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Diplomacy Must Happen
Just as war is an unavoidable part of Galactic Civilizations 2, diplomacy is an event that will happen repeatedly throughout the game. It is unavoidable, and although it is tempting to ignore diplomatic avenues - particularly for races which don't receive many bonuses to their diplomatic efforts - forgetting to make use of diplomacy means discarding a tool that could be used to further your march toward victory. With diplomacy, you can make treaties, form alliances, and manipulate your opponents. You can also buy technologies you otherwise wouldn't have and negate your opponent's edge through various forms of diplomatic sabotage.
Diplomacy only occurs in two different ways. It may be engaged by you, or it may be engaged by another race. If you engage in diplomacy, you can determine exactly what you'd like to ask for. You can typically only ask to engage in diplomatic relations every so often however, particularly if the race you're trying to talk to is hostile. If you attempt to make contact too soon, they'll simply ignore you. On the other hand, waiting for other races to speak to you doesn't trigger this penalty, but it obviously brings the penalty of having to wait for another race to make contact.
Don't forget that you can't speak with other races until you have researched Universal Translators.
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Learn To Trade
Learning how to trade with other races can give you can important edge. The primary items traded will be technologies. Through tech trading, you can learn things instantly, without having to spend any time researching them. This is obviously good for you, but in order to get other races to trade, you'll need to bring something to the negotiations. Typically this will be a technology of your own. Never offer technologies which you consider to be powerful and dangerous. Always attempt to offer a technology that is valuable, but not in a way that can directly harm you. Trading sensor technologies can be good, as can trading morale technologies. It is also smart to trade weapon or defense technologies that are directly opposite of your chosen paths in that area. For example, if you prefer energy based weapons, and you are researching armor, then it makes sense to offer your opponents access to your armor research, because it won't be effective against your weapons but is valuable to other races. If you don't want to trade your own tech, you can bypass the dangers of passing your technologies on to other races by offering cash. This will drain your coffers quickly, but if you have plenty of money laying around, it is a good idea.
You may in some instances find yourself trading for cash. Trading for cash makes sense if you've come across sudden economic trouble. In exchange for cash, you can offer technologies, ships, and even planets. The AI doesn't always offer a fair price for these items, particularly if your diplomacy skills are low. But provided you can trade the right items, making this trade is a zero-risk method of cash generation. When trading tech, the previous rules apply - trade technology that won't be threat to you. But you can also do the same with ships by selling off old cruisers to friendly races.
Lastly, you might trade for warships or planets from another race. In the case of trading for ships, you can offer in exchange technologies, cash, or even your own ships. Trading for ships is not a very cost effective way of increasing your raw military might, but what it can accomplish is a sudden decrease of your opponent's military. If you're planning to launch a surprise attack, offering to buy some of your enemy's warships around key planets is an effective way to reduce your enemy's defenses. Buying planets is less effective and almost never happens, but you can occasionally convince the AI to part with a world. This would only be useful when trying to form a staging area however, as the AI isn't going to part with a planet of any significant worth.
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Manipulate Your Enemy
There are numerous ways in which you can attempt to manipulate your enemies, but the most obvious is by bribing them into wars. By doing this, you can use diplomacy offensively rather than defensively, giving you an edge in your quest for dominance. The idea between manipulating wars is simple; bribe one foe into attacking another foe. Executing the idea is equally easy, provided you have something on hand that can be used in negotiations, such as a tasty technology or a big wad of cash. In this way, you can keep two potential enemies tied up for turn after turn in useless wars which serve no purpose but to drain their cash reserves and destroy their ships. Obviously, this is good for you. If your enemies are weaker, you are stronger.
Peace also can be used as a tool for manipulation. The success of a war for another race can often pose a future threat to you. Let's say you have two neighbors, and they're at war with each other. This is good for you as long as they continue to be roughly even. But if one suddenly were to win, and take over all the planets of the losing race, well - that would be very, very bad for you. You'd suddenly have a neighbor with a large military and many more planets than before. In these situations, bribing the winning race into peace can be a good strategy, as it will give the losing race a time to recover and hopefully give you a chance to swoop in for the kill.
Whenever manipulating other races, remember that while you can start and stop wars, you can't change the naturally tendency of certain races to like or hate each other. Take the above case, for example. If one neighbor was the Korath, and the other was the Altarians, then you could certainly stop the war through a bribe. But it is likely that the animosity between the two races would not end, and that war would break out again at a later time. Likewise, while you may be able to bribe to generally friendly races into attacking each other, you can't bribe them into staying on the war-path forever. Manipulation is a temporary measure, and you should use it to give you an edge in some other area, not as a end goal.
Be careful not to create a monster as well. Manipulating two enemies to be at each other's throats is a wonderful way of making an advantage for yourself, but ask yourself; what will I do if one race wins, and my attempts to bribe the winner into a cease-fire are either to expensive for me to afford, or only succeed in stopping war for a few turns? If you don't think you'd be able to find some way of turning such a situation to your advantage, then be extra careful. You could be walking into a trap.
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Forming alliances with other races can be an excellent way to secure your future or - if you pursue a diplomatic victory - win the game. Once you've allied with a race, they'll stick to you through thick and thin. Forming an alliance is often difficult however, as you can't even offer an alliance unless your relations with that race are very good.
The first step to forming an alliance is to scout for prospective allies. The morality system of Galactic Civilizations 2 is fairly strict, so you won't find many cases where a good-aligned race managed to ally with an evil-aligned one. As you encounter races, determine which ones will be a good prospect for a future alliance based off alignment. Pay attention to which ones seem to be friendly to you and which ones are hostile. There does seem to be a small amount of randomization in terms of how well other races receive you. Make note of how powerful the races appear to be, as it doesn't make much sense to ally with a race that could never come to your aid.
Once you've decided which races you'd like to be buddies with, you need to start buttering them up. A crucial step in accomplishing this is forming economic or research treaties. Ideally these treaties will benefit you, not only because of the future alliance prospects, but also because of the bonuses you receive to your research production and cash flow. This typically is the case, because you should be trying to ally with powerful races. Over time, keeping these treaties will substantially improve relations.
If alignment and treaties aren't enough, then there is one final option that can help close the deal on an alliance: gifts. Races, when given gifts, will usually be more satisfied with you for a short amount of time. You can take advantage of this to seal an alliance. Remember, while the boost in relations may be temporary, an alliance is virtually permanent once completed, even if you stop giving gifts.
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These basic rules provide a good review of important diplomatic strategies. Remember however, that the AI in Galactic Civilizations II is fairly smart and typically aggressive. There are certain things the AI won't know how to recognize. They won't for example, realize that the valuable weapons they're being sold are useless against your defenses. But they will pursue their goals stubbornly. Situations can change frequently. A race that once looked like a good choice as an ally may suddenly become less powerful. Or a race you were selling ships to may turn around and use those ships against you. Always keep on your toes, and never assume that just because a race is your friend today, they'll be your friend tomorrow.