Economic diplomacy in the new era

Economic diplomacy in the new era

Economic diplomacy is a domain concerned with utilizing both diplomatic skills and economic instruments to promote a county’s strategic, economic and political growth. Economic diplomacy is a vital part of any nation’s foreign policy and has the potential to greatly boost its growth if properly implemented. It goes far beyond supporting foreign investments of countries’ citizens abroad. In a narrow sense, it is majorly concerned with international economic policy questions. For instance, it elaborates on how to maintain global financial stability without causing devastating levels of youth unemployment and social unrest or how to stimulate economic growth in underdeveloped countries while responding to climate change. It involves the use of economic sanctions, mobilizing international assistance, financing other countries and enforcing international rules.

Economic diplomacy has its roots in the principles of trade diplomacy. Classic trade diplomacy was initially represented only by the realm of government diplomats, with next to no involvement of civil society and the private sector. During the West-dominated era, in the reign of free market capitalism, the pragmatic link between economics and foreign policy had subsided. However, the 20th century brought the era of rapid globalization and substantial power shifts that once again sparked incentives and conditions for state involvement in the field of foreign policy in relation to economics. In one way or another, economic diplomacy started to develop in the era of globalization and has gradually evolved into what it is today.

More so, globalization has modified the structure of international economic relationships worldwide, impacting political and social fields of societies. It features a complexity of interconnectivity, with more actors influencing the outcomes of the established relationships. They competitively engage in claims to markets and resources and get engaged in activities traditionally regarded as those of diplomacy.

Due to globalization, businesses have engaged in expansion through mergers and acquisitions while emphasizing their efforts to influence domestic and international policy in their favor. Similarly, nations are engaged in fierce competition for economic gains to move regulatory institutions in the direction of their interests. On the same note, countries are striving toward cooperation in regard to standard- and rule-setting institutions, for instance, the World Trade Organization (WTO) and World Health Organization (WHO). In the complexity of these relationships, nongovernment actors are at the forefront in economic-policy debates. In this case, therefore, it is worth noting that the involvement of state and non-state actors – i.e., the multiplication of actors in economic diplomacy – defines the latter in postmodern times.

Diplomacy as a domain belongs to the ministry of foreign affairs (MOFA), but due to globalization, professional boundaries of diplomacy have been blurred. Emergent alternative actors within and outside the state, most of the time, operate independently from the MOFA. Other ministries responsible for specialized policies are getting more involved in policy dialogues with their counterparts in other countries. These ministries, including the ministry of finance and the ministry of economics, have challenged the role of the MOFA in economic diplomacy. However, it is of importance to highlight that the MOFA takes the lead in economic diplomacy more than other ministries, such as that of finance, because diplomacy is and ought to be an exclusive domain of the MOFA, and the other ministries should mainly be treated as stakeholders and be duly advised on their areas of competency.

The European Union is a major player in international economic diplomacy. It is the world’s largest trading bloc; hence, it has great influence on international economic diplomacy. The EU uses a range of competences, processes and tools for carrying out economic diplomacy. They include trade agreements, sanctions and actions within the WTO, as well as financial and monetary regulations. Making trade policy while utilizing trade agreements is managed by the principal-agent model, where the state is the principal and the European Commission is the agent. The European Commission’s Directorate General for Trade exclusively conducts all trade negotiations, permitted by the Foreign Affairs Council. Examples of trade agreements by the EU include the EU-China Comprehensive Agreement on Investment and the EU-UK Trade and Cooperation Agreement.

The competences of the EU in regard to economic diplomacy stem from its acknowledgement as a main player in the international scene. Pertaining to matters of trade, the WTO, particularly its Dispute Settlement Body, is a crucial regime-setting entity. The EU is a member of the WTO, including all its member-states, operating as a single actor and represented by a commissioner. The EU is one of the most frequent users of the WTO dispute settlement system, having been involved in over 180 dispute settlement cases. Actions of the EU within the WTO on economic diplomacy comprise improving, clarifying and supporting WTO agreements that may benefit its interests, such as the Doha Development Agenda.

Article 215 of the Treaty on the Functioning of the European Union (TFEU) provides for the interruption, in part or completely, of economic and financial relations with other countries. It is the legal basis of the EU’s economic sanctions. Economic sanctions are an integral part of the bloc’s Common Foreign and Security Policy (CFSP) and are applied as part of international efforts to curtail money laundering, financing of terrorism, and other crimes. EU sanctions may include freezing financial assets, restrictions, arms embargoes and travel bans, among other restrictions. These sanctions are issued by the European Council and all member-states must unanimously agree to them before implementation. In this case, examples of current EU sanction regimes include the Venezuela ban on arms exports and economic sanctions against Russia.

The Covid-19 pandemic has emerged as the world’s biggest current challenge, with persistently high mortality rates; the virus has gone beyond a health crisis, prompting major implications for relationships between countries, impacting both political and economic affairs internationally. In order to meet their own growing and changing needs during the pandemic, countries, even well-developed ones, have acted selfishly, for instance, banning medical equipment supply exports. Experts are concerned that the trend could temporarily or permanently hurt the principles of free trade. Some of the economic problems exacerbated by the pandemic include the explosion of global debt, an increase in inequality, a decline in globalization and free trade tendencies, persistent bifurcation of technology, as well as disruption of supply chains.

Before, just-in-time supply chains were perceived as the most efficient methods; however, looking into the future, many countries are opting to develop just-in-case supply chains for the purpose of resilience. Some experts have predicted that, due to the pandemic, the world would enter the trap of the backflow of globalization – that is the emergence of protectionist attitudes toward international trade. Such actions have devastated world trade flows. During the pandemic, the US, for example, has learnt a lesson that relying on Chinese industrial goods may damage economic resilience. Following that, the US has relocated its industry. In one way or another, Japan and Germany have followed suit. Japan set aside a 2.2-billion-dollar fund to assist its companies in shifting their production base from China to Southeast Asia.

The EU has 28 member-states for which it is the major body, manning their economic diplomacy matters. The EU plays a critical role in economic diplomacy for these countries; however, it is important to underline that these member-states have their own independent economic diplomacy strategies. One major argument for this is the issue of interests. The interests of a particular country may not align with those of the EU. A vivid example of the importance of a country having an independent economic diplomacy strategy along with the freedom to implement it is the case of Brexit. Beyond the emotional arguments for immigration, some of the reasons cited for Brexit include the EU threat to British sovereignty, EU imposition of burdensome regulations on the UK, entrenchment of cooperate interests, and prevention of radical reforms. All member-states, therefore, need to have their own strategies to uphold economic diplomacy to make sure their interests are served first. In our part of the EU, Cyprus since 2019 and Greece more recently seem to have been considering this tool and making steps toward putting it in the right context. Still, much remains to be clarified with other national stakeholders.

In summary, economic diplomacy is majorly utilized to promote countries’ interests. With globalization, the role of the state in economic diplomacy has been notably undermined, with non-state actors having more say in its aspects. The actors’ complicated relations create a certain competitiveness. It is thus vital for countries to redraw economic diplomacy boundaries that have been blurred by other actors to reinforce the role of economic diplomacy in promoting the country’s interests. Notably, the Covid-19 pandemic has led to the emergence of new trends in economic diplomacy that may last longer, and it is important that countries readjust their economic diplomacy policy and strategy to that effect.

Elias G. Hadjikoumis is a foreign, security and defense policy expert and a member of the International Institute for Strategic Studies.

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