What Does the Spaghetti Bowl of Regional Trade Agreements Mean for the Notion of Free Trade

Bhagwati`s intention in using the term is not very clear in his 1995 work. In his later published work (e.B Jagdish Bhagwati, David Greenaway and Arvind Panagariya, “Trading Preferentially: Theory and Policy”; The Economic Journal 108: 1128-1148; Jagdish Bhagwati, Testimony, Subcommittee on National and International Monetary Policy, Trade and Technology; 1 April 2003; U.S. House of Representatives), we find that he cites nothing more than rules of origin in his argument about the spaghetti bowl phenomenon. Bhagwati focuses on the fact that rules of origin – which make no sense under the World Trade Organization (WTO) regime because the same tariffs are applied to all imports, regardless of their country of origin, as long as the country is a member of the WTO – apply under free trade agreements due to the selective nature of these agreements: Free trade agreements are intended to reduce or abolish tariffs only on certain goods imported from certain countries. The presence of this structure hinders the establishment of an optimal production network in terms of profitability (and thus prevents external investments based solely on economic efficiency, which corresponds to an investment diversion). Particularly on the basis of his findings on rules of origin, Bhagwati found it problematic that a free trade agreement creates a network of artifact production from countries that would not be compatible with the principle of economic efficiency. He called this situation a spaghetti bowl phenomenon. He was referring to how semi-finished products and spare parts pass through different free trade networks, using tariff differentiation to export finished products to consumer countries at the lowest price; He visualized this as intersecting lines and compared these lines to strands of spaghetti entangled in a bowl. (In the first article in which Bhagwati used this term, the crossing of free trade agreements was also compared to spaghetti. But such use disappeared in his later articles.) Both those who see the interweaving of laws and regulations as problematic, and those who have pointed out the phenomenon of spaghetti bowls versus rules of origin, seem to believe that the phenomenon would not occur if all free trade agreements adopted a single set of clear and unambiguous provisions. Many people, especially economists in Japan, argue that this must be taken into account when the government negotiates a free trade agreement.

It is quite common for a single country to have signed various bilateral treaties. Tax treaties are invariably on a bilateral basis, and the content of these bilateral treaties – those negotiated and concluded by a particular country – varies depending on the country that is the other party. Therefore, the tax requirements for each company or group of companies differ depending on specific bilateral agreements. This is not surprising, because that is how tax policy should be. Indeed, it is only natural that the provisions differ from one treaty to another in areas that are not covered by a multilateral treaty such as that of the WTO. This is the case, for example, in the investment sector, where more than 2,200 contracts have been concluded worldwide. (There is some problem with the intersection of investment rules. But the problem is only an extremely technical issue in terms of arbitration and is completely different from the problem mentioned above of navigating laws and regulations.) A country may choose to apply rules for the treatment of persons, capital, goods and services according to the country of origin if it considers that such a complex system is manageable. And if not, all that remains is to implement the laws and regulations in accordance with the strictest of several agreements and apply them to all countries. In this way, many countries have used bilateral and multilateral free trade agreements to promote free trade and globalization more quickly and flexibly. In fact, free trade agreements require the approval of only a limited number of like-minded countries, unlike the general agreement of all WTO members required to conclude a round of negotiations.

These agreements also allow countries to address broader issues such as bilateral investment, labour migration and regulation. As a result, the number of free trade agreements in force and under negotiation has exploded since the mid-1990s, from 100 agreements in 1990 to more than 400 in 2008. [2] The spaghetti bowl effect refers to a free trade agreement (FBA) problem in the rules of origin indicating which country a product originates from. Jagdish Bhagwati first used the term in 1995 in his article U.S. Trade Policy: The Infatuation with Free Trade Agreements. A country may sign free trade agreements with other countries that have different rules of origin, and a company may not benefit from tariffs when exporting its products to one country, but may not be eligible for preferential policy in other countries. In order to export finished products to importing countries at the lowest price, companies could produce semi-finished products and parts in different countries to take advantage of tariff differentiation in free trade agreements. This leads to a crossover of jurisdictions, much like spaghetti getting tangled in a bowl.

In Asian countries, the effect is sometimes referred to as the “noodle bowl effect”. The cause of this phenomenon with regard to rules of origin lies in the creation of complex rules of origin. These complex regulations reflect the industrial situation of each country concerned and can therefore be simplified if necessary. If companies find these regulations too complex and inappropriate, they can export their products at any time without claiming preferential treatment. That is, from the exporters` perspective, rules of origin under free trade agreements offer the privilege of exporting with lower and/or zero tariffs, an additional and more preferable alternative to exporting with a general tariff rate applicable under the General Agreement on Tariffs and Trade. This is an additional option, but not a negative impact. Of course, rules of origin that are easier to apply would be preferable. However, how can we compare the disadvantage of using rules of origin with a spaghetti bowl? Unlike North America and Europe, Asia has not established a universal free trade area. Instead, countries have signed many bilateral or multilateral free trade agreements. These agreements have contributed to convenient trade between the countries that signed the agreements, but they have also caused the spaghetti bowl effect.