Economic Diplomacy in the Era of Great Powers

The emergence of a multipolar global economy in which the US is no longer the main engine of growth has boosted the role of economic diplomacy, the setting of foreign economic policy. While the EU remains the world’s biggest economic bloc and the US is still an economic powerhouse, it is Asia – China in particular – which has created hundreds of millions of new middle-class consumers, helping to drive global economic growth.

This shift has ignited an era of competition between the US and China and, by implication, a debate about the merits of different political and legal systems. The difficulty for the rest of the world is how best to navigate this highly polarized climate – in recent history, only the Cold War comes close to having matched the adversarial dynamics of such a divided international community.

In conducting economic diplomacy, governments should consider their economic strengths, the importance of transparency, and how best to operate in a fragmented international system.

First, the setting of trade and investment policy should take into account developments in the global economy. One trend worth noting is the rising importance of services – in particular digital services – in international trade. The expanding cross-border trade in intangibles such as business services and data means the negotiation, definition and enforcement of standards to regulate these are of growing importance for the global economy, and for policymakers in many countries.

In contrast, negotiations around merchandise trade are likely to take a somewhat lower profile. Under the World Trade Organization (WTO), tariffs on manufactured goods have dropped significantly in any case – though there is still scope to lower them. Contemporary diplomacy, as well as disputes, around the lowering or raising of barriers to international trade will increasingly concern non-tariff measures applicable to services rather than those, such as tariffs, that traditionally apply to goods.

For service-based economies, it is vital free-trade agreements (FTAs) encompass regulations and standards for intangibles. But this is difficult in a multipolar global economy where the US, China and the EU all have different legal and regulatory systems, and raises the prospect of a fragmented global trading system divided into blocs of countries adhering to different standards.

A pluralistic or mini-multilateral approach to trade such as the stalled Trade in Services Agreement (TiSA) could help resolve elements of this division. TiSA was launched in 2013 by a group of advanced economies, not the entirety of the WTO, to further opening up global services trade. However, talks have been on hold since 2016 and, in the current climate, it is near impossible to conclude negotiations when the major economies do not come to the table and instead promote their own standards with their closest trading partners.

Second, policymakers should consider that, in an era of heightened trade tensions, any framework for economic diplomacy needs to be transparent if it is to be trusted and credible. Such a framework could centre on commercial openness and consistency with a country’s foreign and intelligence policy aims. For example, clearly spelling out how a country reviews prospective foreign investment and applying this consistently would demonstrate that all projects are treated equally without singling out any individual country. This would be an improvement over an ad hoc and less transparent approach .

A major challenge in creating a ‘principle-based’ economic diplomacy framework of this kind is reconciling competing policy aims. To this end, several key questions need answering. Should trade agreements encompass non-economic elements, such as foreign policy aims? Do concerns over national security mean that trade and investment agreements should favour allies? Could such a framework assess a trading or investment partner in terms of national security as well as potential economic benefit?

A country should also re-think how to undertake a wider international role when embarking on economic diplomacy. The inability of the major powers to set new global rules has had a detrimental impact on an international system under significant strain. The stalling of multilateral trade talks and urgency of international coordinated action on global public goods, such as health and the environment, shows there is a pressing need for a new approach to international relations.

Economic diplomacy could, and should, bolster the rules-based multilateral system. The challenge is engaging the major powers without whom widespread adoption of global policies and standards is less likely. Yet the chances of wider adoption might actually be better if a proposal does not come from either the US or China. This opens up the opportunity for other countries to be ‘honest brokers’ and potentially improve their own international standing.

In an era of increasing tension between great powers, economic diplomacy requires re-tooling. It should consider not just economic considerations, but also broader foreign policy aims, greater transparency, and a pluralistic approach to global rules to strengthen the multilateral system.

This article is part of the Chatham House Global Trade Policy Forum, promoting research and policy recommendations on the future of global trade.