Economic Diplomacy Strategy of the European Union

By Maria Tsanova (Ambassador to Germany)

After the Second World War (WW2) ended in 1945, a demolished Europe strived for preservation and increased stability. There was recognition of the importance of unity and improved cooperation, an ideology that influenced the formation of the European Union on November 1, 1993. Such recognition was confirmed with the signing of the Maastricht Treaty, a milestone in terms of economic and political stability as well as human rights abuse prevention. Having satisfied their basic human needs and safety, Europeans strived to improve their livelihood and recognised how economic progress and effective political conduct are interlinked (European Union, 2023a).  

Economic Prosperity as a European Value

Following the acknowledgement of the value of economic prosperity, further events of great significance for the economic development of the EU ensued. On January 1, 1993, the single market was established, a concept based on the principle of four freedoms, which allows people, goods, services and money to move freely from one Member State to another (European Union, 2023a). The single market is a primary driver for economic growth since it stimulates business expansion and enforces synchronisation of tax policies, legislative frameworks, and the harmonisation of trade standards (European Union, 2023b). This concept was subject to further development when the European Economic Agreement (EEA) entered into force on January 1, 1994. The single market turned into an internal one by adding the so-called “flanking and horizontal” policies (European Free Trade Association, 2023)  to the principle of four freedoms. These policies affected various social spheres, including “research and development, education, social policy, the environment, consumer protection, tourism and culture” (European Free Trade Association, 2023). Therefore, the EEA was essential to equalising the rights of economic powers and EU citizens (European Free Trade Association, 2023). 

The Role of the World Trade Organization (WTO)

A key instrument of global economic worth today is the World Trade Organization (WTO). It was created in 1995 as an official replacement of the General Agreement on Tariffs and Trade (GATT) of 1948, primarily to boost economic recovery after WW2. The WTO’s main function is the unity of trade regulations under global rules that apply to the European Union as a significant trading block and its individual Member States. The WTO comprises governments and customs territories, which resolve trade disputes and represent a forum for international trade negotiations. Additionally, the Organisation monitors Member States through the Trade Policy Review Mechanism, increasing the chances that each implements a successful and transparent trade policy. Transparency, predictability, and fairness are the central values which stand at the basis of the creation of the European common market and represent the EU’s objectives in being part of the WTO. A remarkable occurrence is that the EU can exercise influence over the WTO by strengthening the latter’s monitoring role and overcoming deadlock on the Organisation’s dispute settlement system (European Commission, 2023).  

The Formation of the Economic Diplomatic Approach

Many factors led to developing the EU’s economic and diplomatic approach. The economic order has been undergoing significant changes worldwide since the start of the twenty-first century and are felt most significantly regarding the WW2 balance of power. However, emerging economies have replaced this balance. Developing countries like China have an extremely competitive position in the global market, whilst industrialised countries can no longer dominate. The rise in developing countries is significantly correlated with increased globalisation. Business relations are starting and evolving quickly due to easier access to global markets via developed transport links and enhanced information technology. Therefore, the scale of trade is globalised today, and priorities such as peacemaking, security, and human rights require international unity of action (Imbert, 2017). 

Definition of Priorities

Diplomatic measures are based on careful analysis and consideration of possible current and future scenarios. From a strategic perspective, the initiatives undertaken regarding European economic diplomacy should prioritise international business development and support existing structures to address any shortcomings. Focusing on improving already functional structures rather than creating new ones is more efficient since these additions would enhance and reform the status quo. Examples of improving existing structures include introducing training to employees and cultivating talent to increase the quality of the labour pool and hence reduce any shortcomings. All actions must be demand-driven and put decisions into a long-term perspective whilst stand-alone missions must be avoided since they do not require proper business preparation and follow-up (The Association of European Chambers of Commerce and Industry, 2015). 

The Importance of International Relations in terms of Economic Growth

Nowadays, countries widely use economic diplomacy to establish secure relations that ensure maximum productivity and monetary gain while also strengthening the political ties between Member States. The main purpose of economic diplomacy is to exercise economic power outside of a State’s borders to protect and promote national interests, which would increase the EU’s visibility (Diplomatic Council, 2023). For these interests to be defended internationally, cross-border trade must be facilitated for national businesses.  The increase in international business operations is linked to the capability to influence and impact international situations, whilst the gain of international approval of a State’s economic approach results in the successful attraction of foreign direct investment at its territory. The goal of economic diplomacy is not limited to economic gains but can also be achieved through geo-political influence and a peaceful network based on diplomatic principles. This network must have shared values to be communicated to third countries to achieve understanding (Imbert, 2017). 

The Four Pillars of Economic Diplomacy

The value system and priorities of the European Union are based on the four pillars of economic diplomacy. Firstly, economic diplomacy is based on the principle of subsidiarity. This is exercised effectively only via unity of action and if Member States aim to collaborate by exchanging knowledge and strengthening the EU’s international business networks. Each Member State has different strengths, and if it balances them and its weaknesses with those of the other European countries, it has improved chances of international economic growth.  Secondly, the EU must strive towards non-duplication and complementarity. The support must compliment the established structures at a national and international level, with the international level being the target market. Thirdly, the legitimacy of any actions taken regarding European economic diplomacy is determined by the principle of subsidiarity and is expressed in terms of the European value-added, which can be solidarity of action, increased visibility, advocacy activities, and giving a voice to the European business community. Lastly, the EU should focus on demand. The process of business development starts domestically and ends abroad. Therefore, there is a need for resource distribution along the whole chain. In summary, the four pillars of economic diplomacy are the principle of subsidiarity, non-duplication and economic growth, and demand-driven actions and result in the creation of a well-functioning foreign policy as well as stimulate conversations between diplomats and businesspersons (The Association of European Chambers of Commerce and Industry, 2015).  

The Role of Economic Diplomacy in the Corporate World

Economic diplomacy can also be labelled as corporate diplomacy since it promotes Small and Medium Enterprises in the EU.  This promotion became necessary when in 2011 statistics were published revealing that from the 25% of EU-based SMEs, only 13% were involved in exporting products and services outside of the internal market. Therefore, the trade of Member States was well developed when business operations were conducted between them but poorly represented when it came to cooperation with non-EU countries. The overall increase in cooperation can be a favourable natural consequence of globalisation if there is a common and comprehensive vision of the EU’s international business expansion. Establishing a clear vision is linked to strengthened competitiveness, which is stimulated by productivity, innovation, and skill investment. Therefore, it can be deduced that forming a coherent strategy for safeguarding the goals of the EU’s economy is essential for achieving growth and establishing a strong position in the global market (The Association of European Chambers of Commerce and Industry, 2015). 

Challenges and Considerations

Furthermore, shortcomings in the current institutional architecture should be addressed promptly. These can either be activity-based or organisation-based. The first category includes cases of limited coordination and meetings between representatives of the European Commission and private persons of the Member States’ business community. Additionally, any lack of exchange of market intelligence regarding free trade negotiations and incoherent cultivation of business practices among Member States represent a threat to international business development. Moreover, when it comes to the second type of challenge faced by European economic diplomacy, the organisational, there can be an overabundance of European Commission services and policies that are insufficiently focused on businesses. Therefore, there are various challenges for the economic diplomacy of the EU, and it is its job to prevent or solve them with diligence (The Association of European Chambers of Commerce and Industry, 2015). 

Main Goals of the EU’s Economic Diplomacy Measures

European economic diplomacy is a strategic tool for increasing economic prosperity via political measures and influence. When utilised effectively, economic diplomacy results in the strong representation and advocacy of the economic interests of Member States outside of the European Union. The European economic block needs to be treated as a major player globally. Therefore, diplomatic initiatives focus on increasing the EU’s visibility, which would result in an increased level of trade. This increase is made possible via bilateral and multilateral trade agreements represented by the legal framework of organisations such as the WTO. Their purpose is to negotiate the abolishment of trade barriers and facilitate the creation of new market relations. European companies benefit from support since it allows them to trade globally and grow internationally. Economic diplomatic measures can create new opportunities for businesses and ensure they can benefit and take advantage of given chances. This signifies that economic diplomacy is a concept which represents all aspects of business support and market intelligence – it enhances everything from trade policy formation to its promotion (The Association of European Chambers of Commerce and Industry, 2015). 

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References

Diplomatic Council. (2023). European Economic Diplomacy Policy. https://www.diplomatic-council.org/node/472#:~:text=European%20Economic%20Diplomacy%20refers%20to%20the%20use%20of,trade%20and%20negotiating%20bilateral%20and%20multilateral%20trade%20agreements.

European Commission.  (2023). EU and the WTO. https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/eu-and-wto_en

European Free Trade Association. (2023). EEA Agreement.  https://www.efta.int/eea/eea-agreement

European Union. (2023a). History of the European Union 1990-99. https://european-union.europa.eu/principles-countries-history/history-eu/1990-99_en

European Union. (2023b). Internal Market, Industry, Entrepreneurship and SMEs. https://single-market-economy.ec.europa.eu/single-market_en

Imbert, F. (2017). EU Economic Policy Strategy. https://www.europarl.europa.eu/RegData/etudes/IDAN/2017/570483/EXPO_IDA(2017)570483_EN.pdf

Hassan, Mohamed. (2022). Politics, Economy, Diplomacy [image].

https://cdn.pixabay.com/photo/2022/01/22/10/04/politics-6956758_1280.jpg The Association of European Chambers of Commerce and Industry. (2023). EEA Agreement. https://www.efta.int/eea/eea-agreement