Economic Diplomacy: A Review

Author Name: Dr. Usman W. Chohan      03 Feb 2021     International Economy

Introduction

The aim of this working paper is to present a literature review of economic diplomacy (ED). ED has adorned an increasing importance in international political economy and inter-state relations, which has increased the multi-stakeholder nature of ED engagement and brought with it a shift in the priorities and in the perceptions of public managers towards contemporary diplomacy. For a particularly apt definition, Kejin states that economic diplomacy can be seen as “the peaceful activities conducted by the state or a union of states for resolving frictions and disputes among nations in economic matters when implementing specific foreign policies.”[1] Berridge and James describe ED as diplomacy that “employs economic resources, either as rewards or sanctions in pursuit of a particular foreign policy objective.”[2] Xiaotong surmises that ED is “the achievement by the government of a two-way conversion between power and wealth, through self-initiated strategy, tactics and institution-building.”[3]

An alternative definition that this paper provides is that ED is the “multi-stakeholder process of deploying economic means towards diplomatic ends, and vice-versa; in a manner that creates value between and across publics through a co-creative process involving of international public managers and other important stakeholders.” To some degree, all countries have departments that engage in economic diplomacy, whether through: their formal executive branch, their foreign ministries, their finance ministries, their defence industries, their tourism departments, their media, their banking system, their private sector stakeholders, their intelligentsia, their artists, their sportspersons, or their civil society; among others. However, some countries have taken the nebulous concept of economic diplomacy and given it a more concretized form, either by reshuffling their bureaucracies or through formalized process of coordination. A handful of countries even have specialized strategy documents to delineate their vision for economic diplomacy.

This trend has increased the multi-stakeholder nature of economic-diplomatic engagement, and brought with it a shift in the priorities and in the perceptions of public managers towards contemporary diplomacy. Indeed the “stereotype” of diplomacy, as “the conduct of relations between states and other entities with standing in world politics by official agents and by peaceful means”,[4] or as being “concerned with the management of relations between states and between states and other actors,”[5] is morphing into something different, such that:

[ED] applies to informal negotiation and voluntary cooperation, not to rule-based systems and legal commitments; [traditional diplomacy, by contrast] is a weak and imprecise activity, where conciliation leads only to meaningless compromises; it is elitist, conducted by an establishment of privileged officials; and it is secretive and opaque, with diplomats striking deals in secret conclaves and emerging only to announce agreement. None of these stereotypes apply to economic diplomacy,[6]

Definitional issues notwithstanding, all countries must pay at least some heed to the emergence of the ED phenomenon, mindful of their institutional endowments and capacities. There is in fact a multitude of approaches and priorities in the field, which is reflected in both formalized documentation as well as ad-hoc arrangements of various countries. With those considerations in mind, the purpose of this working paper is to ground economic diplomacy within the public value literature.[7] The argument that ED constitutes an important form of multilateral public value creation is novel in emphasizing ED’s multifaceted impact,[8] and deserves greater attention in the PVT literature more specifically and the public administration discipline more broadly.[9]

Reviewing Economic Diplomacy

The academic discourse around economic diplomacy was driven in large part by the treatise of Bayne and Woolcock (2003), which sought to produce the first comprehensive edited volume that would draw upon international experiences to discuss the emergent practitioner force of economic diplomacy.[10] Their work was highly influential in drawing upon key regional and global experts to distinguish between how economic diplomacy was practiced across nations (as well as supra-nationally), while also highlighting the importance of wider socio-political-economic movements such as globalization, observing above all that “there has been a steady trend towards far more integrated markets in a single economic system covering the entire world, with many more countries active in it.” Although speaking from a largely international relations (IR) perspective, they noted the economic logic underpinning ED, given that “the examination of economic decision-making also illuminates how governments try to make their policies more efficient and how they respond to pressures for greater democratic accountability,” a point that has been raised often in the public value literature as the supposed trade-off between efficiency and accountability.[11]

Bayne and Woolcock acknowledged that “economic diplomacy is concerned with international economic issues. In principle, this should simplify the analysis,”[12] particularly since a rule-based order post-1945 had set the tone for diplomacy through what Ruggie described as “embedded liberalism,”[13] in the sense that national autonomy would not be hampered but a system would be developed for economic relations between states through rules. Some useful input on this front came earlier from Odell, who framed the issues of negotiating the world economy as “policies relating to production, movement or exchange of goods, services, investments (including official development assistance), money, information and their regulation.”[14]

Bayne and Woolcock adroitly described it all as “the process of international economic decision-making, which we call economic diplomacy.”[15] Economic diplomacy is tied to notions of economic statecraft, which has a longer history of analysis,[16] and is rooted in a blend of economics, international relations, and even arguably public administration;[17] but focuses more so on where economic measures are taken in the pursuit of political goals,[18] including punitive actions such as sanctions.[19] Bayne and Woolcock were among the first to highlight the need for coordination among social agents, in what this paper describes as the co-creation of public value, stating that “Now, with the advance of globalization in the 21st century, there are far more non-government players, while ministers and heads of government are active alongside their officials.”[20] Yet the coordination would not be relegated to national public value agents, since “taking a broader definition of security concerns, the problems exposed by the financial crisis and ensuing recession as well as the threat of climate change[21] threaten the international system and still require attention to be given to economic diplomacy:” Of primary interest to their work was the private sector and non-governmental organizations (NGOs), noting that:

“In the past, business firms tended to comprise the most active interest group. They exerted their influence mainly behind the scenes, though recently the financial sector has been forced into the limelight. Now non-governmental organizations (NGOs), grouped as civil society, have also moved centre stage and actively seek publicity to put pressure on governments.”[22]

What would the means of deploying/exercising ED be? Different authors posit different priorities, as do different countries based on their relative strengths. Indeed, Bayne and Wilcock noted that, “[ED] uses a full range of instruments [and] embraces the whole spectrum of measures from informal negotiation and voluntary cooperation, through soft types of regulation (such as codes of conduct), to the creation and enforcement of binding rules,” further noting that “progress is usually made by persuasion and mutual agreement, although economic diplomacy can also be confrontational.”[23] As Bayne and Woolcock observed, a distinctive feature of ED is that it is sensitive to market developments, and grounded largely in a market logic. As Odell noted, “markets can be endogenous to economic diplomacy, in that they form an integral part of the process.”[24] This market focus is similar to the public value problem of bringing in public managers, politicians, and civil society into a market logic.[25] As Benington observed for PVT, the theory was “developed initially in the United States in the early to mid-1990s, at the height of the dominance of the neo-liberal ideology which privileged models based on individual consumers within a private competitive market over communal citizens within a public democratic state”.[26]

Tensions and Systemic Factors

In terms of theoretical value, the main contribution of Bayne and Woolcock is in identifying three inherent tensions and six underlying (systemic) factors that characterize economic diplomacy.[27] The three tensions that they identified, and which all practitioners of ED must be mindful of, are as follows:

  1. The tension between politics and economics;
  2. The tension between international and domestic pressures;
  3. The tension between governments and other forces.

The six systemic factors that they highlight are as follows:

  1. Relative economic power between countries, inspired by its emphasis in realist theories. However, the context in which power is applied is also important
  2. International organizations and regimes: the dense international network of multilateral institutions can “help states to reach cooperative rather than coercive solutions to economic problems.” This is situated in regime theory discussions.
  3. Markets: in ED, markets play a much more central role than in other forms of diplomacy.
  4. Domestic Interests and bargaining: the variety of interests held by different social groups will determine their attitudes towards economic issues, which are deployed by government abroad, acting as agents of the public in value creation. Rationalist theories help inform this debate.
  5. Institutions and the two-level game: drawing upon Putnam’s work,[28] the praxis of agents reconciling internal pressures leads to processes in international negotiation.
  6. Ideas and persuasion: the internal convictions of negotiators, based on their worldviews and ideas, will influence the process of ED. Constructivist theories shed light on this area. Nicholas Bayne and Stephen Woolcock

These factors together can be deployed in understanding a country’s approach to ED, how it is generated, what objectives is pursues, and through the use of which agents and what resources.

Expanding on the evolution of ED, Bayne highlights that “its range greatly increased; new subjects became active, often arousing strong popular concern; it penetrated deep into domestic policies, with many more actors involved inside and outside government;[29] In addition, the second and third world (developing and ex-communist countries) were increasingly integrated into the world system,[30] and so multilaterals were forced to serve a wider public in their value creation efforts.[31] From a public managerial standpoint, the relative power and resources (element of the public value strategic triangle: operational resources)[32] of governments shrunk, and they were attempting to maximize value but from fewer inputs.

To compensate for the reduction in public value operational resources, to address international interests that spoke to their public’s values, and to manage an international system where value creation would be possible, public managers resorted to a new strategy that could be considered “public value co-creation”, and according to Bayne it included the following four elements (discussed here in PVT terms under Chohan’s work on PVT):[33]

  1. Involving ministers: this raised the political profile of ED, increased the domestic legitimacy,[34] and reduced the sense of politics-administration dichotomy[35] through better coordination between politicians and bureaucrats
  2. Bringing in non-state actors; the incorporation of players from outside public managerial backgrounds, including civil society, academia[36] and the private sector. Both brought a different ethos, but speak to public value’s sense of co-creating value. The challenge for government was to spread the load among different players, noting that private sector and civil society have different impacts on ED.
  3. Greater transparency;[37] civil society in particular drove a movement towards “better information, greater clarity, and more publicity.” The pubic articulated a value for greater transparency, and governments sought to respond to this value. For the private sector, greater information would lead to more efficient outcomes. For governments, certain advantages could be realized by transparency such as cross-border tax avoidance. ED has thus become a more open/transparent form of diplomacy.
  4. Using international institutions: bringing in multilateral institutions[38] into ED helped mobilize international consensus (on trade in WTO etc.) on key issues, and also held public managers of countries to external discipline. It also helped politicians to share the budget of their decisions with external parties.[39] Using multilaterals has worked to differing degrees for each country, and in the process, sometimes the multilateral institutions have discredited themselves following excessive pressure or partisanship in their execution of mandates (FATF,[40] IMF, World Bank).

Bayne surmises that this new general path in ED had both successes and frustrations. Initially, it seemed to show great promise. Later on, trade issues created obstacles,[41] the environmental movement faced limitations,[42] while in finance, many reforms were not entirely implemented. In short, despite early gains, there were limits to what the new strategy described by Bayne achieved.

Woolcock draws upon the international political economy (IPE) literature to provide a toolkit for ED,[43] although it cannot be described as a comprehensive theory.[44] Green and Charveriat discuss the role of NGOs in ED, noting that they can have a significant impact in shaping public opinion and putting pressure on governments to behave in certain ways while conducting ED.[45] Noting the definitional difficulties regarding NGOs, they describe them as “organizations that pursue some wider social aim that has political aspects, but that are not overtly political organizations such as political parties.”[46] There are other useful definitions of civil society available in the public value literature,[47] but Green and Charveriat make good use national-level and multinational NGOS, using their networks and alliances, to illustrate the power of NGO advocacy in realizing ED goals. They also give practitioner suggestions on how to design and apply advocacy strategies in the NGO context.

Case Study Methods

Certain ED case studies are also useful reading for considering the local evolution of ED practices. Rana gives a detailed example from a third world context (India) of government facilitating the private sector, drawing the distinction between what would be economic diplomacy and what is commercial diplomacy, both being important in the value creation of ED.[48] Image building, exporting manpower, deploying embassies, coordinating among stakeholders, and using a proactive approach are all cited as important for developing countries. VanGrasstek studies the US-Russian relationship in terms of ED since 1810 and until the present; highlighting therein the competing interest groups[49] within the United States, and how specific events became causes celebres[50] at different stages over the past two centuries.[51] In conceptualizing China’s ED, Xiaotong highlights an important paradox: as its power resources have increased, so has the external challenge to it realizing its international interests.[52] Indeed, the One Belt One Road (OBOR) initiative, spearheaded by China, represents an important new manifestation of ED in the 21st century,[53] but it faces its detractors and an increasingly hostile international environment. Xiaotong highlights four objectives of China’s ED.[54]

  1. Increasing the country’s power resources
  2. Prolonging its international ‘window of opportunity’
  3. Increasing its will for leadership
  4. Improving the conversion of its power resources

Baracuhy presents a Brazilian case study of how the Itamaraty[55] mobilizes resources to achieve specific regional and international goals (e.g. agriculture) and punch above its weight in ED among the developing world.[56] Vitalis and Soobramanien present two different perspectives on the ED potential of small countries, in the developed and developing worlds respectively. Using the case of New Zealand, and then extending the argument to Singapore and Switzerland inter alia, Vitalis argues that small developed states have to strike a balance among their interests[57] and use a combination of direct and indirect means to do so.[58] Oftentimes, their indirect role can be quite instrumental, and “small countries like New Zealand understand the importance of concentrating and prioritising resources on issues that matter to their vital national interests.”[59]

For developing small states, Soobramanien notes early on that “much more needs to be done to enable them to overcome the obstacles that prevent them from integrating into the global trading system and deriving meaningful economic benefits for their population.”[60] Rather than being policymakers, he notes that they are “‘policy-takers’ and have to adjust to unfolding realities” such that they remain “highly dependent on other major large economies, be it for trade, FDI flows or foreign aid.”[61] Given that the choices are more difficult he suggests certain points to consider the developing-country context: (1) rethinking trade multilateralism, (2) looking at the merits and demerits of group diplomacy, (3) and building national trade capacity. Above all, Soobramanien recommends that “in cases of serious resource constraints and inadequate representation abroad, which is often the case […], ensuring proper coordination at the national level and setting priorities based on economic and political interests is vital.”[62]

Given the importance of trade agreements in general understandings among scholars of ED, Heydon provides a useful study of the motivations underlying and effects resulting from trade agreements,[63] finding that there are benefits such as trades gains and trade growth, but also that they create systemic tensions (increased litigation, perceived discrimination etc.).[64] For financial diplomacy,[65] both Chohan[66] and Pickford[67] highlight the importance of the 2008-09 crisis in rallying financial institutions, both multilateral[68] and national-level,[69] in mobilizing towards cooperation to mend the fallout of the crisis. While highlighting the importance of financial diplomacy during the crisis, Pickford also draws three crucial lessons about the ED effects of the 2008-09 financial contagion:

  1. The interdependency of the world economy leads to spillovers and aftershocks in many countries simultaneously
  2. There is a high degree of cooperation required in coordinating financial responses to crises.
  3. Strong international responses in cooperation are only possible when there are severe downsides to non-cooperations.

It is important to note that financial diplomacy in the early period of the coronavirus crisis (specifically March-April 2020) has also been characterized by a significant amount of coordination among central banks, with the US Fed taking the lead in opening channels of dollar borrowing for other central banks.[70] However, the response has not been fully inclusive and worsens the conditions for many struggling developing economies that do not get this access to open dollar borrowing.[71]

In counterpoint to the many successes of ED that are covered, Depledge considers the global failure in coordinating a diplomatic effort to stem climate change’s damage,[72] noting above all that climate change is a “super wicked problem” that involves complexity, reconciling science with politics, and urgent/critical; “testing diplomacy to its limits.”[73] The coronavirus outbreak in 2019-2020 also illustrates the wicked problems requiring a coordination effort against complexity, the reconciliation of science with politics, and the need to act with urgency.[74] There is thus a parallel to be drawn between Depledge’s work on climate change and the recently erupted pandemic conditions in terms of mobilizing diplomatic (including ED) resources.

Although by no means a comprehensive review of the budding ED field, the aforementioned works give a good indication of the direction in which ED studies are heading. Evidently, they cover numerous regional and thematic aspects that reflect the diversity of elements subsumed by ED itself, which is in no small part influenced by the differing scopes of items that are added by different academics and practitioners to the ED agenda.

References


1. Zhao Kejin. 2011. The Rise of Economic Diplomacy: Substances, Institutions and Trends (in Chinese). Jiao Xue Yu Yan Jiu [Teaching and Studies], Vol. 1, 57.

2. Berridge, G. R. and James, A. 2003. Dictionary of Diplomacy. 2nd edition. Basingstoke: Palgrave-Macmillan

3. Xiaotong, Z. (2017). Conceptualizing China’s economic diplomacy. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

4. See Bull, H. 1995. The Anarchical Society: A Study of Order in World Politics. 2nd edition. London: Macmillan. P.156.

5. Barston, R. P. 2006. Modern Diplomacy. 3rd edition. London: Longmans. P.60.

6. See Bayne and Woolcock (2017). The New Economic Diplomacy. Routledge. 4th Edition. P.5

7. See public value in Alford, J., and O’Flynn, J. (2009). Making sense of public value: Concepts, critiques and emergent meanings. International Journal of Public Administration, 32(3/4), 171–191.

8.  See multifaceted approaches to public administration in Chohan 2018c

9. See also perspectives in Benington, J., and Moore, M. (2010). Public Value: Theory and Practice. Basingstoke, UK: Palgrave MacMillan.

10.  Bayne, N. and Woolcock, N. (2003).The New Economic Diplomacy. Ashgate.1st Edition.

11. This trade-off was posited by Stoker (2006) but challenged in Chohan and Jacobs, 2017, 2018.

12. Bayne and Woolcock, p.8.

13. Ruggie, J. G. 1982. International Regimes, Transactions and Change: Embedded Liberalism in the Postwar Economic Order. International Organization, 36 (4), 379–415

14. Odell, J. 2000. Negotiating the World Economy. Ithaca: Cornell University Press. P.11.

15.  See Bayne and Woolcock (2017). The New Economic Diplomacy. Routledge. 4th Edition.

16. Baldwin, D. A. (1985). Economic Statecraft. Princeton: Princeton University Press.

17.  Blanchard, J.-M. F. and Ripsman, N. M. 2008. A Political Theory of Economic Statecraft. Foreign Policy Analysis, 4, 371–398.

18.  Ibid.

19. Hanson, P. 1988. Western Economic Statecraft in East-West Relations: Embargoes, Sanctions,

Linkage, Economic Warfare and Détente. London: Royal Institute of International Affairs.

20. Bayne and Woolcock (2017). The New Economic Diplomacy. Routledge. 4th Edition. P.1

21. See climate change as socioeconomic threat in Adil, A. and Chohan, U.W. (2020). Climate Change as Socioeconomic Threat: International Perspectives. CASS Working Papers on Sustainability. Working Paper SUS001AAUC.

22. Bayne and Woolcock, 2017, p. 23.

23.  Bayne and Woolcock, 2017, p.17. They added, however, that the instruments of ED are less important than the issues that are raised through ED. Yet for practitioners, the instruments are likely to be as important as the issues, and so the academic focus may be relegated to issues, but in praxis the instruments can and do have a strong bearing on national ED strategies.

24. Odell, J. 2000. Negotiating the World Economy. Ithaca: Cornell University Press

25. See Chohan 2019a for deeper analysis of PVT’s market-orientation.

26.  Benington, J. (2009). Creating the public in order to create public value? International Journal of Public Administration, 32(3/4), p.232

27. Bayne and Woolcock, 2017, p. 23.

28.  Putnam, R. D. 1988. Diplomacy and Domestic Politics: The Logic of Two-Level Games. International Organization, 42 (4), 427–460.

29. Bayne, N. (2017). Challenge and Response in the New Economic Diplomacy. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

30.  See Chohan, U.W. (2020b). Reimagining Public Managers: Delivering Public Value. Routledge.

31. This point is discussed at length in chapter 3 of Chohan, U.W. (2019a). Public Value and Budgeting: International Perspectives: Routledge.

32.  See Chohan and Jacobs 2017; 2018

33.  Bayne, N. (2017). Challenge and Response in the New Economic Diplomacy. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

34.  See also pubic value angle on legitimacy

35. See review of Politics–Administration Dichotomy in Chohan 2017a

36. Academia in the sense of both universities and think tanks

37. It should be noted that transparency is a public value, see Chohan and Jacobs 2017, 2018

38. See chapter 4 in Chohan, U.W. (2020b). Reimagining Public Managers: Delivering Public Value. Routledge.

39. Ibid.

40. See FATF example in Chohan (2019b)

41.  The Sino-US trade war is a recent culmination of that breakdown in consensus on trade.

42.  See Adil and Chohan (2020) for a discussion of the consequences of multilateral shortcomings on climate change

43. The elements of this toolkit essentially represent the aforementioned six factors.

44. Woolcock, S. (2017) Factors shaping economic diplomacy. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

45.  Green, D. and Charveriat, C. NGOs in economic diplomacy. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

46.  Ibid. p.

47. See review in Chohan 2019a

48. Rana, K. (2017). Serving the private sector: India’s economic diplomacy. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

49. E.g. the Jewish lobby was anti-Russian while the farmer lobby was pro-trade with Russia (and Soviet Union)

50. The Magnitsky Act being one example; the exit visas in the Soviet Union being another. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

51. VanGrasstek,G. (2017). Continuity and change in the politics of US trade relations with Russia.

52.  Xiaotong, Z. (2017). Conceptualizing China’s economic diplomacy. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

53.  See discussions on OBOR in Chohan, 2018a-b.

54.  Xiaotong, Z. (2017). Conceptualizing China’s economic diplomacy. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

55.  Itamaraty refers to the Brazilian Foreign Ministry

56.  Baruchy, B. (2017). Brazilian economic diplomacy: Agriculture and the WTO negotiations. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

57. See also balance of interests in Thakur, R. (2013). A Balance of Interests, in A. F. Cooper, J. Heine, and R. Thakur. (eds.) Oxford: Oxford University Press, 70–87

58. Vitalis, V. (2017). Economic diplomacy and small developed economies: The case of New Zealand. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

59.  Ibid.

60.  Soobramanien, T. (2017). The economic diplomacy of small and poor countries in the global trading system. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

61. Ibid.

62. Ibid.

63. See also Bosworth, M. 2014. The Proposed Non-MFN Plurilateral Trade in Services Agreement: Bad for Unilaterals, the WTO and the Multilateral Trading System. NCCR Working Paper, 2014/05. Bern: Swiss National Centre of Competence in Research.

64.  Heydon, K. (2017). Negotiating preferential trade agreements: Motivations and effects. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

65. Financial here refers to investment / capital allocation / financial markets, etc. as opposed to trade

66. See chapter 4 and 5 in Chohan, U.W. (2020b). Reimagining Public Managers: Delivering Public Value. Routledge.

67. Pickford, S. (2017). International financial diplomacy and the crisis. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge.

68.  In particular the IMF

69. Particularly central banks and national financial regulators

70. Chohan, U.W. (2020c). A Post-Coronavirus World: 7 Points of Discussion for a New Political Economy. CASS Working Papers on Economics & National Affairs No. EC015UC

71. See Chohan, U.W. (2020d). Forecasting the Economic Impact of Coronavirus on Developing Countries Case of Pakistan. CASS Working Papers on Economics & National Affairs No. EC016UC

72. Climate change bears directly upon economic activity, but it also has a security dimension that falls in traditional diplomacy, see Adil, A. and Chohan, U.W. (2020). Climate Change as Socioeconomic Threat: International Perspectives. CASS Working Papers on Sustainability. Working Paper SUS001AAUC.

73.  Depledge, J. (2017). Climate change negotiations: pushing diplomacy to its limits. In Bayne and Woolcock (eds). The New Economic Diplomacy. Routledge

74.   See Chohan 2020c-d for coronavirus economic analyses.

 

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