Economic diplomacy, the level of development and trade

Netherlands institute of International Relations Clingendael, 2010. — 33 p.In this paper we analyze how economic diplomacy influences bilateral trade flows. Particular attention is paid to two aspects which have not been considered in the empirical literature so far. Firstly, we study export promotion agencies, the network of embassies and consulates and the interaction between these government instruments. Secondly, we study how the level of development influences the impact of these instruments. We discuss the economic rationale for public intervention in international business activities and investigate whether market failure might provide an explanation and see what instruments are available to solve the problems at hand. An applied trade model is used for 36 countries in the year 2006 to focus on the effectiveness of the two main instruments of commercial and bilateral diplomacy: export promotion agencies and foreign missions, such as embassies. We demonstrate that commercial diplomacy is not a relevant trade-enhancing factor for intra-OECD (Organisation for Economic Cooperation and Development) trade, but that it is significant in the bilateral trade relationships of developing countries. Finally, some implications of our findings are considered, in particular regarding the optimal geography of the network of foreign missions.