behind the Middle East proposals that the President laid out in May, which I have been urging Congress to support. To succeed, the Arab political awakening must also be an economic awakening."^[11]

On Latin America: "we are also making it a priority to engage with the Latin American jaguars, if you can call them that, which grew by more than six percent last year. Our free trade agreements with Panama and Colombia move us closer to our ultimate goal of a hemispheric trade partnership reaching from the Arctic to the tip of Argentina."^[11]

On the Pacific Basin: "...we will continue to use the Asia Pacific Economic Cooperation Forum, which President Obama will host next month in Hawaii, to push the envelope on open, free, transparent, and fair trade across the Pacific basin."^[11]

India

India has engaged in economic diplomacy primarily through the use of trade and aid. For example, in order to build a stronger, more stable relationship with Bangladesh, India granted it an $800 million soft loan, and provided $200 million in aid.^[12]

India set up a development wing in its government in January 2012. The Development Partners Administration (DPA), is a primary way India uses economic diplomacy, in this case development aid, as a way to engage diplomatically. The DPA is building 50,000 housing units in Sri Lanka, a large transmission line in Puli Khumri, Afghanistan, and extends Lines of Credit projects globally, particularly in Africa.

Economic diplomacy and the DPA are very important to Indian foreign policy. As the former Indian Foreign Secretary Lalit Mansingh stated: "The fact that the DPA division is located in the ministry of external affairs shows it is in sync with our foreign policy objectives of transforming India into a global player”.^[13]

See also

• Commercial diplomacy
• Soft power
• Economic warfare

References