Economic diplomacy

Definition of economic diplomacy

Economic diplomacy is concerned with ‘international economic issues’ to ‘enhance prosperity’, which has been ‘the main priority for states in most regions of the world.’

In a broad sense, economic diplomacy can be defined as any diplomatic activity that promotes the state’s economic interests. It also includes diplomacy that uses economic resources to achieve a specific foreign policy objective.

In a narrow sense, economic diplomacy is about export promotion and inward investment. This is sometimes called commercial diplomacy.

Evolution of economic diplomacy

The exchange of goods demonstrates the value of bargaining, fosters skill in the activity, and cannot flourish in the absence of civil – if not necessarily friendly – relations. This seems to be why, in Ancient Greece and probably elsewhere, the exchange of goods between neighbouring tribes and cities at the fairs held at shared religious shrines contributed to the growth of diplomatic institutions. The Delian League, which grew from such a basis, reached its height in the early seventh century BCE. It is no surprise, therefore, that from the first, modern diplomacy, i.e. the diplomacy conducted chiefly by means of resident missions headed by a foreign national that took root in the late fifteenth century AD, had an economic flavour. 

In fact, such missions emerged from the European consulates established around the Mediterranean and its adjacent seas in the late Middle Ages and these consulates had their origins in international trade. When cargo vessels from distant lands arrived in a port, the scope for misunderstanding and trouble was obvious. Sailors speaking strange tongues, displaying peculiar habits, and usually soon drunk, were rarely impressive advertisements for their homelands.

The attitudes of sea captains and local officials to commercial matters and legal procedures were also often at variance, especially when religions were different. To make matters worse, there was usually intense competition between ship-owners from different states, and where foreign merchants settled and formed a community at an important foreign port they needed to be internally regulated as well as defended against rivals and rapacious local officials.

If trade between distant lands was to flourish, therefore, there had to be some representative of the merchants in the ports who had the authority and ability to sort out these problems. Enter the consul: spokesman for the merchants and, where this suited the local authorities, as in the Ottoman Empire, magistrate over them. The consuls, at first, were not servants of the state, living instead on earnings from their private trade plus a small tax (‘consulage’) that it was agreed with the merchants they could impose on the goods moving through their settlements in return for the service they provided. Nevertheless, thus was established the habit of permanent representation in a foreign land for the purpose of dealing with local officialdom and it was chiefly from this that the modern embassy slowly evolved: diplomacy began with trade.

Economic diplomacy since 1500s 

In the modern period of European history, extending from about 1500 to the First World War, high politics generally dominated the work of most diplomatic missions because the potential of permanent representation for the conduct of foreign (political) policy was soon realised. This was eventually the destiny even of the British Embassy at Constantinople, for by the end of the eighteenth century the Levant trade was in serious decline and whether the decaying Ottoman Empire should be propped up or carved up (‘the Eastern Question’) was an issue that was already beginning to mesmerise the great powers. The latter-day focus on high politics was also reinforced by the increasing attractiveness of ambassadorships to the aristocracy, the members of which traditionally held ‘trade’ in contempt. (The earliest residents had not been grandees.)

However, economic diplomacy was by no means completely discounted because:

1. The consular posts established by merchants remained active and were, indeed, taken over by the state during the course of the seventeenth century, becoming outposts of a ‘sovereign’ diplomatic mission, whether legation or embassy.
2. International trade began to grow enormously in the first half of the eighteenth century and, in the late nineteenth century, so did investment abroad (direct and portfolio) by the major capitalist states: Britain, France, and Germany, with the United States also beginning to enter the lists.
3. Diplomatic missions were responsible for the negotiation of commercial treaties; that is, the general framework in which trade was conducted in bilateral relationships.

As rivalry intensified between the major trading states for foreign markets and between the major capital-exporting states for foreign concessions (to sink mine shafts, build railways, cut canals, etc.), so economic diplomacy began to make a real comeback in the late nineteenth century. This was also the high point of the colonial era, when European states established control over vast swathes of territory in Africa and Asia, driven by a search for raw materials and markets. In the course of the twentieth century, with further increases in the relative importance of international trade and investment, it was well on course to being once more the top priority of many diplomatic missions. How did this take shape?

Economic diplomacy in 19th and 20th century

Consular services, although remaining separate from diplomatic services, were gradually reformed: better organised and professionalised, with senior consular officers salaried, although the pace of these changes varied significantly from state to state.

Diplomatic missions themselves became more directly involved in supporting their businessmen and bankers looking for new markets and investment outlets. Diplomatic generalists as well as the new ‘commercial attaché’ took on this work.

Heads of mission (ambassadors or ministers) and their diplomatic secretaries still negotiated commercial treaties. However, when their posts became more easily reached by railways and steamships and such treaties were particularly important, they were commonly assisted in this by experts sent from home. (This is confirmed in Germany’s case by Prince Lichnowsky, Berlin’s ambassador at London before the First World War; see the References and additional reading list). They also tended to ignore the day-to-day promotion of trade. Instead, they usually confined their interest to major capital investment projects, especially when such schemes were thought to serve wider political interests such as:

1. bolstering their country’s prestige and undercutting that of a rival;
2. securing control of, or influence over, a vital line of communication, e.g. the new Suez Canal (French driven), the Berlin-Baghdad Railway (German driven); or
3. fuel needed for military purposes, coal and oil.

This work involved:

• Embassy support in the placement of capital on advantageous terms (securing ‘concessions’), including the encouragement by receiving states of what today would probably be called ‘good governance’ (e.g. by pressing financial advisers and customs officers on governments unfamiliar with Western capitalism, such as those of the Chinese and Ottoman empires), pressure on host governments for guarantees for the repatriation of profits and for monopolies for their businesses in a particular region (e.g. Japan and Russia in Manchuria), and so on.
• Embassy intervention to protect capital investments once placed, which evolved into the legal doctrine of ‘diplomatic protection’: that any means consistent with international law might be employed by one state in seeking redress for an injury to one of its nationals or corporate bodies caused by an internationally wrongful act or omission on the part of another – providing all local remedies have been exhausted. The application of this doctrine was particularly notable – and much resented – in South America. The doctrine could be invoked in either of the following situations:
  • violence and disorder at the scene of the investment, perhaps caused by revolutionary turmoil; or
  • revocation of privileges or breach of contract in regard to a particular investment.

When ‘diplomatic protection’ was employed in such circumstances, typically by the capitalist states of the Northern Hemisphere, it was often something of a misnomer: the ‘local measures’ (usually local courts) were often ignored and it could – and in the nineteenth and early twentieth centuries often did – extend well beyond a démarche by a head of mission. It could also involve such measures as arbitration, judicial settlement, sanctions, reprisals – even armed intervention and outright annexation. Not surprisingly, it provoked a counter-doctrine.

Commercial attachés

Commercial attachés were among the first specialist attachés to appear in embassies and marked a new development: diplomatic involvement in promoting the day-to-day trade of their businessmen as well as the shaping of the treaty framework in which they operated. Chiefly, this meant the promotion of exports. The first commercial attaché is believed to have been appointed to the British Embassy in Paris in 1880. France and Germany, and then other states, followed this example, as international trade became increasingly the concern of governments.

The introduction of commercial attachés led to a long period of uncertainty as to how the commercial staff of embassies should be appointed and supervised35. Initially, and for a long time afterwards, they were simply recruited from the consular service with a remit to report both to the foreign ministry and the government department responsible for overseas trade, as consuls themselves had usually done. In fact, commercial attachés were just consuls by another name, except that they were usually relieved of their non-economic responsibilities.

Subsequently, during the whole of the twentieth century, two administrative models as to how the commercial staff of embassies should be appointed and supervised vied for adoption:

1. The dedicated commercial attaché, who was a civil servant employed by a department of trade (e.g. British Department of Overseas Trade, 1919–1943; US Department of Commerce) but temporarily ‘attached’ to an embassy. Such attachés (aka ‘commercial counsellors’ and ‘commercial secretaries’) might move from one diplomatic mission to another but tended to remain at least in the same region and also to remain specialists in this work throughout their careers. This model had the advantage of bringing specialist knowledge and experience to bear on the task of promoting commerce but risked creating tension between ministries at home and the staff inside embassies; it also placed obstacles in the way of mobility of staff and promotion.
2. The straight diplomat, who was employed by a foreign ministry and did not specialise in commercial work, but did occasional postings in that capacity; for example, as ‘counsellor (commercial)’, ‘2nd secretary (commercial)’, and so on.

The second model was the one that came to be favoured after the Second World War by the UK but the first seems to have remained the American preference. The advantages and disadvantages of the second model were in general the reverse of those of the first.

The late twentieth century

The ultimate decisiveness of US economic resources to the outcome of the stalemated European war of attrition between 1914 and 1918, the subsequent need for vast economic reconstruction, the later Great Depression and the rise of economic nationalism in the 1930s, all led to a greater emphasis on economic diplomacy in its various facets – although resistance from the old guard in the diplomatic service was often stubborn, and not just in the ‘old world’.

Nevertheless, after the Second World War, the rise of economic priorities continued remorselessly. The ‘ex-enemy states’ had to reclaim their markets and the ‘victor states’ had to start worrying about their declining share of world trade and investments. After getting stuck in Vietnam and finding itself faced not only with a resurgent Europe and Japan but also a muscle-flexing oil cartel (OPEC), in the 1970s the economic worriers even came to include the United States. As for the new states that emerged from the dissolving European empires, the title embraced by them – ‘developing countries’ – was alone sufficient to indicate the priority most of them attached to economics in their foreign as in their domestic policies. They were followed at the end of the century by the successor states of the USSR, anxious to replace Soviet-style socialism with market economies.

One of the consequences of these developments is that since the Second World War foreign ministries have been under steadily increasing pressure to demonstrate that their diplomats are giving high priority to economic diplomacy. They have also needed to do this because, beginning in the 1960s, major improvements in transport and communications were beginning to cast doubt – particularly in the tabloid media and on the part of multinational corporations – on the continuing need for large networks of diplomatic missions. Why were they still needed when telephone communications and fast, direct flights between capital cities were by this time readily and cheaply available to businessmen? To defend their budgets, therefore, foreign ministries needed to cultivate a domestic constituency among businessmen with three components:

• big businesses (rich and politically connected), which might not usually have need for diplomatic assistance abroad but could be persuaded of its value in particular states of importance to them; for example, because of political instability, a tense relationship, or state control of the economy;
• small and medium-sized enterprises (SMEs), that could less afford to project their own influence anywhere abroad, and existed in much greater numbers; and
• trade associations and chambers of commerce.

With this domestic constituency in mind, foreign ministries began to take great pains to advertise the economic priority they were determined to impose on their missions abroad. The British case is probably fairly typical.

Trade and investment promotion

Trade and investment promotion represent the cutting edge of economic diplomacy. While the agencies at home, the foreign ministry, and the economic ministries prov1ide direction, much of the work is carried out in the field, by embassies and by overseas offices of promot2ion agencies, within the home country policy framework.

These activities hinge on close coordination between the ministry of foreign affairs (MFA), economic ministries, and official promotion agencies, plus associations of business and industry, and their overseas network. 

Role of non-state actors

It is mainly concerned with ‘what the governments do’ and is an activity pursued by state and non-state actors in our ‘real world of today.’ The non-state actors engage in economic diplomacy both by ‘shaping government policies and as independent players in their own rights’ (Bayne and Woolcock, 2012).