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USING ECONOMIC DATA IN COMMERCIAL DIPLOMACY:

 MAKING RULE OF THUMB CALCULATIONS OF THE ECONOMIC EFFECTS OF TRADE POLICY DECISIONS

   by

GEZA FEKETEKUTY, ROBERT MCCLEERY, MOYARA RUEHSEN 
AND FERNANDO DE PAOLIS

 

 

 

©2001, 2002 INSTITUTE FOR TRADE AND COMMERCIAL DIPLOMACY


TABLE OF CONTENTS

Preface

Commercial Diplomacy & the Commercial Diplomat
The Challenge Addressed by this Manual

Chapter 1   Introduction to the Use of Economic Data in Commercial Diplomacy

Why Is the Effective Use of Economic Data So Important?
For Whom and For What Areas of Trade and Investment Is This Relevant?
How Does Effective Use of Data Fit Into the Policy Process?
Interfacing with Economists.
How to Use This Handbook.

Chapter 2   Estimating the Economic Magnitude of Trade Policy Actions

What Is A “Trade Policy” Issue?
Who Are the Stakeholders?
Gathering Relevant Data.
Creating Initial Rough Estimates.

APPENDIX   DEFINING THE BOUNDARIES OF “TRADE POLICY”: WHAT DOES THE WTO RULING ON THE US FOREIGN SALES CORPORATIONS MEAN?
Background

The FSC system: How it works
Main points in the dispute-- A time line
Stakeholders.
US Legislative Responses.
Assessing the Monetary Dimension.
Beyond Trade.

Chapter 3  Estimating the Impact of Trade Policy Changes on the Price of Imported Products and on Trade in such Products

Calculating the Price Impact of a Policy Action.
Estimating How a Change in the Price of Imported Products Impacts Trade.

Elasticities and Their Uses in Trade Policy Analysis.
Own Price Elasticity of Demand.
Import Price Elasticity
Cross-Price Elasticity of Demand
Income Elasticity of Demand
Price Elasticity of Supply
Elasticities in the Long Run
Some Cautions When Using Elasticities
Finding Elasticity Estimates.

APPENDIX   ELASTICITY POLICY CASES AND A NEW CALCULATION METHOD

Chapter 4  

Calculating Changes in Production and Profits

APPENDIX   IMPERFECT SUBSTITUTES
Partial Equilibrium, Imperfect Substitutes
Hints and Rules of Thumb

Chapter 5   Estimating the Impact of Policy Actions Affecting Trade on Jobs and Wages

Direct Job Creation in Export Industries.
Indirect Job Creation As a Result of Increased Exports.
The Difference Between a New Job in an Industry and a New Job in the Economy.
The Direct Employment Effects of an Increase in Imports.
Impact of Trade on Labor Productivity and Wages.
Indirect Impacts of Trade Policies on Jobs.

Chapter 6  Estimating the Cost of Protection to Consumers

Calculating Consumer Benefits and Costs when Price Effects are Known
Estimating the Price Effects of Trade Policy Actions

APPENDIX  THE ECONOMIC CONCEPT OF CONSUMER WELFARE AND HOW IT IS CALCULATED
Some Sample Calculations
Chapter 7  Estimating the Economic Efficiency Gains of Trade

Partial Equilibrium Measures of the Cost of Protection
Studies of the Impact of Trade Policies on National Welfare


APPENDIX     CANADIAN EXPORTS OF SOFTWOOD LUMBER TO THE US: A HISTORY OF CONFLICT
Background information
Charges and counter-charges
Spin City: Lobbying efforts and coalitions
Evaluating the current impasse, its likely impact on stakeholders, and steps toward resolving the dispute
Resolving the dispute

Chapter 8  Estimating the Impact of Exchange Rate Changes on the Price of Imported Products and on Trade in such Products
Why Worry About Exchange Rates?
Calculating the Impact of Exchange Rate Movements
Factoring Time into the Calculation of the Trade Effects of Currency Changes
Exchange Rates and Protectionism
Factoring Income Changes into the Calculation of the Trade Effects of Currency Changes
Impact of Exchange Rates on Investment Decisions and Trade-Related Jobs
Factors Influencing Exchange Rate Movements
Chapter 9 Understanding and Working with Data Generated from Econometric Models, Input-Output Tables, CGE Models, and Sensitivity Analysis
Econometric Models
Input-Output Tables
CGE Models
Sensitivity Analyses

Chapter 10  Effective Data Presentation
The Five-Second Rule
Working with Time Series Data
Simple Line Graphs
Multiple Line Graphs
Manipulating Scales
Pie Charts
Vertical bar charts
Horizontal bar graphs
Combining Lines and Bars
Area diagrams
Scatter Diagrams
Using objects
Combining text with graphs
Appropriate use of 3-D 
Summary
Chapter 11 Data Sources for Trade Policy Analysis

Types of data

APPENDIX APPENDIX TRADE DATA RESOURCES

  


Preface  

The International Commercial Diplomacy Project (ICDP) develops and disseminates world-class training materials for commercial diplomats. Commercial diplomacy is a relatively new field encompassing policy advocacy, policymaking, and negotiations in international trade and investment. To strengthen professional training in commercial diplomacy, the ICDP has created model curricula, course outlines, teaching modules, case studies, negotiating simulations, and model operational documents, and has published these training tools on its website, www.commercialdiplomacy.org.
 

Commercial Diplomacy & the Commercial Diplomat

Commercial diplomacy is diplomacy with a commercial twist—diplomacy designed to influence government policy that affects global trade and investment. Commercial diplomacy encompasses the analysis, advocacy and negotiating chain leading to international agreements on the increasingly diverse set of trade-related issues. 
The number of people involved in making and influencing trade policy has grown in tandem with the number of issues covered by trade negotiations. In today’s increasingly interdependent world, trade negotiations address a broad range of government regulations and actions that affect international commerce. They cover, for example:
  • Tariffs, quotas, and customs procedures.
  • Health, safety, and consumer and environmental protection standards.
  • Regulation of such service industries as banking, telecommunications and accounting.
  • Laws concerning fair competition, bribery, and corruption.
  • Industry specific subsidy programs such as agricultural support programs.
  • Trade-related investment measures
The most visible commercial diplomats are those who work in ministries of trade and industry—those who negotiate international trade and investment agreements and resolve policy conflicts that impact international commerce. Commercial diplomacy skills are also required, however, by officials in other government departments and international organizations that have a stake in trade policy, including those concerned with foreign affairs, finance, agriculture, industry, labor, health, environmental protection, bank regulation, telecommunications, air transportation, and the licensing of professionals. Finally, commercial diplomacy skills are required by professionals and managers in a wide range of fields, including:
  • Corporate government-relations departments.
  • Overseas subsidiaries that interact with host government officials on a regular basis.
  • Industry associations. 
  • Unions. 
  • Non-governmental organizations.

Because these individuals have a stake in the outcome of trade policy decisions, they engage in the domestic and global analyses, and advocacy and coalition-building processes that precede negotiations on international trade and investment issues. In order to influence this process, they need to be able to understand and address the economic impact of trade policy decisions. 
 

The Challenge Addressed by this Manual 

We see two gaps in the skills that many entry-level professionals bring to the practice of commercial diplomacy. The first gap is in understanding the impacts of commercial policy changes on private sector actors. How will firms adapt their production, ordering, hiring, and other decisions? What will be the impact on their bottom line? If there are commercial policy options to accomplish a certain goal, will those options have similar or very different impacts on workers, firms, suppliers, etc? 

The second gap is in understanding the big picture of international commerce. How are international movements of goods related to international financial flows, movements of labor, and technology transfer? More simply, how does the economic health of an economy relate to international transactions in the long run?

These course materials seek to enable students and practitioners who may not have much mathematical or economics background to understand quantitative assessments provided by professional economists and to make basic rule of thumb calculations when a professional economist is not available. From the first sentence of the first chapter, the intent is to inform without either overwhelming or condescending. We hope to make the commercial diplomats more knowledgeable of the details and the big picture, thus reducing their dependence on specialists. 

After discussing the skills actually used in entry-level commercial diplomacy jobs, we supply credible cases and stories to help students and practitioners address the challenging material in this manuscript. Our goal is to accompany each new concept with a real-world application of the concept, from the experience of commercial diplomats. 

This manual serves three separate objectives. It is designed to help trade policy practitioners and students of commercial diplomacy who lack extensive training in economics and data analysis to make rule of thumb calculations of the economic impact of trade policy decisions; it is designed as a teaching manual for seminars and courses; and it is designed to give both the practitioner and the student a handy reference guide to other pedagogical resources.

The manual has been a collective effort. All four authors teach at the Monterey Institute of International Studies. Robert McCleery and Moyara Ruehsen teach courses on International Economics and Data Analysis for Commercial Diplomats, among other courses. Geza Feketekuty teaches courses related to the professional practice of commercial diplomacy. He is also the founder and President of the International Commercial Diplomacy Project, Inc. and developed the graduate program in commercial diplomacy at the Monterey Institute. Fernando De Paolis teaches a general course in Data Analysis and has done considerable research on trade impacts on industries and regions.

We hope that this manuscript, along with other teaching materials developed as part of the ICDP project, will help to create a common body of commercial diplomacy training materials for both professional school and on-the-job training programs. This, in turn, will forge a common body of knowledge for commercial diplomats, extending across national, disciplinary, and sectoral divisions.



Chapter 1  
Introduction to the Use of Economic Data in Commercial Diplomacy
 

Why Is the Effective Use of Economic Data So Important? 

The whole chain of policy analysis, policy-making, advocacy, and negotiations leading to international agreements on international trade and investment issues has come to be referred to as commercial diplomacy, a term we will use frequently in this volume. The field of commercial diplomacy is practiced by a variety of professionals including trade policy makers, trade negotiators, private industry representatives and many other players who have a stake in policy decisions affecting international trade and investment. To be truly effective in this area, the commercial diplomat must utilize the full range of political advocacy tools and techniques to obtain government decisions favorable to the stakeholders he or she represents. In short, commercial diplomacy is all about persuasion, and economic data play an extremely important role in persuasion. The commercial diplomat must be able to support arguments in favor of policy positions with data highlighting the economic impact of policy decisions on key stakeholders and on the country as a whole. Learning how to use economic data effectively is therefore one of the critical skills in commercial diplomacy.
 

For Whom and For What Areas of Trade and Investment Is This Relevant? 

In the past commercial diplomacy was concerned largely with negotiations over tariffs and quotas on imports. In today’s more interdependent world, trade negotiations cover a much wider range of government regulations and actions that affect international commerce. These include: 
  • Standards for health, safety, environment, and consumer protection.
  • Regulations covering services such as banking, telecommunications and accounting.
  • Competition policy.
  • Laws concerning bribery and corruption.
  • Agricultural support programs.
  •  Policies affecting foreign investment and foreign exchange controls
  • Historically “domestic” policy issues, such as taxation and immigration policies.
The primary practitioners of commercial diplomacy are trade officials, who are charged with solving trade problems created by government policy actions and negotiating international trade and investment agreements. Commercial diplomacy skills are also required of officials in many other government departments and ministries with trade-related responsibilities—covering foreign affairs, finance, agriculture, industry, labor, health, the environment, the regulation of banks, telecommunications, air transportation, or the licensing of professionals. The same skills are also required of managers in international government relations departments of industry associations, corporations, unions and non-governmental organizations. These organizations frequently have a stake in the outcome of trade policy decisions, and therefore play a role in the domestic and global political advocacy and coalition-building process which usually precedes government-to-government negotiations on international trade and investment issues. Skill in commercial diplomacy is required of corporate managers posted in foreign countries, who must interact extensively with the host government on a broad range of regulatory issues, and officials in international organizations dealing with global trade, investment and trade-related regulatory issues.
 

How Does Effective Use of Data Fit Into the Policy Process? 

There are three main stages to the policy process, and data and data analysis play an important role in all three. The first stage of the policy process is collecting relevant data on current and proposed policies, trade flows, production and employment levels in the industry and linkages to other industries. Chapter 11 includes a list of sources for the basic data needed for the mentioned analysis.

In the second stage of the policy development process, the commercial diplomat seeks guidance from supervisors on a proposed course of action and seeks to develop consensus among participants who share the same interests. The commercial diplomat must be able to identify the most important economic impacts from the point of view of all relevant decision makers. In seeking to persuade a boss, colleague, potential coalition partner, legislator, or the public at large on the desirability of a particular course of action, it is usually not enough to make good arguments. Good arguments must be bolstered with hard facts and quantitative estimates of the impacts of the proposed policy action. Moreover, it is necessary to crystallize the issue by finding and highlighting the key economic issue that will persuade stakeholders that their interests are best served by a particular course of action.

Interfacing with Economists

The object of this handbook is not to make commercial diplomats into PhD economists. That task is too difficult and not necessary. Instead, it is to make the commercial diplomat both less dependent on economists and more knowledgeable and critical of the work of economists. 
There is an expression, that “A little bit of knowledge is a dangerous thing.” We intend both to raise the level of your economics awareness and effectiveness, and to show the limitation of some of the back-of-the-envelop tools presented here. We hope the result is to increase the respect economists have for commercial diplomats, and vice versa.

 


“The commercial diplomat is the international economist’s worst nightmare: an advocate on behalf of trade policy ‘stakeholders,’ armed with just enough economics to be convincing to policymakers but not enough to be encumbered by the truth.” The statement above, by an international economist active in the trade arena, portrays the current situation at its worst. That person says that an ideal would be “to help commercial diplomats understand and communicate with economists, in the interest of bringing about better, or at least better informed, trade policy decisions.” 

  
How To Use This Handbook

This handbook serves three separate objectives. First and foremost, it is designed to equip trade policy practitioners with the analytical tools to understand and make quick “back of the envelope” calculations on the economic impact of policy decisions affecting international trade and investment. The commercial diplomat must understand the impact on the constituency he or she represents, the impact on other key stakeholders, and the impact on the country at large. Chapters 3 through 8 offer detailed guidelines and some simple rules of thumb, while also alerting readers to caveats and potential pitfalls in such calculations. Each chapter is organized around the calculations of a specific impact or group of impacts. These include the impacts of trade policies on prices, trade flows, industry revenues, costs, profits, jobs, wages, economic efficiency, the cost to taxpayers, and the broader national interest, as well as the impacts of monetary and fiscal policy on trade.

Often, the determination of each impact involves a chain of calculations. The chapters in this handbook, after providing background discussion on each issue, aim to provide basic “recipe” guidelines for each series of calculations. For example, suppose we wish to determine the impact of a proposed trade policy on the profits of producers. This seemingly simple calculation still involves at least five steps.[1]
  1. Determine how the policy action affects costs for relevant producers, importers and exporters.
  2. Determine how those changes in costs will affect the retail prices of the goods offered for sale in the home market and/or the foreign market.
  3. Calculate how the changes in prices will affect the demand for exports in the foreign market and the demand for imports and import substitutes in the home market.
  4. Calculate how suppliers will respond to the changes in demand.
  5. Calculate how the change in the costs and revenues of producers translates into changes in profits. If we wish to take this a step further and calculate the impact of this same policy decision on workers, we would need to add three additional steps.  
  6. Calculate how changes in production obtained from the above calculations translate into changes in the number of jobs available in the industry.
  7. Estimate how changes in costs affect productivity of workers and the wages they can earn as a result.
  8. Estimate, using elements of the seven steps above, the impact of the policy on related industries. 
Going through each of the steps outlined above is not merely a simple mechanical process. First, we must assemble considerable data on current production, trade, costs, prices, employment and wages. We also must acquire reliable information on historical relationships between price changes in the industry and changes in the amount of a product consumers wish to buy or producers wish to sell at those prices. Each of these tasks is handled in the individual chapters, with tips to streamline the process as much as possible without compromising the final results.

The economic impacts of trade policy actions, of course, are not the only policy impacts that matter. Policy decisions that affect global trade and investment flows inevitably affect such other policy dimensions as health, safety, environment, foreign policy, or national security. Estimating these other policy impacts largely requires other policy tools that are treated elsewhere. Exclusion from this handbook is not meant to signal that they are not important, or less important.

Second, this handbook is designed as a teaching manual for seminars and courses, with sample cases described throughout. A separate packet of problem sets, answer keys, and PowerPoint presentations is also available. The cases and problem sets have all been used and tested with graduate students in the Commercial Diplomacy Program at the Monterey Institute of International Studies in Monterey, California.

Third, this handbook is designed to give the practitioner and the student tools to estimate the economic effects of trade policy decisions, and tools to test and present results of earlier calculations. It shows them how to apply and to interpret basic economic tools, how to use simple mathematical calculations, how to read graphs and economic diagrams, and when and how to use them to illustrate a point most effectively. 

Chapter 9 demonstrates how to interpret the results produced by more rigorous empirical investigations carried out by professionally trained economists. These more rigorous methods require econometric models and sophisticated statistical testing. In an ideal world all calculations of the economic impact of policy decisions would be delegated to professionally trained economists, these economists would all agree on the correct way to approach the problem, and would write up their results clearly, without jargon. In the real world, however, the commercial diplomat often has neither the time nor the resources to call in the economists. Existing studies, if they can be found, may use different methodologies and reach different conclusions (to the extent that a non-specialist can understand their conclusions!). Fortunately, in many cases the added precision from running econometric models is simply unnecessary for the ball-park estimates typically used in political discussions, public policy advocacy, coalition building and negotiation. There may be instances, however, when the quality of the decision-making process can be improved by access to the results of econometric modeling and more sophisticated statistical testing. The decision-makers themselves, however, usually do not have the training to understand the technical jargon in which the results are couched. In such cases, it is up to the commercial diplomat to interpret these results for the decision-makers. The chapter covering these topics is specifically designed to show commercial diplomats how to do this. 

This handbook has intentionally been written in a manner that even practitioners of commercial diplomacy without formal training in economics can understand. However, a basic understanding of key economic principles clearly will make it easier to follow. Those with additional training in economics can take advantage of the more rigorous presentations provided in each chapter, and of the references provided at the end of each chapter which point to more in-depth treatment of the subject matter covered. No attempt is made to teach the reader how to build econometric models or how to use sophisticated statistical tools, though one chapter is devoted to interpreting the results of such models and techniques.

 


[1] In this example we have omitted the additional consideration necessary in analyzing the case of intermediate goods, and their impact on corresponding final products.  An additional real world complexity is the degree to which manufacturers control retail prices or large retailers affect wholesale prices.

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