The Increasing Importance of Economic Diplomacy

Symbolizing of peace. Hand of North Korea gives a help for a hand of the United States

Peter A.G. van Bergeijk and Selwyn Moons look at and analyse the importance of economic diplomacy.

The major lesson from the Great Depression abruptly seems to have been forgotten: protectionism and trade disintegration are rambling at the gates. Multilateralism and regional integration are no longer certainties. Indeed, we are witnessing an unprecedented change in geopolitics with a clear impact on the international business environment. Uncertainty, lack of trust and unpredictability are the building blocks of a new world ‘order’. Negative interaction with important allies, well-established trading partners and even member states of economic unions and regional trade agreements make the headlines nowadays. Is there a role for economic diplomacy in this context?

BRAVE NEW WORLD

Four key stylized facts that apply to this new environment make the RESEARCH HANDBOOK ON ECONOMIC DIPLOMACY timely and highly relevant

  1. In the brave new world of Trump and Brexit trade and investment uncertainty increases significantly with a negative impact on trade and investment.
  2. Trump’s open confrontational approach to foreign policy as a form of negative diplomacy bears costs both in the US and abroad.
  3. Bilateral relationships become more relevant and valuable, especially for developing and emerging economies.
  4. Bilateral economic diplomacy needs to be carefully designed and properly managed in order to generate optimal impact

We started the project that led to the Research Handbook well before the election of Donald Trump and the referendum on Brexit. The Research Handbook, however, offers relevant and focused contributions that are valuable for current and future policies. First, in addition to the full coverage of positive interactions our contributors also explicitly consider the impact of negative interaction. Second, the Research Handbook in addition to the analysis of OECD markets provides a comprehensive set of detailed empirical analyses of developing and emerging economies in Africa, Asia and Latin America. The contributions by 31 leading experts from industrial nations, emerging economies and developing countries in five continents provide a unique perspective on both the heterogeneous dynamics of economic diplomacy and the tools to analyse the impact and efficiency of economic diplomats both qualitatively (case studies, interviews) and quantitatively (macro-economic gravity models, micro-economic firm level data, surveys, meta-analysis, cost benefit analysis). Third, the Research Handbook provides detailed discussions of information requirements, data coverage and the impact of (changes in) the level and quality of diplomatic representation. The studies in the Research Handbook thereby reveal how and under which conditions economic diplomacy can be effective, providing clear guidance for evidence-based policy.

PREPARE FOR THE NEW GLOBAL CONTEXT

Analysts of economic diplomacy would seem to have been ill prepared for the twitter tsunami and the watersheds in international policy as the existing literature typically deals with positive interaction. A clear example of this limited focus is the literature on economic integration, but also the literature on commercial diplomacy has focused on ways to stimulate exports and bilateral investment, i.e. state visits and other trade missions, the role of (economic) diplomatic staff and structures and the role of trade promotion institutions. The Research Handbook of course covers positive economic diplomacy as it remains an important activity (with major contributions from Mario Cruz, Daniel Lederman, Arjan Lejour, Christian Volpe Martincus, Volker Nitsch and Laura Zoratto). The Research Handbook, however, goes beyond traditional approaches. The analysis of modi operandi is strengthened by consideration of new forms and new agents in economic diplomacy, such as business diplomacy (Désirée van Gorp), iDiplomacy (Gorazd Justinek) and the management science of commercial diplomacy (Olivier Naray). Comparative perspectives are also provided, for example for the major EU countries (Filippo Vergara Caffarelli and Giovanni Veronese). Furthermore, building on the economic diplomacy literature, Henri de Groot, Marcel van den Berg and Michiel de Nooij provide the first cost benefit analysis of economic diplomacy, showing its important potential contribution to economic welfare. The study of positive economic diplomacy is thus further established and has a clear message: it works and contributes significantly to welfare.

Additionally, Andrew Rose, one of the seminal contributors to this literature moves away from the narrow focus of trade and investment promotion by also considering sanctions and soft power. Indeed, the Research Handbook significantly extends the existing analysis by investigating the impact of negative forms of economic diplomacy in several ways (Table 1).

Table 1 Positive and negative economic diplomacy

Positive interaction State visits, Export promotion, Development cooperation Establishing/ upgrading diplomatic representation Signing of Treaties, regional economic integration, membership of international organizations
Negative interaction Boycott, Embargo, Financial sanctions (temporary) closing of embassies and consulates; withdrawal of Ambassadors Exits, non-adherence to rules, regulations and/or obligations, Multilateral sanctions
Bilateral economic diplomatic exchange Bilateral economic diplomacy infrastructure Multilateral economic diplomatic events and structures

The reason for this broadening is that the mainstream focus on positive interaction is problematic from a policy perspective because current developments reshape the future importance of the constituent parts of economic diplomacy. Moreover, from a scientific perspective “natural experiments” of negative interaction offer new, exciting and valuable insights Examples include the chapters on China’s trade and development policies (Andreas Fuchs, Arjan de Haan and Ward Warmerdam), sanctions against Iran (Sajjad Dizaji) and the consequences of Brexit and MAGA for the Liberal Peace (Mansoob Murshed). These examples show under which conditions negative economic diplomacy bites and demonstrate that reactions and adjustments to positive and negative interactions are not symmetrical. The Research Handbook thus provides a comprehensive analysis for evidence based policies in the coming decade.

GLOBAL RELEVANCE

One of the important lessons from practice (Kishan S. Rana) and science is that economic diplomacy has especially significant impact in the international economic relationship of developing and emerging economies (Selwyn Moons and Renata Cavalcanti Muniz provide a meta-analysis and a structured review of empirical findings and qualitative case studies, respectively).This important finding is underlined by the analysis at the global level in relation to the complexity of the traded product (Moons and de Boer) and at the level of countries and country groupings in Africa (Sylvanus Kwaku Afesorgbor), Central and Eastern Europe (Hugo Lapeyronie, Mathilde Maurel and Bogdan Meunier), Latin America (Phil Compernolle and Mark Vancauteren) and Asia (Prahastuti Maharani). Importantly, these studies often include new elements recently covered in the literature, such as the extensive and intensive margins of trade, negative interaction, invisible barriers to trade, the business climate and the quality of economic diplomatic representations. One of the key topics that we currently face is to better understand the conditions under which trust rather than uncertainty can be created by economic diplomacy and how the contribution of trade to sustainable development can be strengthened globally, regionally and locally. The Research Handbook shows that the analysis of economic diplomats and their interactions with states and stakeholders promises to be a very versatile future research area.


Edited by Peter A.G. van Bergeijk, Erasmus University and Selwyn J.V. Moons, Erasmus University and PwC, the Netherlands


van Bergeijk Hbk
Research Handbook on Economic Diplomacy is available now. Read chapter one free here.

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