The Role of Embassies and Consulates in Promoting Trade: Does Economic Freedom in the Host Economy Matter?

Abstract

Are exports systematically associated with diplomatic representation abroad? Given the expenses of maintaining posts abroad, this question is obviously of deep interest to governments seeking to promote their country's export performance while coping with budgetary pressures. In a recent article, Andrew Rose found that posts abroad increase trade with each post adding 6-10 percent additional exports. We take up a question that immediately arises given Rose's findings: does it matter whether the host economy is economically "free," in the sense that the host government intervenes little in economic decision making? This question is salient for an understanding of how posts abroad affect exports: do they serve primarily to help would-be exporters connect with private sector purchasers abroad (i.e., a "networking" role), or do they serve also or even mainly to reduce red-tape associated with government intervention in economic decisions abroad? To investigate this question, we construct a variable for representation abroad weighted by an index of economic freedom. We find that, using the same data base as Rose, the value of an additional post in an economically less free economy (e.g., China) is worth more in terms of a percentage increase in exports than one in a freer economy (e.g., New Zealand). Encouragingly, this specification of the foreign post variable improves the overall goodness of fit of the conventional gravity equation and increases the significance level of the parameter for posts. We conclude that the value of a post abroad is to some extent based on the role of the foreign service in smoothing the interface with foreign governments, over and above any role the post might have in developing private-private networking.

Keywords: Gravity model, trade promotion, consulate

JEL Classification: F13, F14