Saturday, March 6, 2021

The Basics of Economic Diplomacy, Lessons from Latvia

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Mayelinne De Lara
Mayelinne De Lara
DIPLOMAT MAGAZINE “For diplomats, by diplomats” Reaching out the world from the European Union First diplomatic publication based in The Netherlands Founded by members of the diplomatic corps on June 19th, 2013. Diplomat Magazine is inspiring diplomats, civil servants and academics to contribute to a free flow of ideas through an extremely rich diplomatic life, full of exclusive events and cultural exchanges, as well as by exposing profound ideas and political debates in our printed and online editions.

By Eugene Matos de Lara

The coronavirus presents Germany’s most significant challenge in its postwar history; Chancellor Angela Merkel told viewers across the German nation. COVID triggered the most profound economic recession in nearly a century, threatening almost every fundamental aspect of our societies. The IMF estimates our global economy went down by 4.4% in 2020, the worst decline since the Great Depression. The only major economy to grow in 2020 was China of 2.3%.

The immediate outlook on the pandemic’s impact has made us think on how governments have dealt with prospects for economic growth. Most forecasts envision a 5 per cent contraction in global GDP, despite the outstanding efforts of governments to counter the economic spiral with fiscal and monetary policy support and even austerity.

During the COVID-19 crisis peak, EU leaders regularly met via e-conferences to discuss and assess the situation and coordinate action COVID economic reactions. The same happened in other states internally, namely Canada, who spearheaded federal strategic communication and policy building under the Trudeau government to reboot the economy. Something that will cost Canadians considerably down the line. Yet most if not all world leaders know that this situation is expected to leave lasting scars through lower investment, an erosion of human capital through lost work and schooling, and fragmentation of global trade and supply linkages. We are just about to enter a new world era.

It is instructive for us international relation practitioners to review and refine our diplomatic, economic strategies to guide us through these hardships. What diplomatic tools can we use to help our communities get through, and how to go about it?

A little refresher for those interested in economic diplomacy and its study has rapidly developed over the past decade that is very relevant today, especially. Yet, there is still no strict consensus among academics about its definition. Despite this lack of agreement, in this short article, I will try to outline the basics of economic diplomacy theory and some examples of its practice.

We could see economic diplomacy as a policy practice, institutional structure, behavioural aspects, and policy aims and results in dealing with the state and businesses’ financial and commercial interests. Indeed, different thinkers have given a variety of angles of practice and theories on economic diplomacy yet they all agree that: economic diplomacy can be defined as a set of methods and processes related to cross border economic activities such as exports, imports, investment, lending, aid and migration, all of which are pursued by state and non-state actors. It is divided into three main elements; economic diplomacy encompasses the use of political influence and relationships to promote trade and investment, monetary assets and relationships to increase economic security including multilateral negotiations to consolidate the right political climate and political-economic environment to facilitate the institution’s objectives.

To distinguish it from diplomacy in general, we would have to highlight the private sector’s involvement in decision-making processes precisely because market developments are closely monitored by private sector actors and not government agencies to stay informed about where and how to invest in their country of interest. Economic diplomacy became particularly important within our globalized economic interdependence context to set the tone of foreign policy. It is also essential for domestic markets while managing regional trade and competitive international investment agreements. To get the desired financial results, states would have to use their available resources agencies, networks, and yes – diplomatic tools, while practising economic diplomacy.

The subject touches many levels, and governments practice informal dealing on various issues such as trade agreements and investment agreements. Multilateral approaches are assisted with pre-established guidelines within a set framework of international organizations in different levels such as the World Trade Organization, the Organization of Economic Co-operation and Development, etc. Strategic communication is imperative between the private and government sectors to agree on set positions, hardliners, in other words, taken between government actors and their stakeholders before negotiating with other countries or organizations in this framework.

Moreover, we must not forget the plurilateral or more commonly known as the regional approach. It offers a streamlined, expressway for exploring the market opportunity, The EU being the best example of this approach. From the plurilateral perspective, we can observe how economic diplomacy has many tools to remove trade barriers while its users aspire to liberalize economies. Liberalizing markets, of course, has proven itself easier done in the regional context.

Contemporary practices see economic diplomacy as mainly concerned with formal government activities to promote their economic interest. However, our readers are invited to see the idea in the broader sense, which goes much further than foreign ministers’ mandated responsibilities. Engagement in economic diplomacy concerns all government agencies that have economic responsibilities, it is not exclusive to the foreign ministries, although they might not acknowledge it themselves. That is, in other words, all ministers, and independent public agencies and institutions that are involved with economic issues are engaged in economic diplomacy.

Analyzing the current global cooperation structures shifts economic diplomacy to be deployed by states seeking to achieve the newly flexible international environment’s financial goals. These flexible approaches and the weakening adherence to strict multilateral rules have made bilateral policies more attractive to economic diplomacy. The same could also be said about plurilateral methods; geo-economic power shifts encourage governments to reassess their national and foreign policies to be compatible with regional power shifts. Modifications and changes spark new thinking, such as on commercial diplomats’ mandate working on trade and investment promotion. In emerging economies and small states, a larger role for the ministry in international economics becomes necessary for success because emerging forms are seen to have a much stronger influence on the domestic private sector. Therefore public institutions have a larger stake in economic diplomacy than the private sector alone.

Nonetheless, economic and cultural and historic reasons explain why trade partners in emerging economies expect state involvement from their foreign partners in investment and trade. This contrasts the separation of public and private sectors as seen in larger capitalist economies. Economic diplomatic practices reflect the larger private sector and allow these to have an essential role in diplomatic practices. In the same way, states must be flexible; they have to change how they go about diplomacy depending on the economy they are dealing with.

As mentioned above, due to its main concerns with governments’ actions and what they do to promote their economic interests, economic diplomacy involves government agencies as primary actors. It recognizes the involvement of non-governmental entities in shaping economic diplomacy strategies.

The case study of Latvia’s economic interests regarding economic diplomacy manifests in facilitating exports and promoting foreign investment, a good form of flexible economic diplomacy. Of course, most of the work concerning economic diplomacy is done through the Latvian Ministry of Foreign Affairs and its diplomatic representation network across many countries, each with commercial representatives that would deal with economic diplomacy. However, other ministries such as the Ministry of Economics, the Ministry of Transportation, the Ministry of Justice, the Ministry of Agriculture and the State Chancellery are also in touch with, say the embassies to define commercial targets.

Meanwhile, other government agencies such as the Investment and Development Agency of Latvia are involved, indirectly, in dealing with various issues more or less related to the realm of economic diplomacy. Relations between government agencies and non-governmental actors have been coordinated through several forms of cooperation, both formal and informal. Diplomacy, commerce, trade and international investment concepts are therefore hard to separate in cases of practical implications for Latvia, which leads to an assumption that businesses may have an easier way to access decision-making. Indeed, economic diplomacy favours the discussions as direct as a business owner and an ambassador.

Internationally, Latvia’s economic diplomacy policy is highly influenced by its business sector and its membership in the EU. Since the EU has an exclusive role for trade policy and significant part of the investment policy, the EU monopolizes much of the economic diplomacy arena; the EU institutions are also negotiating EU-level treaties and agreements on behalf of Latvia. However, Latvia is still free to negotiate bilateral agreements with third-party countries, although only in cases where the EU has not already started negotiations and with the formal approval of other member states, and engage in external economic activities to promote trade and investment. Over the last 25 years, the Latvian government established a fully functioning set of state organizations from the ground up, responsible for formulating and executing an economic policy which includes economic diplomacy.

These frameworks imply action on both domestic and external levels for Latvia to be competitive enough in the international environment. Main policy initiatives suggest that the government is pursuing an active partnership with non-government actors to facilitate a better environment for business. Other state institutions, indirectly would do their part by informing and supporting Latvian companies that wish to enter foreign markets and provide useful services to foreign investors and enterprises looking to invest in Latvia. That said, it is evident that the Ministry of Foreign Affairs is not only the only coordinator since other agencies’ activities help towards this end as well. Yet the foreign affairs organizations have become the spearhead of foreign economic management since they are best positioned to represent and promote Latvian businesses abroad and access foreign markets.

While there is no universally useful institutional framework of economic diplomacy applicable for every country, the coordination of economic diplomacy in Latvia has adapted to the changing environment and issues that are most pressing in a particular time frame, and that is so considering the current changes and tensions coming from contemporary EU challenges. This and other institutional frameworks’ success or failure can be observed only by an in-depth look at specific issues of economic diplomacy, not a general overview. To conclude, for those who are embarking in studying the challenges of a state’s economic diplomacy, they must dissect and uncover its layers due to its broad umbrella covering a series of stakeholders interconnected through formal and informal activities.

A bout the author:

Eugene Matos De Lara

The author is an scholar, teacher, pilot and a Canadian military officer. The former publisher of the academic journal Border Crossing, and a former member of the International Public Diplomacy Institute also worked in embassies, international political organizations, and private law firms. Matos De Lara, also worked with several indigenous leaders and community activists. LL.B, Political Science and Public Administration degree from the University of Ottawa, Community and Public Affairs from Concordia University and Masters in Diplomacy from the University of Malta. Currently in the Faculty of Civil Law, and International development at the University of Ottawa. Eugene is a regular contributor to the Institute of Middle Eastern and Balkan Studies, and at the Geneva Desk for Cooperation.

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