ECONOMIC DATA IN COMMERCIAL DIPLOMACY:
RULE OF THUMB CALCULATIONS OF THE ECONOMIC EFFECTS OF TRADE POLICY DECISIONS
GEZA FEKETEKUTY, ROBERT MCCLEERY, MOYARA RUEHSEN
AND FERNANDO DE PAOLIS
2002 INSTITUTE FOR TRADE AND COMMERCIAL DIPLOMACY
TABLE OF CONTENTS
to the Use of Economic Data in Commercial Diplomacy
Diplomacy & the Commercial Diplomat.
Challenge Addressed by this Manual.
Is the Effective Use of Economic Data So Important?
Whom and For What Areas of Trade and Investment Is This Relevant?
Does Effective Use of Data Fit Into the Policy Process?
to Use This Handbook.
the Economic Magnitude of Trade Policy Actions
Is A “Trade Policy” Issue?
Are the Stakeholders?
Initial Rough Estimates.
DEFINING THE BOUNDARIES OF “TRADE POLICY”: WHAT DOES THE WTO RULING
ON THE US FOREIGN SALES CORPORATIONS MEAN?Background.
FSC system: How it works.
points in the dispute-- A time line.
the Monetary Dimension.
Estimating the Impact of Trade
Policy Changes on the Price of Imported Products and on Trade in such
the Price Impact of a Policy Action.
POLICY CASES AND A NEW CALCULATION METHOD
Estimating How a Change in the Price of Imported Products Impacts
and Their Uses in Trade Policy Analysis.
Price Elasticity of Demand
Elasticity of Demand.
Elasticity of Demand.
Elasticity of Supply.
in the Long Run.
Cautions When Using Elasticities.
Estimating the Impact of Policy
Actions Affecting Trade on
Jobs and Wages
Changes in Production and Profits
Partial Equilibrium, Imperfect Substitutes
Hints and Rules of Thumb
6 Estimating the Cost
of Protection to Consumers
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
The Direct Employment Effects of an Increase in Imports.
Impact of Trade on Labor Productivity and Wages.
Indirect Impacts of Trade Policies on Jobs.
the Economic Efficiency Gains of Trade
Consumer Benefits and Costs when Price Effects are Known
THE ECONOMIC CONCEPT OF CONSUMER WELFARE AND HOW IT IS CALCULATED
Estimating the Price Effects of Trade Policy Actions
Some Sample Calculations
the Impact of Exchange Rate Changes on the Price of
Imported Products and on Trade
in such Products
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
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
Worry About Exchange Rates?
and Working with Data Generated from Econometric
Models, Input-Output Tables,
CGE Models, and Sensitivity Analysis
Calculating the Impact of Exchange Rate Movements
Factoring Time into the Calculation of the Trade Effects of Currency
Exchange Rates and Protectionism
Factoring Income Changes into the Calculation of the Trade Effects of
Impact of Exchange Rates on Investment Decisions and Trade-Related Jobs
Factors Influencing Exchange Rate Movements
10 Effective Data Presentation
Data Sources for Trade Policy Analysis
Working with Time Series Data
Simple Line Graphs
Multiple Line Graphs
Vertical bar charts
Horizontal bar graphs
Combining Lines and Bars
Combining text with graphs
Appropriate use of 3-D
APPENDIX APPENDIX TRADE DATA RESOURCES
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,
Diplomacy & the Commercial Diplomat
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
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:
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:
quotas, and customs procedures.
safety, and consumer and environmental protection standards.
of such service industries as banking, telecommunications and accounting.
concerning fair competition, bribery, and corruption.
specific subsidy programs such as agricultural support programs.
subsidiaries that interact with host government officials on a regular
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
Introduction to the Use of Economic Data in Commercial Diplomacy
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
Whom and For What Areas of Trade and Investment Is This Relevant?
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:
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.
for health, safety, environment, and consumer protection.
covering services such as banking, telecommunications and accounting.
concerning bribery and corruption.
affecting foreign investment and foreign exchange controls
“domestic” policy issues, such as taxation and immigration policies.
Does Effective Use of Data Fit Into the Policy Process?
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
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
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.
How To Use This
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.
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.
how the policy action affects costs for relevant producers, importers
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.
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.
how suppliers will respond to the changes in demand.
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.
how changes in production obtained from the above calculations translate
into changes in the number of jobs available in the industry.
how changes in costs affect productivity of workers and the wages
they can earn as a result.
using elements of the seven steps above, the impact of the policy
on related industries.
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.
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