Chapter 4

 

ECONOMICS AND DIPLOMACY

 

 

Contemporary Importance

 

Viewed earlier as a peripheral activity best left to commercial secretaries and specialists from other departments, the building of trade and economic relationships has moved to the center of diplomacy. This is an interesting turn of the wheel of history. Even a couple of decades back, commercial diplomacy was seen as a “black hole” by diplomats pursuing a fast–track career, and paled in comparison with political work. But if we go back to the origins of diplomacy, like the recently transcribed Amarna archive clay tablets of Middle Egypt of the period 1460–1220 BC, and the extensive trade that existed in subsequent centuries among the countries and civilizations of Egypt and West Asia, we see that trade provided the first motivation for inter-state contacts and agreements. Another example is provided in the spread of colonialism in Asia, following Vasco da Gama’s journey to India in 1498, and Europe’s “discovery” of the riches of the East Indies. Again the flag followed trade.

 

Today, diplomatic services place virtually equal emphasis on political and economic work. Rich countries and developing nations alike consider the mobilization of inward foreign investments (FDI) and export promotion as the essence of advancing interests in foreign countries. Over a dozen nations around the world use the Australian and Canadian model of an integrated ministry that handles foreign affairs and external trade;[1] others like UK have achieved similar unity of action with joint new structures that handle trade and investment promotion through the embassy network, under the direct charge of the Foreign Office. Thus economics is a major component of contemporary “integrated diplomacy”. In a word, economics permeates diplomacy.

 

In the same way that law was seen as the foundation of diplomatic studies in the past, economics is now the sine qua non of contemporary training. (Example: Germany now attracts more economists than law graduates in its diplomatic service.) No diplomat can afford not to master this so-called “dismal science”, both to understand the dynamics of world affairs, and to integrate economics into all his work. At headquarters, politics and economics are intertwined in bilateral and multilateral work. In the embassy, every diplomatic official, regardless of work domain, must weave into his or her job the economic perspective in the same manner that he or she also keeps an eye on the political dimension[2].

 

The US–China relationship, in the way it has developed in the past 20 years, is one outstanding example of the way economics becomes a driving force in shaping political relations. Each time the US administration or the Congress has considered human rights issues or the Taiwan issue in a manner that is contrary to the interests of Beijing, US business lobbies that are fixated on that country’s immense market potential, become active to “safeguard” their export interests. This is one way economics becomes a driver of political relationships.

 

A different example is provided by the way India–US ties have evolved after India’s nuclear tests of May 1998. The non-proliferation concerns of the US some European states, and Japan had led to the imposition of an explicit policy of economic “sanctions”. Gradually these sanctions have been modified and lifted, at least in part because of the business attraction offered by this “Big Emerging Market”.[3] In both cases astute eco-political diplomacy has been marshaled by the country affected, to neutralize adverse political circumstances, using also wide networks of non-state constituencies, especially the corporate communities within the other nation.

 

Foreign ministries do not generally handle external economic relations (with the exception of Australia, Canada and a score of others that have a combined ministry, as mentioned above). But some monitoring of bilateral economic links is combined with political work in most MFAs, through their territorial divisions. This is in recognition of the fact that economics is a vital and often dominant component of bilateral relations. The other related element is that most diplomatic services combine economic work with other tasks, though there are a number that also have a specialized foreign commercial service (like the US), or handle commercial diplomacy with a combination of specialists deputed to the larger embassies from the trade ministry, and regular foreign service personnel handling this elsewhere.

 

The four pillars of economic work are:

 

q       Trade promotion, with prime but not exclusive focus on exports.

q       Investment promotion, mainly focused on inward investments, but not excluding the home country’s outbound investments, where appropriate.

q       Attracting suitable technologies, plus technology “harvesting”.

q       Management of economic aid, which is important for most developing countries as a “recipient”, and for as a “donor” developed nations[4].

 

There is also the larger task of country promotion, which supports all the above, and blends into image building, as well as tourism promotion. Enhancement of the image of the home country is one of the essential tasks of diplomacy that underpins and relates to a wide range of external activities.

 

A word should be offered on definitions. Contemporary “economic diplomacy” is broader in scope than the “commercial” work of the past. As the above list indicates, the tasks go beyond trade, and encompass activities that would not have figured on the work agenda of embassies and foreign ministries even some 25 years back. Three concrete examples are investment mobilization, tourism promotion and management of the country image. Each of these three is relevant to diplomacy, as concrete activity that official representatives today undertake in external relation building. And each of them provides feedback into other elements of the diplomatic process. It is another demonstration of expanded and integrated diplomacy.

 

Organization of Economic Work

 

There are several different models, if we try and understand how economic work, i.e. trade and investment issues are handled within the MFA. These are:

 

q       Unified. There are about 15 countries which now combine foreign affairs and foreign trade (Australia, Canada, Sweden). But in a special twist, under the unified ministry, Australia has a separate commercial export promotion service, distinct from the diplomatic service, though the head of mission plays a unified role in heading both activities.

q       Part unification. The best instance is UK that has created two special units in the Foreign Office, jointly with the Department of Trade & Industry, to handle trade and investments, manned by a unified diplomatic service.

q       Third agency. This is the Singapore method, where the MFA largely keeps out of economic work, and the operational tasks are handled by two special entities, the Singapore Trade Board and the Singapore Economic Development Board, under the supervision of the Ministry of Trade and Industry. Each Board posts its own representatives at key locations, placed within the embassy or consulate general. The ambassador and other diplomats work closely with them in the well-known “Team Singapore” style. In other instances we see that harmony is harder to establish.

q       Competition. This is the relatively confused situation in many countries, with the MFA and economic ministries engaged in turf battles over responsibility not only for export promotion and investment mobilization, but also over the handling of WTO affairs, and some other economic groupings. Examples: India, Thailand. One direct consequence is that the diplomatic machine does not make a full contribution to advancement of economic interests.

q       Renunciation. The MFA does not play an active role in bilateral economic work, and is glad to hand this over to another ministry. Examples: China, Germany. This does not optimize resources, even if there is little outward evidence of disharmony.

 

There are also exceptional situations where aid work is concentrated in the MFA, but this happens only with donor countries (examples: Denmark, Japan). There are no instances where recipient countries (i.e. developing countries) handle aid work in the MFA. India offers an interesting contrast; it runs a small aid donation program, which is handled entirely from the Ministry of External Affairs. But the inbound aid work is handled exclusively by the Indian Finance Ministry.

 

Methodology

 

Let us assume that the diplomat has a basic understanding of economics, and accepts the logic of complete integration of this activity into his mainstream work. The practical components of economic diplomacy are given below. This list is illustrative, and does not exclude other matching actions.

 

A.     Analysis. Understanding the economic dynamics of the target country is an essential prelude. It includes: insight into the principal elements of the local economy; analysis of the export and import basket of the country and its chief regions; the foreign investment profile; technology strengths; and the activities of competitors, actual and potential, gauged against one’s own exports and other ongoing economic activities in that country. It is assumed that the diplomat fully understands the economic needs of his or her own country, and that this knowledge is kept updated. (Example: some diplomatic services require diplomats to undertake familiarization tours at home, prior to taking up each foreign assignment.)

B.     Basic guide notes. Writing a “commercial note” or briefing guide on the country is useful on several counts. First, it necessitates understanding the basic economic profile of the country, its principal indicators, the organization of the economy, tax, tariff and customs policy, the banking and related structures, system of business dispute settlement, the pattern of the business organizations, the principal import and export players, and the like. Second, such a guide responds to general commercial inquiries from home. The commercial note can be posted on the mission’s website on the Internet, and the feedback used to improve the Note (it has to be a continual task to updating and improving the material). Third, one’s own note can be compared against those prepared by foreign embassies, again for self-improvement. (Example: the US Commerce Department guide notes available on most countries serve as a useful yardstick). There are other commercial briefing notes to be written, like market reports on individual products, plus analysis covering competitors and their market share, plus the marketing strategies used by them.[5]

C.     Outreach. This involves the obvious economic partners, like the local enterprises engaged in bilateral trade and investments, or others that have a potential interest. There are also the associations of business, individual enterprises that enjoy clout, and other pressure groups, as well as parliamentarians, academics, the media, specialists in science and technology, plus local constituents like regional and other subsidiary political entities that have a direct stake in stronger economic exchanges.[6] The latter types of local groups are especially important, for reaching out to local businesses, when employment generation and other local economic benefits are involved. A distinction should be made between companies and entrepreneurs who are the prime actors in economic relations, and the commerce chambers and the like who are the intermediaries. Both have their role and value.

D.     Teamwork. It may go against the grain of internal work allocation, but a “task force” method is often useful, which involves the entire mission team in handling specified economic tasks (such as export promotion of priority products). Some believe that such wide distribution of tasks treads into the work domain of the commercial or the economic officials, but the advantage is full engagement of the entire team. Outside the mission, advantage can also be taken of own nationals in key positions, like experts on technical cooperation assignments, business representatives stationed in the country, and others, for brainstorming and participation in different kinds of outreach activities. This acknowledges the reality that relationship building is not the exclusive job of the official representatives; others can contribute, if only they are asked! And leadership has to be provided for such teamwork by the head of mission, through personal example.

E.     Delegations. Dispatch of business mission in both directions is a classic method of promoting trade, investments and all other forms of economic exchanges. Careful preparation is indispensable for good results, consisting of scrupulous program preparation, and pre-arrival match-making, to identify serious interest among businessmen on both sides. This is possible only when comprehensive information is gathered and distributed on specific interests and targets of each participant. No less vital is post-visit follow-up, to gauge results and draw lessons for the future. Thanks to the Internet, it should be possible to try a “virtual” delegation method, not as a substitute to the real visits, but as a supplement. This is a concept that awaits exploration.

F.      Multilateral Issues. Basic understanding of the WTO process, and the manner in which it operates in the country of assignment (local attitudes, policy on “dumping” issues, the dispute settlement mechanism, and positions on different subjects in the multilateral debates), are required information for all diplomats, not just the ones handling economic work. Multilateral diplomacy constantly demands support actions at the bilateral level. The purpose is not just to canvas support from the target country, but also engage in real two-way dialogue.

G.     Innovation. Economic work offers scope for innovation and needs a proactive mindset, perhaps more than any other aspect of diplomatic work. Beyond the list of tried and tested methods, involvement of the full mission team has the advantage of producing new approaches and inventiveness. (Example: the use of the Asia-Pacific group of embassies as a regional promotional tool in Germany arose at the initiative of one visionary individual, former Ambassador Tony Siddique of Singapore.) The tools of “linkage” are also available, making interconnections between what may at first sight appear as unconnected issues, to advance one’s national interests.[7]

 

Diplomacy and Innovation

 

Jan Melissen provides an elegant definition of the role of innovation: “If it is agreed that diplomacy is the management and facilitation of change in international relations by means of adaptation and innovation of the modes of diplomatic practice…Diplomacy could not be about anything other than innovation.”*

 

Adaptation to change produces different kinds of innovation. One instance of innovation has been the “Asia Europe Meetings” (ASEM) launched in 1995 at the initiative of ASEAN, annual summit meetings between itself, other major Asian states and the European Union. ASEM exploits the desire of EU to build strong connection with the economically vibrant Asian region, and envy at having been left out of the other successful new grouping APEC (in which the US is a major participant.) Concentrating primarily at the summit level, without ministerial meetings or any other structural paraphernalia, ASEM focuses quietly on concepts and methods that guide relations among participants. By taking the driving seat, ASEAN also projects itself larger on global stage.

 

Consider also another completely different level at which a new method was tried out  in 1994 and continued since —  diplomatic coordination among Indian embassies in major EU capitals. With the support of the Ministry of External Affairs a system of 6-monthly meetings of ambassadors was launched, taking place in the capital that held the rotating EU presidency. Such regular consultation among regional missions was unknown in the Indian system. In December 1994, just a few days before the Koln EU Summit, the German Foreign Office State Secretary who met our group for a briefing and conversation, remarked that we were the first country to have understood the way European unification would require others to begin also to understand and deal with them collectively.

 

* Jan Melissen, ed., Innovation in Diplomatic Practice (Macmillan, London, 1999)

 

 

Country Promotion

 

All aspects of economic work are subsumed under country promotional activities, (trade, investments, and technology). This activity also reaches into other areas, like building positive media and public images, destination promotion for attracting tourists, and for activities that may even include building institutional links in research & development or education cooperation. Example: during the apartheid era in South Africa, chief executives of major enterprises were targeted with invitations that were ostensibly for tourist visits, on the calculation that such executives would go back with a sharper awareness of business opportunities.[8] Business takes place in all kinds of environment, including situations where countries are hostile, and may not even maintain diplomatic relations, like China and Taiwan in the period right up to the early 1980s when political contact was established between the two rival regimes. But business always goes better when people like one another and find the other country congenial!

 

In 1991 the International Finance Corporation and the Multilateral Investment Guarantee Association, both based in Washington DC, had published a comparative study on the country promotional methodology of several countries. (This study was revised in 2000[9]). In the past decade there has been a much greater accumulation of experience, since most countries, regions and even province-level entities in large countries now implement vigorous programs of their own in pursuit of ever-elusive FDI. We all understand that one’s own efforts have to be conditioned by awareness of the competitive market for investments.

 

The hard material for country promotion — the websites, brochures and other distribution material — is produced by the home agencies, and the Mission acts as the distributor. But it can also use its ingenuity in adapting such material for local use, selecting the data and positioning for its own website, and using local knowledge for optimal impact. It also often has the prospect for using local opportunities for extensive and intensive contact, without waiting for investment procurement delegations from home.

 

Regions within countries have emerged as entities that engage in their own external relationship building, particularly in the economic sector. For instance, in Germany the state of Saxony regards the neighboring areas of Poland and the Czech Republic as its special partners in creating a high growth “Euro-region”. The same is true of the state of Baden-Württemberg that also sees itself as a unique locus of entrepreneurship, based on its dynamic medium-sized industry (“Mittelstand”) and a concentration of scientific and research institutions, unmatched elsewhere. In France and in Italy too, such high growth regions are seeking distinct external identity. In the US, many leading states maintain their own networks of representation abroad. For the purpose of “country” promotion, such regional initiatives aimed at attracting business, inward and outward, are assets that can be used to the advantage of the region and for the country as a whole.

 

Other methods that are relevant include:

 

a)      An “image audit” should be regarded as a fundamental prerequisite for establishing a base line and a reference point, for image building and for country promotion, but the device is seldom used in practice. Consequently, an accurate basis for addressing the image issues that are really important at the particular place and time is often missing. This is an expensive device that can be undertaken only by headquarters. But for the individual embassy this does not reduce the responsibility for making a good assessment of the local challenges in country promotion.

b)      Official representatives are expected to depict a rosy picture of the scene in the home country, but statements by nationals of the target country and third countries often carry greater credibility. This is even truer of case studies. Yet official statements are important, especially when one can demonstrate an ability to “walk the talk”.

c)      All the classic skills of outreach are involved at their peak in country promotion, including social entertainment and a welcoming ambience offered by the Mission. There are documented instances where the efficient delivery of consular services has been a positive factor in image building and country promotion.

d)      In one more demonstration of the integral nature of external affairs, tourism promotion is closely allied with country promotion and it is best to use the synergy available by combining or at least coordination the two activities.

e)      One special device in the armory of the mission is the regional approach, locally using a group such as the cluster of SADC ambassadors or the Asia Pacific group of envoys, for joint promotional effort, vis-à-vis the local agencies, or regions. It is remarkably productive in gaining access and visibility.

 

The role of initiative, innovation and inventiveness cannot be minimized. These qualities are fully tested in all branches of economic promotion work.

 

Balanced Economic Diplomacy

 

Can there be too much of economic diplomacy? One commentator has argued that one reason for the inability of the British Embassy in Teheran to foresee the downfall of the Shah in 1979, despite an abundance of warning signals, was that the entire mission team was engaged in pushing British exports, including even the defense attachés. Feedback to headquarters on important political developments is the logical first obligation of any embassy, and preoccupation with other tasks cannot supplant this responsibility. We know from other evidence, including analysis of the role of the CIA and others, that the failure in Iran was in willingness at headquarters to listen to those who offered advice that ran counter to the wisdom accepted in the highest councils.

 

There are other instances of failure of diplomatic mission to anticipate tectonic shifts within their host countries, which has more to do with mindsets that depend on conventional thinking and “status quo-ism”. In diplomacy as in other professions, there is a strong case for “out-of-the-box’ thinking and exploring the unthinkable. This is an even greater challenge for the policy planners at headquarters.

 

 

            Bibliography

 

1.       Rana, Kishan S, Inside Diplomacy (Manas, New Delhi, 2000), Chapter 4 (pp. 96–127); Chapter 6, pp. 144–48.

2.       Berridge, GR, Diplomacy: Theory & Practice, 3rd edition (Palgrave, London, publication expected in early 2002).

 

Questions:

 

1.       Why has economic diplomacy gained in importance?

2.       Give an example of country promotion activities, or provide a model for undertaking this work?

3.       What model exists in your country for handling economic work? Which would be the best method in your view, looking to what other countries have done?

4.       What work methodology is the most important for economic work in your view?

 

 



 



 

Notes

 

[1] Two recent studies on MFAs are relevant. These are: Brian Hocking, Ed., Foreign Ministries: Change & Adaptation (Macmillan, London, 1999); Justin Robertson, Ed., Foreign Ministries in Developing Countries and Emerging Market Economies (Halifax, International Insights: Dalhousie Journal of International Affairs, Volume 14, Summer, 1998).

[2] This is a concept of work allocation that is not universal, but it makes sense, as explained in Chapter 8. Every diplomatic official should keep both the political and economic perspective in view, whether he handles cultural, education, or consular work, or any other task.

[3] In the late 1990s the US Commerce Department identified a dozen “Big Emerging Markets” for special attention in the development of economic ties, also giving political overtones to the exercise.

[4] Countries such as China, Egypt and India are both donors and recipients of external economic assistance. Each focuses on providing the kind of aid that is best suited to its strengths, especially technical assistance which leverages availability of high quality trained manpower and the domestic training infrastructure.

[5] It is not an easy task for the embassy to prepare commercial market reports of this nature, but the very act of meeting local and one’s own businessmen, gathering information, and getting into the study project becomes a learning experience for the commercial officer. He or she finds that there are allies that can be used, like business chambers, trade publications and even companies that possess expert information and may be willing to share some of this on a two-way exchange basis.

[6] Serving in Germany in 1992–95, I found it quite feasible to get a regional party body or a newspaper published in a major city, to organize a business promotional event permitting us to reach out to companies in different localities that were attracted by the Indian market but unsure about how to handle problems of distance and lack of familiarity. This is the kind of promotional activity that a resident mission can accomplish using non-obvious local partners.

[7] The Diplomatic Corps also offers opportunity for mutual learning, on a basis of confidentiality and credibility; this in turn hinges on making constructive use of opportunity.

[8] The cross-over between business and tourism is recognized very well by countries such as Malaysia, Mauritius, Singapore and Thailand, and inadequately by many others in the developing world. Good tourism promotion meshes very well with business promotion.

[9] Marketing a country: promotion as a tool for attracting foreign investment. Revised edition (World Bank, Washington DC, 2000)