Downgrading State’s Economic Diplomacy

Volume VI, Issue 6, June 2017

This month marks 70 years since Secretary of State George C. Marshall gave his seminal speech at Harvard planting the seed for the famous reconstruction plan that would bear his name. The Marshall Plan was U.S. economic statecraft at its best: not only producing good economic outcomes for Europe and the United States but also supporting U.S. strategic aims in the emerging Cold War.

In stark contrast to that historic effort, the Trump administration’s budget proposal for fiscal year 2018 marks a clear downgrading of economic statecraft as a tool of U.S. power. It sharply reduces funding for U.S. development agencies; slashes multilateral assistance (which includes funding for the World Bank and other multilateral development banks) by almost 50 percent; and cuts support for international organizations like the Organization for Economic Cooperation and Development (OECD) by more than a third. It also merges State’s Economic Support Fund (ESF) and Development Assistance (DA) accounts into a new Economic Support and Development Fund (ESDF)—and slashes the combined account by some 46 percent.

The administration’s budget proposal also cuts operational funding for the very bureau at the State Department that crafted the Marshall Plan, the Economic and Business Affairs Bureau (known in State lingo as EB). EB has been leaderless since January 20, with no names even floated yet for the bureau’s assistant secretary or for that person’s boss, the under secretary for economic growth, energy, and the environment.

Even if, as is likely, Congress moderates some of the proposed cuts during the budget process, the administration’s proposal sends a message about how little weight Secretary of State Rex Tillerson puts on economic statecraft. Tillerson seems to feel that his department should not be duplicating what other agencies are doing on international economic policy. As a former Treasury staffer, I have some sympathy for this view. But as a citizen, I find it odd that the secretary of state would not think it important to have a full set of economic tools to support his broader diplomacy. Without these, a foreign minister has little more than jawboning or threat of kinetic action at his disposal.

To understand the power of economics in diplomacy, imagine a meeting between the secretary of state and the foreign minister of an emerging state. The former lays out U.S. priorities: reining in North Korea’s nuclear program, battling the Islamic State, stabilizing Afghanistan. The counterpart mutters general support for these objectives but quickly moves on to his priorities: access for his companies’ exports to the U.S. market, attracting U.S. investment to his country, perhaps debt relief. Especially for the world’s largest economy, with abundant consumer demand, capital, and technology to offer, economics means leverage.

Other countries get this. The new Moon administration in South Korea is reportedly planning to return the country’s trade negotiating functions to the foreign ministry after several years of housing them in the economics ministry. Many other countries, including Japan, Australia, and Brazil, also give the lead on trade negotiations to the foreign ministry to bolster broader diplomacy.

Just as economic policy is a vital tool in diplomacy, the reverse is also true. Foreign ministries bring something unique to policymaking: in a word, “reach.” Through its embassies and consulates in over 190 countries, the State Department has the closest thing to omniscience of any U.S. government agency. The Commerce Department has representatives in only 70 countries, Treasury in 15, the Office of the U.S. Trade Representative (USTR) in just 3. Moreover, when I was Treasury attaché in Tokyo, I had a line of sight into the finance ministry, central bank, and financial sector, but little else; by contrast, my foreign-service colleagues operated across the Japanese government and society.

At its best, State deploys that breadth of perspective to enrich U.S. international economic policymaking. Imagine an interagency trade policy meeting in which USTR is seeking ways to open a foreign market to U.S. exports. An effective State representative might describe the political landscape in the target country, the incentives that would persuade the foreign capital to comply with the U.S. request, the local allies that could be mobilized, and so on.

To be sure, State too often does not bring that value-added contribution to interagency policy debates, instead adopting a defensive posture about the foreign country in question (a phenomenon disparagingly called “clientitis” by other agencies). But having worked at an embassy and been in countless interagency meetings in Washington, I know that State’s diplomatic expertise and breadth of perspective have real value, an essential complement to the technical expertise of Treasury, USTR, and other agencies.

Then there are the specific contributions that State’s EB bureau makes to economic statecraft. For example:
  • Digital economy: EB’s Office of International Communications and Information Policy (CIP) effectively serves as the country’s ministry of telecommunications. It leads international negotiations on wireless spectrum, helping improve access for U.S. companies to the $1 trillion mobile wireless market. CIP also fights for an open Internet and unimpeded cross-border data flows, in the face of efforts by Russia, China, and others to promote “Internet sovereignty” and data localization.
  • Civil aviation: State is also the U.S. government lead in international negotiations in this area. Since 1992, EB’s aviation office has negotiated 120 “open skies” agreements generating some $4 billion in annual gains for U.S. consumers.
  • Commercial advocacy: State’s Office of Commercial and Business Affairs helped U.S. companies win nearly $51 billion worth of foreign government contracts in fiscal year 2016, supporting some 178,000 American jobs.
  • Debt restructuring: Together with Treasury, EB coleads on Paris Club sovereign debt negotiations. In 2014, it helped negotiate a nearly $10 billion restructuring of Argentina’s debt, enabling the country to return to international financial markets and supporting domestic economic reform.
  • Anticorruption: EB leads an OECD working group on bribery, marshaling technical expertise from the Departments of Justice and Commerce and the Securities and Exchange Commission (SEC).
  • Sanctions and terrorist finance: State works through its missions around the world to win support for economic sanctions and to combat terrorist finance, including persuading governments to take actions to freeze assets and providing technical assistance.
Could most of these functions be devolved to other agencies? Perhaps. But again, for all their technical expertise, other agencies do not have State’s ability to mobilize broad swaths of the international community, or interests within countries, in support of U.S. objectives in these areas. For his part, it is difficult to understand why Secretary Tillerson would want to let go of such valuable tools of his broader diplomacy. Not only the State Department but U.S. international economic policy would be less effective without them.

To be sure, budgets require choices. A reasonable case can be made to trim some fat in EB and State’s other economic functions. But the Trump administration’s initial budget proposal goes too far. It reflects a lack of understanding of the important role that economic statecraft plays in U.S. power projection.
Photo credit: Drew Angerer/Getty Images

Subscribe to Global Economics Monthly