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Underfunding the State Department could hurt U.S. exports — and U.S. companies

- February 14, 2018
The Trump administration has proposed a series of cuts to the State Department’s budget. (AP)

Secretary of State Rex Tillerson has survived his first year in Washington, but his department remains at war — with itself. The recent budget deal has blown a multibillion-dollar hole in funding for current operations, and the new White House budget proposal would cut 2019 funding by 23 percent. In the face of fierce internal opposition, Tillerson insists that a smaller State Department will “deliver the greatest value and opportunity of success for the American people.”

There are big problems with this approach — particularly in light of President Trump’s hard line on foreign trade. U.S. diplomats point out the cuts have a serious effect on long-standing efforts to promote conflict resolution, environmental protection and human rights. But the State Department also works on a broad range of economic issues. So how will Tillerson’s plan affect a top Trump priority — the promotion of U.S. businesses?

We can now measure economic diplomacy

 Long ago, another Republican president, Calvin Coolidge, famously said that “the chief business of the American people is business.” Now that government archives come in the form of millions of electronic records, we can actually test this proposition. We can measure how much time U.S. diplomats spend negotiating international aid and trade, promoting U.S. companies and gathering information about economic conditions abroad.

[interstitial_link url=”https://www.washingtonpost.com/news/monkey-cage/wp/2017/06/12/those-empty-desks-at-u-s-embassies-and-the-state-department-its-a-big-problem/?utm_term=.6fd499f48930″]Those empty desks at U.S. embassies and the State Department? They’re a big problem.[/interstitial_link]

We can’t tally contemporary communications, many of which remain classified. But the recent release of more than 3 million declassified State Department records from 1973 to 1979, the period when the agency first adopted electronic record-keeping, allows us to analyze not just the relative importance of economic diplomacy, but the effect on U.S. exports.

Economists explain that most international trade comes through what they call a gravity model. This says, in simple terms, that countries with bigger GDPs or that are closer to one another will have more bilateral trade. “Closeness” is measured not just by the distance between their capitals, and whether they share a border, but also cultural similarities, such as a common language or a former colonial relationship.

But there is still a lot of unexplained variance, and what governments do to promote trade clearly makes a difference. It turns out that governments, especially the U.S. government, do quite a lot. The message text in hundreds of thousands of these records is still classified, but the National Archives has made all the metadata available, including what the State Department calls “traffic analysis by geography and subject,” or TAGS.

Here’s what we found: If we exclude records with TAGS related to administration and consular affairs — activities that were not specific to any particular policy or subject of U.S. interest — and we add those on military sales and assistance, communications related to economics and business made up 36.9 percent of State Department activity in the years 1974 to 1979.

So how do we know what difference this made? Our research revealed that within the category of economic affairs, about 30 percent — or 307,000 messages — have TAGS that deal explicitly with foreign trade, and four of these subject TAGS are specifically about trade promotion.

To measure the impact, we start by summing up these communications for each country beginning with 1974. Second, we include this count in a regression model to explain what influences U.S. exports. We find that if the State Department increased the number of trade promotion cables by 1 percent, U.S. exports to that country increased by 0.356 percent. So if the United States had 100 trade promotion communications with a country and exported $10,000 of products, each additional communication would increase exports by $35.60.

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To be sure, correlation is not causation. But the effect we measure is consistent with the effect other researchers have found from the mere presence of an embassy or an export promotion agency. The results hold even when we exclude the largest importers, like Canada, that might have had a disproportionate impact. We also find a similar effect for each year when we treat them individually, so it is consistent over time. Also, export promotion communications have no effect on imports, so our result does not just reflect the fact that the United States has more communications about its largest trading partners. 

Diplomats spend a lot of time pushing U.S. exports

Diplomats are often dismissed as “striped pants cookie pushers.” But on a day-to-day basis, they actually spend a lot of time pushing U.S. exports. In one typical cable, the Bangkok Embassy’s commercial attache made the rounds in Seattle, Portland and San Francisco and found “businessmen seemed surprised to be informed that recent dollar devaluation had sharply increased competitiveness of U.S. goods.”

Diplomats also serve as go-betweens for foreign and domestic firms, such as when an Austrian national was seeking a U.S. supplier of valves and pipes for Eastern Europe. Conversely, diplomats defended the Made In America brand, stepping in when one firm took advantage of a 1979 USDA trade promotion effort in Saudi Arabia to ship $250,000 of shoddy food products, which endangered $364 million in U.S. exports of fruits and vegetables to the kingdom.

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Of course, small- and medium-size companies will likely need more U.S. government help identifying export opportunities than big multinationals, and start-ups may need more attention than established firms with long-standing trade relationships. The government can provide otherwise expensive information about market conditions in foreign countries as a public good. The State Department can also help settle disputes before they reach the stage of a formal complaint — something that would be particularly costly to a smaller company. All this may suggest why someone like Tillerson, who spent his entire career at Exxon, might not have a full appreciation of the role the State Department has long played in promoting U.S. exports.

So what’s the bottom line? Ultimately someone has to pay for all the striped pants and the cookie-pushing. But the cost of embassies and diplomats is trivial compared to the value of international trade. The State Department budget in 1978 was $1.4 billion — while U.S. exports that year totaled about $136 billion. Our findings indicate that if the State Department had increased trade promotion by about 4 percent, the resulting increase in exports would have generated overseas sales for U.S. businesses in excess of the entire departmental budget.

Moving forward to 2018, when global business and global competition are even more complex, what does that tell us? Underfunding diplomacy costs U.S. businesses dearly, and creates incalculable risks for U.S. prestige and security. The data suggest an adequately resourced State Department can more than pay for itself, while promoting U.S. political and economic goals. Bigly.

Editor’s note: This post has been updated to clarify the calculation of exports resulting from State Department communications.

Raymond Hicks is the project manager for History Lab at Columbia University.

Matthew Connelly is professor of history at Columbia University and principal investigator of History Lab.