Free Trade Agreements aren’t Really Free: The Spaghetti Bowl Effect

We live in a time where Marshall McLuhan’s idea of a “global village” is clearly taking shape. With economies opening up to the rest of the world, trade, in all senses of the word, has been roughly flourishing. Nations slowly realised that a policy of economic isolation (or protectionism) was proving costly and moved to free trade.

Free trade agreements (FTAs) are practised by governments across the world where any discriminatory and restrictive policies such as tariffs on imports or expansionary policies such as subsidies on exports are not used. Free trade policies ensure that a state does not gain a disproportionately unfair advantage on the global scale or promote their own economic policies.

To ensure that such free trade policies are effectively observed across the world, the World Trade Organisation (WTO) has set up rules and regulations whereby no country should be allowed to flex their economic might to unfairly excel in trade and generate profits. The introduction of the General agreement on tariffs and trade (GATT) in 1947 saw a total of 23 signatory countries, with the number swelling to more than a 100 by 1973. While the current number stands at around the 150 mark, it is inevitable that more members will keep on joining the fray. The GATT encompasses certain basic principles such as-

• Non-discrimination
• Reciprocity
• Anti-dumping
• Anti-subsidy
• Safeguards (aka escape clauses)

This system is however not without its own flaws. The WTO expects governments to not provide high amounts of subsidies towards its domestic products, but makes inexcusable and apparently inexplicable exceptions in certain cases. Take the US for example. One particular case that comes to mind is the cotton subsidy case, where even with a history of high subsidies, the US blamed India for increased MSP, all while being the highest exporter w.r.t. internal production in the world and dumping cotton in the global markets, putting millions of farmers at a competitive disadvantage.

With the rise in the number of inter-country FTAs, an issue arises where keeping up with all the different FTAs and PTAs (Preferential Trade Agreements) becomes a hassle, which leads to what is known as the Spaghetti bowl effect. To put it simply, it is the interconnected entanglement that arises due to many different (PTAs)  and their agendas basically forming a very complicated spaghetti-like scenario. This is not just hard to manage but also leads to increased administrative costs and could also lead to issues with maintaining intellectual property rights between different countries. Jagdish Bhagwati coined the “spaghetti bowl” phenomenon in 1995 to refer to the convoluted maze that is the diversity of Preferential Trade Agreements (in his original statement) that causes tariffs from specific countries to be reduced or even eliminated completely.

In the present day, the argument also extends to Free Trade Agreements (FTAs). FTAs and PTAs are rather similar, save for one distinct feature- PTAs have the characteristic of being unilateral, wherein one country involved can reduce tariffs or relax restrictions on trade without the other country necessarily reciprocating in the same regard. Bhagwati has been critical of the FTAs since forever, stating that “it is likely that the dilution of the multilateral trading regime by the spaghetti bowl of preferential trade agreements will be our fate.” FTAs being a prerequisite for being a WTO member only adds to this mess, while simultaneously decreasing the relevancy of the organisation due to them now being associated with inadvertently having created this mess.

Not only are FTAs counterintuitive, according to him they are even a misnomer. In fact, every FTA is a PTA according to him, each with their own exceptions, loopholes and particular regulations. Not only is this not free in any sense, a majority of these agreements just add unnecessary costs and time  commitments to many countries’ administrations. To assume that bilateral relations cannot internally affect the freedom of trade (in terms of adhering to WTO guidelines), both intentionally and unintentionally is not just a display of naivety but also an apparent lack of foresight on the part of policymakers.

A small example of how big and unmanageable this issue is becoming is the rise in the number of trade agreements in Asia. In 1975 there was only a singular agreement to bring together South Asia and East Asia called the Asia Pacific Trade Agreement (APTA). However, the number has now gone up to 10 (as of 2015). This may not seem like a lot, considering that there are so many diverse countries in Asia with so many diverse trade needs and demands, but the gravity of the situation becomes clear when we take a look at the ‘Rules of Origin’ (RoO). RoOs refer to the rules that apply to the country of origin, which helps in deciding whether imported products from said country are eligible for duty-free or reduced duties under the FTA rules even if they may be containing non-FTA components.

The concept of a ‘country of origin’ comes up when member countries of an FTA agree on lower tariffs for internal trade, while they can also levy their own external tariffs for those who are non-members. Rules of cumulation (RoCs) on the other hand ensures that countries within a given FTA can treat originating input products from one country in the FTA as an originating input product for another country adhering to that FTAs’ rules. This ensures that tariff costs are non-existent and incentivises trade partners to engage in bilateral or diagonal cumulation.

Determining whether one country is adhering to the FTAs of another is in itself a daunting task.  But when we take into consideration the FTA and non-FTA RoOs pertaining to products which are not manufactured in a single country (i.e. different components having different origins and the final product is assembled somewhere else altogether) is applicable for every single component over many such countries becomes a headache. This was just for one group of FTAs. Multiply this entire process by 10 for each group and each individual country within the group and we see the Pandora’s box of administrative nightmares open.

There has been increasing regional research on various ‘spaghetti bowls’ across the world. Out of these, the Asian ‘noodle bowl’ is being highlighted at greater levels.

Trade distortions as a result of the spaghetti bowl are proving to be increasingly costly in terms of time and money- they result in augmented costs of doing business.  Since each FTA is associated with its RoO, an increasing number of FTAs would mean an increasing number of RoOs as well, until it gets to a point where a firm will not be able to satisfy one RoO without being in violation of some other, simultaneously. This can lead to welfare losses as a result of trade diversion. Given its disastrous implications, it becomes very evident that the spaghetti bowl associated with FTAs must be detangled at the earliest.

The Doha Round of trade negotiations of the WTO addresses this issue and notes that the best way forward currently is to minimise the negative effects as a result of the convoluted mess of FTAs.

A proposed way forward is to consider multilateralisation of preferences compared to preferential liberalisation. In the case of preferential liberalisation, there is a non-linear diminishing effect of benefits due to actual utilisation rates (Menon, 2009). Menon goes on to say that switching over to a policy of multilateralisation promotes welfare because of three reasons:

1. There is greater liberalisation
2. Greater liberalisation reverses the effects of trade diversions
3. Allocation of productivity of scarce resources amongst firms within member nations becomes more efficient.

While the debate continues, one must remember that the positive effects of multilateralisation are important enough to give it a seat at the table; they are important enough for nations to begin considering it as a serious alternative. Now that a problem has been identified, there must be a global move to mitigate potential damage as the spaghetti bowl threatens to harm the framework that is international trade today.

Aarya Pillai

Aarya Pillai is a research intern with Tatvita Analysts pursuing her graduation in Economics from Gokhale Institute, Pune. She has keen interest in researching on international relations and food security as a policy matter.

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