New Challenges

Abstract

Economists and diplomats are different specimen. For long they could neglect each other’s existence. Typically economic and commercial policies were labelled ‘low politics’ by statesmen and diplomats. At first sight the tough dynamic world of commerce and the subtle glamour of diplomacy do not have much in common, but as any newspaper reader knows, international economic relationships are an important factor in the diplomatic sphere of influence and vice versa. ‘No matter who reigns, the merchant reigns.’ ‘Trade follows the flag.’ This book takes a closer look at international economics and politics. Economic diplomacy (of which commercial policy is an important element) is at the interface between these subject fields as its aim is to influence decisions about cross-border economic activities (export, import, investment, lending, aid and migration) pursued by governments and nonstate actors. A closer study of the interrelationships between, on the one hand, diplomacy and politics and, on the other hand, trade, investment and capital is warranted from a broader theoretical perspective. Mainstream neoclassical economic theory typically tends to pay little if any attention to public policy in the context of bilateral economic relationships. This is an undesirable situation and one can only agree with Bhagwati (1991, p. xvi) when he complains ‘How can we possibly explain what happens unless we bring in the political equations into our modelling at the same time?’ The lack of attention may be due to the fact that the economic recipe is to specialize according to comparative advantage and to avoid subsidies and other distorting government policies that reduce welfare. Indeed, most textbooks in international economics do not pay attention to the inherent political character of international economic exchange. A case in point is Ricardo’s Principles of Political Economy and Taxation ([1817] 1962, para. 7.1) which develops the theory of comparative advantage as an explanation for the ‘natural trade’ that leads Portugal to export wine and England to export cloth: