Why the Conservative approach to diplomacy misses the target

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Don't pack away those tweed jackets just yet, John Baird.

The Conservative government has decided to make economic diplomacy its chief mission in international relations, issuing a Global Markets Action Plan last November that made trade Job One. One official told The Globe and Mail at the time that the message to diplomats was this: "Take off your tweed jacket, buy a business suit and land us a deal."

But the C.D. Howe Institute has found, in a report to be released Wednesday, that one of the most effective ways of boosting trade is old-fashioned diplomacy: high-level, government-to-government diplomacy, with an embassy in a foreign capital.

Yes, it turns out the capital chatter of embassy diplomats is good for landing deals.

The report, authored by the C.D. Howe Institute's Dan Ciuriak, doesn't argue against economic diplomacy – in fact it finds it can be effective in boosting trade. It's just that government-to-government diplomacy is one of the most effective elements. For Foreign Affairs Minister John Baird and Trade Minister Ed Fast, it's a signal that political diplomacy is helps the bottom line.

Mr. Ciuriak's study built a model of trade patterns, based on the distance and economic weight of trading partners, and sought to sort out the impact of various factors. It provides some useful hints for economic diplomacy.

Having an embassy in a foreign capital, for example, has a big impact: it boosts exports to a country by an average of 29 per cent. But once you have an embassy, you don't get the same kind of impact from opening a series of consulates and trade offices in the same country – they have a statistically negligible effect on trade.

That's an important consideration. Canada and many other western countries are trying to economize and shift their diplomatic networks, closing some embassies and opening more offices in big emerging economies like China, India and Brazil. They might be better off with an embassy in every capital on the planet.

The study also finds that Canadian diplomatic representation has a bigger impact on trade with countries where the state plays a bigger role in the economy – like China, or many African and Asian countries.

That suggests that effective dollar diplomacy might not be what governments, like Canada's Conservatives, think it is.

Because businesses find it more expensive and more complicated to sell in foreign countries, with less information about the market than local competitors, governments sometimes try to step in with expertise or other measures to help bolster business-to-business ties. Companies that do take advantage of trade services tend to export more – but very few do.

But Mr. Ciuriak finds that relationships with the foreign government matter. It matters more in state-influenced economies.

That suggests one of the most effective ways for diplomats to help land a deal is to build relationships with those governments that make economic decisions. That isn't exactly the free-market-driven global deal-making you'd expect from a Conservative government, but that may be an effective use of diplomatic dollars.

Those methods, however, tend to work better for raw materials and commodities – imagine a country where the state has a large role in deciding where they buy potash, or wheat – than they do with manufactured goods. The best export markets for manufactured goods tend to be different countries, too – with economies that are more similar to Canada's.

But there is one factor that does tend to have a big boost on Canadian exports of manufactured goods: a free-trade agreement. In general, having an FTA in place boosts exports of goods by 77 per cent – and for manufactured goods, by 92 per cent, the study found.

That, of course, is a strategy that does fit the Conservatives' inclinations. Prime Minister Stephen Harper's government has signed trade agreements with several small partners, and more recently, completed talks with two major ones, the European Union and South Korea. But there's a catch: free-trade agreements usually come from negotiations launched by two governments with reasonably strong political ties.

In all, the C.D. Howe study suggests that dollar diplomacy requires thinking about more than just dollars. "Without gainsaying the case for pure trade facilitation, getting the political relationships right also matters," Mr. Ciuriak concluded.

In other words, a key ingredient of effective economic diplomacy is just plain old diplomacy.

Campbell Clark is The Globe's chief political writer in Ottawa.