The New Economic Diplomacy

Decision-Making and Negotiation in International Economic Relations

Nicholas Bayne, Stephen Woolcock, Nicholas Bayne, Stephen Woolcock

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9780367538231
• eBook ISBN: 9781317022862
• Edition: 4
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

The New Economic Diplomacy explains how states conduct their external economic relations in the 21st century: how they make decisions domestically, how they negotiate internationally and how these processes interact. Although the previous edition, published in 2011, was able to reflect the impact of the financial crisis and the immediate reaction to it, a lot has happened since then, and the atmosphere of economic diplomacy has darkened.

To capture the emergence of new trends and the intensification of old ones, the salient features of this new edition are:

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• The advance of China and other emerging powers at the expense of G7 governments, despite some setbacks;

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• Much greater activity in negotiating regional and plurilateral trade agreements, while the multilateral system struggles;

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• The persistence of problems exposed by the financial crisis, notably the long-running euro-zone crisis.

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• The interaction between domestic and external forces: the balance has shifted towards the domestic axis, with international agreement more difficult to achieve. This edition goes further in comparing the practice of different players, to reflect the greater diversity of economic diplomacy.

Based on the authors' work in the field of International Political Economy, it is suitable for students interested in the decision-making processes in foreign economic policy, including those studying international relations, government, politics and economics. It will also appeal to politicians, bureaucrats, business people, NGO activists, journalists and the informed public.

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What is Economic Diplomacy?

Nicholas Bayne and Stephen Woolcock

This is a book about how states conduct their international economic relations at the start of the 21st century: how they make decisions domestically, how they negotiate with each other internationally, and how these two processes interact. While states are at the centre of this study, it also includes non-state actors, whose influence on decision-making has grown over the years. This book focuses on the methods and process of decision-making and negotiation, rather than the content of policy. It is not intended to be a manual for negotiators, but rather to explain why governments and other actors in economic diplomacy behave in the way they do.

We call this book The New Economic Diplomacy to emphasize how much this activity has changed in the 25 years since the end of the Cold War. For half a century after World War II, economic diplomacy was dominated by permanent officials from the governments of a limited number of countries.¹ It was shaped by the constraints of East–West rivalry. 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. Originally limited to measures taken at the border, economic diplomacy increasingly operates ‘within the frontier’ and influences domestic policy. Above all, 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. New emerging powers, with China in the lead, have made great advances, while mature economies of North America, Europe and Japan have lost ground, especially after suffering financial collapse and economic recession. All these trends will shape this book, along with new ones. Since 2011, emerging powers have met difficulties and the G20 summit, which integrated them, has lost momentum. The European Union faces recurrent crises, the latest being the United Kingdom’s decision to leave.

There are several reasons to pay attention to the process of international economic decision-making, which we call economic diplomacy. First of all, it fills a gap in current academic studies. The discipline of International Political Economy (IPE) focuses more on structural factors, such as the relative power of states or the structures of influence within national economies, rather than on process. But where power relationships are balanced, the process of decision-making and negotiation can determine outcomes, as Professor John Odell has pointed out in his book Negotiating the World Economy (Odell 2000). 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. Since the end of the Cold War economic diplomacy, to enhance prosperity, has been the main priority for states in most regions of the world. New security concerns emerged after the terrorist attacks of 11 September 2001, and these persist, notably in Syria and other parts of the Islamic world, but also in Ukraine. 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 threaten the international system and still require attention to be given to economic diplomacy.

Economic diplomacy is not just a subject for academic study. It is an activity pursued by state and non-state actors in the real world of today. In some respects, economic diplomacy is like sex: easier to describe if you have practised it yourself. So while much of this book is written by Nicholas Bayne and Steve Woolcock of the LSE, with the help of our colleague Ken Heydon, an integral part of it is contributed by experienced practitioners of economic diplomacy. The practitioner chapters, starting at Chapter 5, provide case studies and illustrations of how economic diplomacy works.

This opening chapter covers the following:

• It begins by defining the scope and content of economic diplomacy;
• It identifies useful theoretical and analytical tools for interpreting the main factors shaping economic diplomacy;
• It explains multi-level diplomacy and ‘forum shopping’ as further dimensions of economic diplomacy;
• It sets out one interpretative approach unique to this book, based on three tensions of economic diplomacy.

The chapter concludes with a brief review of the structure of the book, showing how the academic and practitioner chapters fit together.

Defining economic diplomacy

‘Economic diplomacy’ is the term chosen to describe the subject of this study. This has the advantage that ‘diplomacy’ is a broad and elastic term. But precisely because it admits of wide interpretation, some further definition is needed, to make clear what is and is not included in this book.²

The classical concept of diplomacy defines it as: ‘the conduct of relations between states and other entities with standing in world politics by official agents and by peaceful means’ (Bull 1995: 156). A more recent definition says that ‘[d]iplomacy is concerned with the management of relations between states and between states and other actors’ (Barston 2006: 1). To do justice to economic diplomacy, it will be necessary to stretch these definitions and dispose of some misleading stereotypes associated with the term diplomacy.

According to these stereotypes, diplomacy is conducted only by people from foreign ministries; it applies to informal negotiation and voluntary cooperation, not to rule-based systems and legal commitments; it 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, as covered by this book. As the following sections will show, the scope and content of economic diplomacy is much broader and more purposeful.

International and domestic

Economic diplomacy is concerned with international economic issues. In principle, this should simplify the analysis. The Bretton Woods system of international economic institutions created after World War II was based on what John Ruggie has called ‘embedded liberalism’ (Ruggie 1982). This meant that the system developed rules for economic relations between states, but left national autonomy untouched. As long as domestic policies did not have negative impacts on others, governments could pursue whatever employment, tax or industrial policy they wished. For example, when the General Agreement on Tariffs and Trade (GATT) was formed in 1948, there was a clear distinction between trade issues that were subject to GATT rules, and non-trade issues that were not. Provided domestic policies did not discriminate against imported goods, GATT rules did not constrain national policy autonomy.

But the increase in economic interdependence over the last 70 years has put an end to such tidy distinctions between what is domestic and what is international policy. The advance of globalization since 1990 obliges economic diplomacy to go deep into domestic decision-making, so as to capture its international repercussions. The international financial crisis that began in 2007 was a striking example of this, since it was triggered by US policy in the housing market, the most domestic of economic sectors. Globalization thus makes economic diplomacy much more complex, bringing in more issues and more actors.

State and non-state actors

Economic diplomacy is mainly concerned with what governments do, in the broadest definition. It goes much wider than foreign ministries or any closed circle of bureaucrats. All government agencies that have economic responsibilities and operate internationally are engaging in economic diplomacy, though they might not describe it as such. Ministers and heads of government, parliaments, independent public agencies and sub-national bodies are all making their influence felt.

A great variety of non-state actors also engage in economic diplomacy, both by shaping government policies and as independent players in their own right. 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. International organizations are important as a forum for negotiations, but this book does not treat them as independent actors. Instead it focuses on how governments make use of these organizations and integrate them into their own decision-making processes.

Instruments and issues

Economic diplomacy uses a full range of instruments. It 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. Progress is usually made by persuasion and mutual agreement, although economic diplomacy can also be confrontational. However, in our view, economic diplomacy is best defined not by its instruments, but by the economic issues that provide its content. We follow the same categories as used by Odell in determining the scope of economic negotiation: ‘policies relating to production, movement or exchange of goods, services, investments (including official development assistance), money, information and their regulation’ (Odell 2000: 11). This is a very wide range of issues. A single volume could not cover them all and, of necessity, this book is selective. It concentrates on the central issues of trade, finance and the global environment. These are topics of high political profile, which arouse strong popular concern and bring out well the interplay between different actors in economic diplomacy.

While this is our preferred definition of economic diplomacy, we recognize that there are others, and this book aims to take account of them. One definition embraces the broad concept of economic statecraft, where economic measures are taken in the pursuit of political goals, including punitive actions such as sanctions (Baldwin 1985, Hanson 1988 and Blanchard and Ripsman 2008).³ This is reflected in Craig VanGrasstek’s Chapter 7 below. It is a definition that is closer to what in European terms would be a ‘grand strategy’ than the more concrete negotiation on international economic issues that we see at the core of economic diplomacy. Others see export and investment promotion as the principal function of economic diplomacy, like Van Bergeik (2009) and Kishan S. Rana (Chapter 6 below and Rana 2015), although we would call this commercial diplomacy.⁴ Okano-Heijmans (2013) offers an elegant synthesis of commercial and economic diplomacy, which also covers political factors. But it does not integrate the domestic process, which we regard as an essential component.

This book also has to make choices between the countries studied. Earlier editions concentrated on economic diplomacy as practised by the industrial states of Europe, North America and Japan. These had been the most influential countries in the international system and their decision-making practices were relatively open and easy to study. But this offers only an incomplete picture of the world in the early 21st century, where the large mature economies are losing ground. So this fourth edition, like the third, gives greater attention to rising powers like India, China and Brazil, and more space to small economies and developing countries generally.

The impact of markets

A distinctive feature of economic diplomacy is that it is sensitive to market developments. This sets economic diplomacy apart from political diplomacy and its study through foreign policy analysis. Increased economic integration has created global markets for production and investment. National regulatory policies can change the competitiveness of different locations, so that markets can punish national policies which are not in line with expectations. Market developments will shape the actors involved in any issue, influence their negotiating positions and possibly offer alternatives to a negotiated solution. As Odell puts it, markets can be endogenous to economic diplomacy, in that they form an integral part of the process (Odell 2000: 47–69). Yet claims that the market always offers a more efficient solution have been undermined by the collapse of the financial system in industrial countries like the United States, where the hubris of bankers and neglect of regulators led to disaster. Governments and regulators are now searching for processes that will discipline financial institutions, without stifling them, and prevent them becoming a burden on the state.

Theories and analytical tools for economic diplomacy

Theoretical aspects of economic diplomacy are the subject of Chapter 3 of this book, where full references are given; only the main points are summarised here. It is important to make clear at the outset that there is no single theory of economic diplomacy that can provide answers on how states, under given circumstances, will conduct policy. The disciplines of international relations or International Political Economy are influenced by a concern to develop predictive theories that are possible to test whether they are correct or not. But they only work by making significant simplifications, for example, by regarding states as unitary actors with clearly defined and stable policy preferences. Theories of this kind are very challenging in economic diplomacy, which is concerned with the dynamic interaction between international and domestic factors and between economic and political concerns. It makes no sense to assume that states are unitary actors, that negotiators have full knowledge of national policy preferences or that these preferences will be steady and not affected by market developments.

The alternative use of theoretical concepts is in putting together an analytical toolkit...

Table of contents

• Cover
• Title
• Copyright
• CONTENTS
• List of illustrations
• Notes on contributors
• Preface to the fourth revised edition
• List of abbreviations
• 1 What is economic diplomacy?
• 2 Challenge and response in the new economic diplomacy
• 3 Factors shaping economic diplomacy: An analytical toolkit
• 4 How governments conduct economic diplomacy in practice
• 5 NGOs in economic diplomacy
• 6 Serving the private sector: India’s economic diplomacy
• 7 Continuity and change in the politics of US trade relations with Russia
• 8 Conceptualizing China’s economic diplomacy: Conversion between wealth and power
• 9 Brazilian economic diplomacy: Agriculture and the WTO negotiations
• 10 European Union economic diplomacy
• 11 Economic diplomacy and small developed economies: The case of New Zealand
• 12 The economic diplomacy of small and poor countries in the global trading system
• 13 Lessons from the G7 and G8 for the G20 summit
• 14 Negotiating preferential trade agreements: Motivations and effects
• 15 International financial diplomacy and the crisis
• 16 Climate change negotiations: Pushing diplomacy to its limits
• 17 International investment negotiations: A case of multi-level economic diplomacy
• 18 The future of economic diplomacy
• Index