Bilateral exports rise by about 6-10 percent for each additional consulate a nation establishes in a customer country.
Last fiscal year the U.S. Department of State paid $4.2 billion for diplomatic and consular programs, and another $1.5 billion for embassy security, construction, and maintenance. Was the money well spent?
Perhaps, since one justification for diplomatic representation abroad, probably less well recognized, is that it promotes exports. Indeed, looking at data for 22 large exporting nations with 200 destination countries, NBER Research Associate Andrew Rose finds that bilateral exports rise by about 6-10 percent for each additional consulate a nation establishes in a customer country.
In The Foreign Service and Foreign Trade: Embassies as Export Promotion (NBER Working Paper No. 11111), Rose notes that "foreign missions" do, of course, have other duties. They have been important sources of information about foreign countries over the years. And, they were empowered to make significant decisions. But as communication costs have fallen, much of that information has become quickly and cheaply available through alternate sources - the media and the Internet, for instance. Key decisions about foreign affairs increasingly are made at home and simply communicated abroad. Consular affairs -- that is, dealing with passports, visas, and the like -- "do not seem to justify the expense and prestige of a Foreign Service," writes Rose. So export promotion increasingly has been seen as a raison d'etre for the Foreign Service. Ambassadors, commercial attaches, and other members of the diplomatic corps play a key role in developing and maintaining export markets.
Foreign Service jobs are usually seen as glamorous. In the United States, ambassadors rank eighth in the nation's protocol precedence list, just after the Chief Justice of the Supreme Court and former presidents, and just before the Secretary of State and the President of the United Nations General Assembly. But the prestige of the Foreign Service may be a historical legacy; many nations now see a more mundane task for their diplomats - export promotion. The U.S. Commercial Service, operating out of foreign missions, has the role of "supporting U.S. commercial interests around the world." The United Kingdom, describing itself as the fifth largest trading nation, gives its diplomats the role of "promoting trade and investment opportunities overseas." Canada assigns diplomats the role of "fostering" international trade. Germany talks of assisting its companies by "generally enhancing mutual trade."
In his analysis, Rose takes advantage of the fact that countries have varying numbers of foreign missions abroad. Some embassies cover multiple countries. Some countries host an embassy and a number of consulates. For instance, the United States last year had an embassy and two consulates in Canada, an embassy in Cape Verde, and no official presence in the Central African Republic, which is covered from Chad and Cameroon. The Netherlands has more than 400 foreign missions, while Sweden has less than 100.
Taking into consideration a host of other factors that could affect export levels, Rose concludes that the 6-10 percent export gain he finds is statistically significant and economically plausible in magnitude. Moreover, it varies by the exporting nation and is non-linear -- that is, the first foreign mission gives a larger boost to exports than successive missions
-- David R. Francis