The spaghetti bowl effect is an interesting phenomenon in the commercial economy, where the growing number of free trade agreements (FTAs) between countries is slowing down trade relations between them. This term (spaghetti bowl) makes an analogy between the tangle of spaghetti in a bowl and the entanglement of various FTAs in a region. The spaghetti bowl phenomenon was first discussed in 1995 by Jagdish Bhagwati. In free trade agreements, members agree on a lower domestic law to be applied among themselves, while each member may have its own external duty levied on imports from third countries. This introduces the concept of “country of origin” of the marketed product; It is used to distinguish products from one country from another in this highly globalized world where products often pass through many countries in the production process. In addition, there are rules in international trade known as “rules of origin” (ROO), which set the criteria for determining the country of origin. The problem is that each free trade agreement has its own ROO, and as the number of free trade agreements grows and becomes entangled, so does the ROO. It will then be almost impossible for manufacturers to comply with all ROOL at the same time. In the diagram above, the connection lines of different colors show different free trade agreements. Worryingly, even after the signing of these agreements, the volume of trade did not increase as expected. Until 2003, there was only one free trade agreement between South and East Asia, namely the Asia-Pacific Trade Agreement (APTA) signed in 1975. Today, the number of agreements has increased to 10. The graph below shows that the volume of trade between South asia and East Asia as a percentage of South Asia`s total trade with the world has stagnated at about 20%, with proliferating trade agreements adding nothing significant to the volume of trade.
*Percentage on the y-axis. Years on the x-axis. IMF-DOTS data. The assumption of my work is that one of the reasons why the volume of transactions did not increase as expected is due to the spaghetti bowl effect. To test this hypothesis, I used the gravitational model of trading and integrated two dummy variables to capture the effect of spaghetti bowls. I have noted that the signing of additional trade agreements has a negative impact on the volume of trade between the countries of the two subregions. As a political proposal, I recommend abolishing the 10 trade agreements and opting for a free trade agreement between South Asia and East Asia that links the two subregions. My recommendation is confirmed by a recent simulation study conducted by the Asian Development Bank comparing the expected results of various potential free trade agreements in Asia. It shows that the gains from the formation of a single free trade agreement between South and East Asia are the greatest.
My presentation was well received at the conference. One of the jury members advised me to further explore the spaghetti bowl phenomenon by measuring the marginal impact of any additional free trade agreement between the two sub-regions. The results can be presented graphically and help to obtain more practical policy recommendations instead of abolishing the 10 free trade agreements, a somewhat difficult and long-term task in the given socio-political environment of the region. In my opinion, in the context of the spaghetti bowl phenomenon, people have started talking about other rules by associating “rules” with rules of origin. Let me take a look at this by citing a case of intellectual property rights as an example. Some free trade agreements that only call for “cooperation” in the field of intellectual property rights (IPR), such as those concluded by Japan, can never lead to a crucifixion of regulations. Let me therefore focus on the so-called TRIPS plus free trade agreements – free trade agreements that impose greater obligations than those under the agreement on trade-related aspects of intellectual property rights – such as those negotiated by the United States. As a result, businesses and governments began to worry about the burden created by the increasing complication of the Asian business environment. This phenomenon has been called “The Noodle Bowl Effect” by several newspapers and academics to highlight its endemic Asian nature. In a 2009 survey[6], only 20.8% of South Korean companies, 29% of Japanese companies and 45.1% of Chinese companies actually used free trade agreements. 20% of companies surveyed across Asia considered multiple rules of origin to be costly for their business. Small businesses have also been more discouraged from using preferential tariffs from free trade agreements due to the high and complex administrative burden.
Bhagbati`s intention in using the term is not very clear from 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), 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 due to the selective nature of these agreements under free trade agreements: Free trade agreements are intended to impose tariffs only on certain items imported from certain countries, lower or eliminate. The presence of this structure hinders the establishment of an optimal production network in terms of economic efficiency (thus preventing external investment solely on the basis of economic efficiency, which corresponds to a diversion of investment). 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 various networks of FTAs that use tariff differentiation to export finished products to consumer countries at the lowest price; he visualized this as intersecting lines and compared those lines of lines to strands of spaghetti tangled 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 consider the interweaving of laws and regulations to be problematic, and those who have pointed out the phenomenon of spaghetti bowls in relation to rules of origin, seem to believe that the phenomenon would not occur if all free trade agreements adopted uniform 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. The spaghetti bowl phenomenon mentioned by Bhagwati is an inevitable result of free trade agreements that reduce or eliminate tariffs on imports from certain countries, and cannot be circumvented simply by changing the design of free trade agreements.
The spaghetti bowl effect is the proliferation of free trade agreements (FTAs) that replace the multilateral negotiations of the World Trade Organization as an alternative to globalization. The term was first used in 1995 by Jagdish Bhagwati in the article “US Trade policy: The loveation with free trade agreements”[1], in which he openly criticized free trade agreements for being paradoxically counterproductive in promoting freer and more open global trade agreements. According to Bhagwati, too many cross-border free trade agreements would allow countries to pursue discriminatory trade policies and reduce the economic benefits of trade. The spaghetti bowl effect refers to a problem of free trade agreements (FTAs) in rules of origin that indicate 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 policies in other countries. In order to export finished products to importing countries at the lowest price, companies could manufacture 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 peel effect”. The presence of complex rules of origin (determination of a country of origin of a product) would make it difficult to determine the country of origin, resulting in higher commercial and administrative costs. If different complex rules of origin apply to different free trade agreements, things are even more complicated: businesses and governments would find them harder to understand and more expensive to enforce. .