United Nations Secretary General Ban Ki-moon delivers a speech during the second day of third Global Review of aid for trade co-hosted by the World Trade Organization in Geneva, Switzerland, on July 19. | AP Photo

Globalization works because it is supported by a broadly accepted rules, the author writes.

To grow the economy, enforce rules

Here is a modest step the United States and other governments can take to help stave off a global economic slowdown: insist that countries play by the rules on trade and investment to which they have committed in international treaties. The free flow of goods, services and capital that we call “globalization” can be a powerful engine for growth and development.

But globalization works because it is supported by a broadly accepted set of rules that are well known and, for the most part, enforceable. Those rules, which are set forth in pacts including the World Trade Organization agreements and a vast and growing network of free trade agreements and investment treaties, create expectations, which allow producers of goods and services, importers, exporters and investors to plan their business on a global scale.

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When those expectations are upended, the resulting uncertainty makes business planning difficult. Uncertainty creates risk, which increases the cost of doing business and causes the globalization engine to slow. A case in point, to which I will return in a moment, is the refusal of Argentina to play by the rules applicable to international investment by promptly and voluntarily paying the hundreds of millions of dollars it owes to U.S. and other investors under awards issued by international arbitration panels.

Rules establish predictability. Because of WTO rules, for example, a Chinese maker of laptop computers knows that the customs duties it pays when it sends its goods to the United States cannot exceed a set level, and a U.S. architecture firm wishing to provide its services in France knows it can do so (provided it complies with various formalities).

Just as important as the expectations set by the rules themselves are the expectations set by the ability to enforce the rules. For example, a cornerstone of international investment rules for the past half century has been the right of a foreign investor to challenge the harmful acts of a host government in a neutral arbitration forum, and to obtain monetary compensation if the government is found to have breached a treaty obligation. That right provides a degree of security, which can be important to the decision whether to build a factory, a hotel, or any other job-creating investment in a foreign country in the first place.

It may come as a surprise to some that when countries lose in arbitration brought by foreign investors they usually pay. Their incentive to do so is the recognition that in the long run, being seen as playing by the rules is vital to the attraction of capital and job-creating investment. That benefit far outweighs any short-term loss in a single case.