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Trade Policy

Diplomacy and International Trade

(London, 1994)
“Today, the generally accepted view (at least on the part of most states) is that trade, and particularly free trade, is good, notwithstanding the conflicts (and bouts of protectionism) that arise between individual states and between geopolitical blocs as each try to advance their own interests.

Besides the material benefits that free trade is assumed to bring (it enables countries to consume commodities that their resource endowments might not otherwise permit and maximises global output and economic growth by the efficient use of resources based on the theory of comparative advantage), there has been another reason for promoting free trade that can be traced to the “collective memory” of the economic nationalism of the 1930’s and it’s role in the developments that led to WWII. As Rosecrance (1) points out: “In international society where government does not exist, nations will have power conflicts unless they can work out a system of interdependence to satisfy their needs. Only the reciprocal exchange and division of labour represented by the trading world can prevent conflict in such an anarchic environment”. These were two of the reasons that led to the creation of the multilateral economic institutions which were to regulate the post-war world economy, namely, the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (IBRD) -the World Bank-, and an International Trade Organization which did not materialise and was substituted instead by a “provisional” arrangement in the form of the General Agreement on Tariffs and Trade (GATT).

Since 1945, the volume of world trade has increased substantially, to reach US Dollars 3.600 billion in 1993 (excluding services), and accounts for a significant percentage of world output, albeit unevenly distributed, developing countries’ (including the former Soviet Block) share of world merchandise exports in 1992 amounted to only 30% of the total. Therefore, it is not surprising that countries will vie with each other to obtain as big a share as possible of it, and that those that gain the most from it should place it high in their political agenda, especially in the post-Cold War world -President Clinton in his address at the American University on 26.2.93 (2) talked of making “trade a priority element of American security”. As with many of the areas in which states interact, international trade is characterised sometimes by conflict (competition), others by cooperation, and most of the time by both simultaneously.

In examining the role that diplomacy plays in international trade we can distinguish two different settings, the bilateral and the multilateral, and two types of diplomatic methods or functions that are adapted to suit the objectives to be pursued. Both, the bilateral and multilateral settings have one thing in common, in them, diplomats determine, by negotiation, the general framework under which trade is to be conducted, but they differ in the bargaining process, the interests of the participants, their relative power, the degree of leverage they can exercise in linking issues, and the manoeauvrability that can be achieved within the bargaining space.

Multilateral settings can be near universal like GATT, regional as the North American Free Trade Agreement (NAFTA) and the Association of South East Asian Nations (ASEAN), and in the unique case of the European Union (EU) a regional agreement that goes beyond trade.

Some of the differences mentioned above can be illustrated by referring to the GATT. The main assumption underlying the GATT is that free international trade will benefit all countries by promoting the efficient use of resources, on the basis of the theory of comparative advantage, and increasing world output. ItÂ’s central aim is the promotion of free and fair trade, and to this end, it seeks the removal of all barriers to trade by the reduction of tariffs and the elimination, or at least the conversion into tariffs, of non-tariff barriers. In addition, it seeks to end unfair trading practices and provides a forum for dispute settlement. An important characteristic in the GATT negotiations, or rounds, is that decisions are arrived at by consensus of all the participants, or contracting states (117 at the last count), on a package of measures, and therefore, whilst countries will try to promote their individual interests, in the end they have to weigh the overall potential long-term benefits that a successful conclusion of the negotiations will bring (a study by the OECD and the World Bank estimated that the measures proposed in the Uruguay Round would add US Dollars 213 billion to world income in 2002 and every year thereafter), against short-term gains or losses.

Thus, the diplomatic method used in this setting will be one that tries to promote each countryÂ’s interests, whilst at the same time being prepared to reach a compromise. The position of the diplomat may, however, be influenced by strong domestic pressures and particular circumstances that make countries deviate from this course of action, or adopt an intransigent position. For example, the pressures of the farm lobby in the US, and the introduction of the Common Agricultural Policy (CAP) by the European Economic Community (EEC) in the 1960Â’s meant that, from the start, GATT disciplines on agriculture have been very weak. However, at the beginning of the 1980Â’s when the US was exporting double the amount of agricultural products that it was importing, it changed its position and began to press for a reversal of the exceptions granted to agriculture. The US was joined in itÂ’s objective of bringing farm trade under GATT disciplines by the Cairns Group, created in 1986 by a group of agricultural exporting countries to exert pressure for the removal of barriers to farm trade.

The ensuing confrontation with the EEC appeared to have been resolved by the Blair House agreement concluded in Washington, but later, France, under strong pressure from itÂ’s farmers, reneged on the deal, threatening the conclusion of the Uruguay round. The matter was resolved by the US agreeing, in exchange for FranceÂ’s acquiescence of the deal, to defer negotiations regarding audio-visual trade -another bone of contention with France- and by undertakings to compensate French farmers from the EU budget. The “negotiating” strategy of French diplomacy, regardless of any other judgements about it, would appear to have been based on an element of “bluff” -would France have really been prepared to jeopardize the round?-, by calling the very poor “bluff” of the US -indicating a retrenchment into regional trading blocs, NAFTA and a remodelled and strengthened Asia-Pacific Economic Co-operation Forum (APEC)-, and by good timing – the authority of the US Congress to the Administration to negotiate the round was due to expire.

Other countries are seldom in the strong negotiating position as the one described. The Less Developed Countries (LDCs), for example, are normally limited in the degree of leverage they can bring to bear in multilateral negotiations. Their weakness not only stems from their economic disadvantage, but also, in the post-Cold War world, from their decreasing strategic importance. Having been enticed, if not forced, to open their economies and to engage in international trade with promises of economic growth, they faced, instead, foreign debt and Structural Adjustment Programmes (SAPs). Although the original GATT included provisions for LDCs, it was not until the mid to late 1960’s, with the creation of new states in Asia and Africa, that these countries began to press for their problems to be addressed “seriously” by the developed countries of the industrialised world. Their negotiating strategy was to be based on “strength by numbers” and their vehicle the Group of 77 (G-77), a coalition of developing countries created in 1964 at the first United Nations Conference on Trade and Development (UNCTAD).

As Weiss (3) has pointed out : “In retrospect, the birth of UNCTAD and its group system filled two lacunae in the existing system of international debate on economic issues, one institutional and the other logistic. There was really no forum in which the views of newly independent and poorer states could be presented effectively and where the very nature of their relationships to the more economically advanced countries of the North could be investigated and discussed…The GATT, was seen…as a richman’s club controlled by the West…it still omitted several areas of vital concern to developing countries…”. The efforts of the G-77 were directed, principally, towards linking trade with overall development and seeking preferences for their exports (mainly primary commodities). The results of this system of “group bargaining” materialised, on the one hand, in the passing of various resolutions at the United Nations, especially, the Declaration on the Establishment of a New International Economic Order in 1974, albeit with strong reservations on the part of the industrialised countries and it’s non-binding character, and on the other, into concrete concessions, namely, a number of international commodity agreements, the introduction of the generalized system of preferences (GSP) in 1971, and stabilisation agreements, amongst others. Nevertheless, their position today, is not much better, in some cases even worse, than it was then.

There has been a marked difference between the developmental paths of LDCs, especially with regard to some of the countries in South East Asia and Latin America compared to countries in Sub-Saharan Africa, and there is therefore, less common ground for joint action. Whilst the Newly Industrialised Countries (NICs) of South East Asia embarked on export led economic growth, with growth rates averaging 5-6% and an increasing share of world merchandise exports that now stands at about 21%, the world economic recession has depressed demand and the prices of primary commodities and has led to increased protectionism in industrialised countries, with drastic consequences for most African economies still relying on one or two of these commodities for almost 80% of their export revenues.
Whilst multilateral settings determine the general framework for conducting trade focusing on what has been called the “collective goods” problem, bilateral settings, besides setting a general framework, are directed to more specific issues and, unless the relationship between the two countries is one of dependency rather than interdependency, the concept of “reciprocity”, will figure more prominently. In addition, because the setting is more issue specific and one where concrete results can be more easily identified, there is an inclination, when relations are good, to avoid political rhetoric and to concentrate on practical matters, namely the promotion of trade. The diplomat involved in this aspect of the bilateral setting is at his or her most visible when posted to one of his or hers country’s embassies abroad.

The functions of an embassy, as regards to bilateral trade and the related activities of finance and investment, can be divided into: political, economic and commercial, although at some stage they may well overlap. The political function will be concerned with negotiating and establishing the general and particular (i.e. sectorial) framework under which specified trade is to be conducted. It will cover such instruments as: agreements on air services, fishing and transport; investment protection agreements (IPAs), and economic cooperation agreements including aid. The economic function has more to do with “intelligence” in that it entails the gathering of information regarding the economic situation of the country. This will include a knowledge of government policies, investment patterns, the workings of the local markets, etc. The commercial function is, perhaps, the most visible as regards to trade promotion and will involve: setting up trade fairs, giving advice on local business methods, providing or facilitating access to government departments and local trade organisations and companies, and keeping abreast of business opportunities.

In essence, the above three functions may, generally, be labelled the “business” approach to trade diplomacy, in that it concentrates on promoting the clear-cut benefits of trade between the two countries. In addition, we can also identify the “foreign policy” approach to trade diplomacy. I should point out that the distinction is one of convenience for the purpose of examining the subject, since both approaches often interact, and especially as regards to the political function of embassies, it is difficult to identify a clear-cut dividing line. But, what is apparent is that economic actors may have a different foreign policy agenda from that of the state, and that the latter will sometimes use trade as a foreign policy instrument to achieve non-economic objectives. As Barston (4) points out: “…In this sense trade is used to support or further objectives which are not exclusively economic but political or military. The political uses of trade involve diplomacy in initiatives to develop goodwill, promote regional cooperation, gain political influence or strategic assets within another state, through to coercive sanctions and other forms of punitive behaviour”.

The complexities of trying to reconcile economic and non-economic objectives through the medium of foreign policy and even to identify what those foreign policy objectives are, may be examined by referring to the policies of the U.S.

As mentioned at the beginning of this paper, the Clinton administration has made trade a priority element of its security, which has led to the creation of a National Economic Council in the White House and of a Commerce Department Advocacy Centre to mobilise resources and support on behalf of US companies seeking export orders. The Commerce Department Undersecretary for Trade, Mr.J.Garten, has been quoted as saying that “government advocacy would go beyond the usual representations by ambassadors or visiting senior officials, to making strenous efforts involving everything from financing to foreign policy pressure” (5), witness the announcement last February of the US Dollars 6 billion deal to supply civil aircraft to Saudi Arabia, which appears to be linked to a rescheduling of Saudi Arabia’s military debt to the US, and which counted with the involvement of three cabinet secretaries and the President himself. However, there are other aspects to American security, and policy objectives, that the US administration is finding difficult to reconcile with its emphasis on trade and the pressures from domestic commercial interests, especially if viewed in the context of America’s status as a superpower (or rather “the superpower”) and its consequent global responsibilities. These difficulties are apparent in its policies towards Asia, dynamic in economic terms, but with potential security implications in view of the antics of the rogue North Korean regime, and the question mark over China’s aspirations in the region.

US policy towards China is torn between, on the one hand, commercial considerations (American exports to China are worth US Dollars 9 billion and account for around 200,000 jobs) and, on the other, its policy of pressuring China to improve its human rights record by threatening not to renew the latterÂ’s MFN status. Possibly an unwise approach when it appears that China is the only state that has some influence with the regime in North Korea. The conflict in policy is also apparent in AmericaÂ’s relations with Japan and the continuing row over the latterÂ’s US Dollars 51 billion trade surplus, with threats of economic sanctions unless Japan rectifies the imbalance by opening its markets. Whatever the merits of AmericaÂ’s argument as regards to the dispute over JapanÂ’s trade practices (flawed in some respects and dubious as to the remedies sought to resolve it), they would not appear strong enough to damage relations with its strongest ally in the region, and one that has been conducting a diplomatic effort towards China viz-a-viz the threat from North Korea. In these cases it would appear that trade considerations, promoted by US commercial interests, have become more important than wider security implications.

A further aspect of bilateral trade relations concerns the exports of arms and the provision of aid, particularly tied aid. This is an area in which governments will go to extraordinary lengths in order to secure sales, sometimes even to the point of misleading their own judiciary and legislative bodies and breaking their own guidelines for the exports of such material, witness the Matrix-Churchill case concerning the sale of “dual purpose” machinery to Iraq, and the affair over the Pergau dam involving the apparent linking of an arms deal with aid for the construction of a dam in Malaysia. In 1992 the developing countries received US Dollars 60 billion of aid, with just over two-thirds of it in the form of bilateral aid. The latest figures available (for 1989-91) show that around 28% of bilateral aid is tied to the purchase of goods and services from the donor countries (6).

Hitherto, we have examined trade on the basis that governments have some kind of exclusive control over “their” trade and the companies that carry out such trade, and that the latter, in some way, will promote the “national interest” before any other considerations. But, is this a realistic assumption in the interdependent world of unregulated capital flows and the pervasiveness of transnational corporations (TNCs)?

As Robert Reich (7) has pointed out: “The CEOs of American-owned corporations continue to rail against what they claim to be unfair foreign competition, of course. It confirms their patriotism and it might get them a tax break. But beyond politics and public relations, the CEO is wheeling and dealing worldwide, oblivious to national borders.” The TNCs are the embodiment of the important structural changes that have taken place in the world economy, namely, technological advances, the internationalisation of production, the mobility of capital and advances in communications. It is particularly the internationalisation of production, both by transferring production from high-wage industrial economies to low-wage developing economies (or to the newly industrialised countries of South East Asia), and by being able to break production from large-scale to high-value and therefore being able to exploit a global division of labour, that has had important effects on the role of diplomacy in international trade, and the relations between states.

In what Susan Strange (8) has called “a new dimension of diplomacy”, the structural changes in the world economy have intensified the competition among states for world market shares and has forced them to bargain with TNCs to locate their operations within their territories and to try and convince “national” firms not to leave. The effect of these changes has been to introduce a further dimension to conflicts and disputes between states, witness the rows between states when a TNC moves production from one to another, the UK’s opt-out from the Social Chapter of the Treaty on European Union in order to maintain a “competitive edge”, and the recent proposals on the part of the US and France for “social dumping” to be subject to GATT rules, on the basis that it represents unfair competition in trade. The result of hightened conflict may be an increase in the resort to trade sanctions and to unilateral protectionist measures, either in visible form (the use by the US of the “Super 301”) or by means of “voluntary” restraint agreements, and non-tariff barriers to trade.

In conclusion, it is evident that the role of diplomacy in international trade is a complex one, and multifaceted depending on the objectives of states. On the one hand, we see states cooperating with each other, in both multilateral and bilateral settings, to lay the ground rules and the general framework for the conduct of trade, and on the other, intense competition and protectionism when their “national” interests are at stake. What is apparent is that trade, especially in the post-cold war era, has made its way into the realm of “high politics”, spured by the possibility of linkage between trade and non-trade issues, and by the “new dimension” of diplomacy as a result of the structural changes in the world economy. Besides anything else, trade diplomacy has become a powerful tool in the pursuit of foreign policy objectives, which is used both to sanction and to reward, and to gain political influence (the example of the European Union being a case in point).

Results-Oriented Trade Policy and International Trade Economy

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See Also

  • Economic Development
  • Social development

Resources

Notes

[1]Rosecrance, R. The Rise of the Trading State: Commerce and Conquest in the Modern World, (Basic Books Inc, New York, 1986), p.25.
[2]William J.Clinton, A five Step Agenda for a New World, excerpt from American Scene 12.3.93 in W.Olson, ed, The Theory and Practice of International Relations, (Prentice-Hall Inc, New Jersey, 1994).
[3]Weiss, T.G. Multilateral Development Diplomacy in UNCTAD, (Macmillan, London, 1986).
[4]Barston, R.P. Modern Diplomacy, (Longman, London, 1988), p.159.
[5]Financial Times 24.2.94
[6]The Economist 2.4.94
[7]Reich, R. The Work of Nations, (Simon and Schuster, London, 1991).
[8]Strange, S. “States, Firms and Diplomacy”, in International Affairs, 68, (1), 1992a, pp.1-15, p.6.

See Also

Managed trade
International Trade

Further Reading

  • Barston,R.P. Modern Diplomacy, (Longman, London, 1988).
  • Olson, W. ed, The Theory and Practice of International Relations, (Prentice-Hall Inc, 1994).
  • Reich, R.B. The Work of Nations, (Simon and Schuster, London, 1991).
  • Rosecrance,R. The Rise of the Trading State: Commerce and Conquest in the Modern World, (Basic Books Inc, New York, 1986).
  • Strange, S. States, Firms and Diplomacy, in International Affairs, 68, (1), 1992a, pp.1-15.
  • Weiss, T.G. Multilateral Development Diplomacy in UNCTAD, (Macmillan, London, 1986).

Hierarchical Display of Trade policy

Trade > Trade policy
Trade > Trade > Supply and demand
Trade > Tariff policy > Tariff policy
Trade > International trade > Trade relations > Trade agreement
International Relations > International affairs > International agreement > Protective clause
International Relations > Cooperation policy > Cooperation policy > Trade cooperation

Trade policy

Concept of Trade policy

See the dictionary definition of Trade policy.

Characteristics of Trade policy

Resources

Translation of Trade policy

Thesaurus of Trade policy

Trade > Trade policy > Trade policy
Trade > Trade > Supply and demand > Trade policy
Trade > Tariff policy > Tariff policy > Trade policy
Trade > International trade > Trade relations > Trade agreement > Trade policy
International Relations > International affairs > International agreement > Protective clause > Trade policy
International Relations > Cooperation policy > Cooperation policy > Trade cooperation > Trade policy

See also

  • Trade system

Hierarchical Display of Trade policy

Trade

Trade policy

Concept of Trade policy

See the dictionary definition of Trade policy.

Characteristics of Trade policy

Resources

Translation of Trade policy

Thesaurus of Trade policy

Trade > Trade policy

See also

  • Economist
  • Economics science researcher
  • Economics analyst
  • Business economist

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