What is the "Spaghetti Bowl Phenomenon" of FTAs?

Faculty Fellow, RIETI

The "spaghetti bowl phenomenon" is often cited as a problem of free trade agreements (FTAs) and many people get a self-assured look on their face upon hearing the term. But what really is the spaghetti bowl phenomenon?

Spaghetti bowl phenomenon as perceived in Japan

The presence of complex rules of origin (determining a country from which a product comes), would make it difficult to determine the country of origin, resulting in higher business and administration costs. When different complex rules of origin apply to different FTAs, things are even more complicated: both companies and governments would find them more difficult to understand and more costly to use. Such is how some people understand the spaghetti bowl phenomenon, particularly in Japan. Meanwhile, others knowledgeable about intellectual property rights explain the phenomenon as being when FTAs include provisions for intellectual property rights and if such provisions differ from one FTA to another, domestic rules and regulations for the protection of intellectual property rights get entangled. If we consider the spaghetti bowl phenomenon as referring to the entanglement of domestic rules and regulations, the expression is applicable to other trade rules such as antidumping and safeguarding. Indeed, many people think such is the case.

Both those who see the entanglement of laws and regulations as problematic and those who have pointed to the spaghetti bowl phenomenon with respect to the rules of origin seem to believe that the phenomenon would not occur if a uniform set of plain and unambiguous provisions are adopted by all FTAs. Many people, particularly economists in Japan, argue that this must be considered when the government negotiates for an FTA.

Spaghetti bowl phenomenon as Bhagwati put it

The term was first used by Jagdish Bhagwati in "U.S. Trade Policy: The Infatuation with Free Trade Agreements" in Jagdish Bhagwati and Anne O. Krueger, The Dangerous Drift to Preferential Trade Agreements, AEI Press, 1995. Subsequently, Bhagwati has used the term on various occasions in describing a problem of FTAs. Also, due to its charm, the use of term quickly spread. Some people even began to advocate the meaning of the spaghetti bowl phenomenon by referring to the difference in eating styles for spaghetti and Japanese udon noodles.

Bhagwati's intention in the use of the term is not very clear from his 1995 paper. In his subsequently published papers (e.g. Jagdish Bhagwati, David Greenaway, and Arvind Panagariya, "Trading Preferentially: Theory and Policy"; The Economic Journal 108: 1128-1148; Jagdish Bhagwati, Testimony, Subcommittee on Domestic and International Monetary Policy, Trade and Technology; April 1, 2003; U.S. House of Representatives), we find he cites nothing other than the rules of origin in his argument on the spaghetti bowl phenomenon. Bhagwati focuses on the fact that the rules of origin - which are meaningless under the World Trade Organization (WTO) regime because equal tariff rates are applied to all imports, regardless of their country of origin, as long as the country is a WTO member - are operative under FTAs because of the selective nature of such agreements: FTAs are to reduce or eliminate tariffs only on specific items imported from specific countries. The presence of this structure hampers the adoption of a production network that is optimal in terms of economic efficiency (thus prevents external investment purely based on economic efficiency, which equals investment diversion). Specifically, based on his findings about the rules of origin, Bhagwati found it problematic that an FTA creates an artifact production network of countries that would not be consistent with the principle of economic efficiency. He called this situation a spaghetti bowl phenomenon. By this, he was referring to the manner in which half-finished products and parts go around various FTA networks using tariff differentiation in an effort to export finished products to the consumer countries at the lowest price; he visualized this as crisscrossing lines and likened these strings of lines to strands of spaghetti tangled in a bowl. (In the first article in which Bhagwati used this term, the crisscrossing of FTAs was also likened to spaghetti. But such usage has disappeared in his subsequent papers.)

The spaghetti bowl phenomenon as referred to by Bhagwati is an inevitable result of FTAs that reduce or eliminate tariffs on imports from specific countries and cannot be circumvented simply by changing the shaping of FTAs.

What is the "made-in-Japan spaghetti bowl phenomenon" and is it blamable on FTAs?

So then what is the "made-in-Japan spaghetti bowl phenomenon," and how should we interpret this problem?

The cause of this phenomenon with respect to rules of origin lies in the creation of complex rules of origin. Such complex rules are a reflection of the industrial circumstances of each country concerned and therefore can be simplified if that is what is intended. Furthermore, if companies find these rules too complex and inappropriate for use, they can always export their products without seeking preferential treatment. That is, from the viewpoint of exporters, rules of origin under FTAs 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 represents an additional option but no negative impact. Of course, easier-to-use rules of origin would be preferable. However, how can we compare inconvenience in the use of rules of origin to a spaghetti bowl in the first place?

My view is that people began to talk about other rules in the context of the spaghetti bowl phenomenon by associating the "rules," from rules of origin. Let me take a look at this using a case of intellectual property rights as an example. Some FTAs that call for only "cooperation" in the area of intellectual property rights (IPRs), such as those concluded by Japan, can never cause the crisscrossing of regulations. So, let me focus on the so-called TRIPS-plus FTAs - FTAs that impose greater obligations than those under the Agreement on the Trade-Related Aspects of Intellectual Property Rights - such as those negotiated by the United States.

Countries subjected to greater obligations than TRIPS have two choices. One option is to implement laws and regulations that provide greater IPR protection exclusively for the nationals and products of specific FTA counterparts. The other is to apply greater IPR protection not only to the nationals and products of specific FTA counterparts but also to all others regardless of their nationality or the country of origin. If a country finds the crisscrossing of laws and regulations too complex and problematic, it can simply opt for the second choice. Or, if it finds the complexity manageable, it can choose the first. That is all, and nothing less or more. What is supposedly a problem of the made-in-Japan spaghetti bowl phenomenon is reasonably avoidable by changing the way in which such an agreement is implemented domestically. In other words, this problem is not attributable to the substance of FTAs or the way in which provisions are set forth under them. Rather, the problem stems from the way in which FTAs are implemented by individual countries concerned. The same holds true for other trade rules including antidumping rules.

International treaties and domestic regulations

It is quite usual that a single country is a signatory to various bilateral treaties. Tax treaties are, without exception, on a bilateral basis and the content of such bilateral treaties - those negotiated and concluded by a certain country - would differ depending on what country is the other party. Therefore, tax requisitions differ for each company or each group of companies depending on specific bilateral treaties involved. There is nothing surprising about this because it is how tax matters are supposed to be. Indeed, it is quite natural that provisions differ from one treaty to another in areas not covered by any multilateral treaty such as one under the WTO. For instance, such is the case in the area of investment where more than 2,200 agreements have been concluded worldwide. (The crisscrossing of investment rules is causing a certain problem. But the problem is merely an extremely technical issue concerning arbitration procedures and it is completely different in nature from the aforementioned problem of crisscrossing laws and regulations.) A country can chose to apply rules in the treatment of people, capital, goods and services depending on their country of origin if it considers such a complex system manageable. And if not, all that needs to be done is to implement laws and regulations in accordance with the strictest of multiple agreements and apply them to all countries.

In negotiating FTAs, Japan rarely goes to the extent of demanding that its counterpart country change its laws and regulations except for the sake of lowering or eliminating tariffs. Therefore, as far as Japanese FTAs are concerned, there is no chance at all that the crisscrossing of FTA-related regulations will occur. However, even in the case of FTAs in which one party demands major regulatory changes from the other, as is the case with those concluded by the U.S., the crisscrossing of regulations - a problem different from that targeted by Bhagwati but representing a type of the made-in-Japan spaghetti bowl phenomenon causing anxiety in Japan - can either be made to happen or avoided depending on the intention. That is, whether or not to let it happen is unrelated to the substance of an agreement but up to the way individual countries implement the agreement at home.

Those who only know the world governed by a single set of rules called WTO agreements believe that international regulations are directly linked with domestic regulations. Thus, they are misled into thinking that when a certain item or matter is made subject to different regulations under international treaties depending on the nationality of people and capital involved, it will make domestic regulations complex. However, international regulations are not necessarily directly linked with domestic regulations implemented by individual countries to comply with the international ones. When people fully understand this, there will be no indulging in such meaningless argument as what should be done to prevent FTAs from causing the made-in-Japan spaghetti bowl phenomenon with respect to IPR.

Conclusion: Stop using the term "spaghetti bowl phenomenon" in the made-in-Japan context!

The occurrence of the spaghetti bowl phenomenon as defined by Bhagwati is unavoidable when an FTA is concluded. On the other hand, the made-in-Japan spaghetti bowl phenomenon which many Japanese people worry about is either a problem that cannot be likened to a spaghetti bowl (rules of origin), or a problem that should be addressed separately from FTAs. These two kinds of problems have one thing in common in that both make it more difficult for companies and administrative authorities to understand systems. But they are totally different in nature. Some people might say it is OK to call them the made-in-Japan spaghetti bowl phenomenon because it is true that both of them pose problems and moreover because the use of the term makes it easier to understand. Yet, bundling together two totally different problems would lead to a misperception that a single prescription will cure them. It is time we stop using the term "spaghetti bowl phenomenon" in the made-in-Japan context.

May 23, 2006

Jagdish Bhagwati. (1995), "U.S. Trade Policy: The Infatuation with Free Trade Areas" in Jagdish Bhagwati and Anne O. Krueger. The Dangerous Drift to Preferential Trade Agreements, The AEI Press: pp. 1-18.

Bhagwati, Jagdish, David Greenaway, and Arvind Panagariya, (1998), "Trading preferentially: theory and policy", The Economic Journal, 108: 1128-1148.

Jagdish Bhagwati, (2003), Testimony, Subcommittee on Domestic and International Monetary Policy, Trade and Technology, U.S. House of Representatives, Tuesday, April 1.

May 23, 2006

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