U.S. exporters may soon be subject to over one billion dollars in retaliatory measures by Canada and Mexico due to a recent World Trade Organization (WTO) decision. On December 7, a WTO Arbitrator found that Canada and Mexico incurred annual trade damage of US$1.017 billion from U.S. violations of the WTO’s Technical Barriers to Trade Agreement (TBT Agreement) in connection with a long-running WTO dispute over the U.S. country-of-origin labeling (COOL) requirements for beef and pork. Mexico and Canada have requested a special meeting of the WTO’s Dispute Settlement Body (DSB) on December 18 in order to secure authorization to impose retaliatory duties on an equivalent amount of U.S. products. Such authorization is virtually automatic and can be denied only if the DSB decides by consensus to reject the request.1 In other words, unless Congress repeals COOL shortly, retaliatory Canadian and Mexican duties on over US$1 billion of U.S. exports are imminent and very likely to go into effect before the end of the year. 

According to a statement by Mexico’s Ministry of Economy, it has started the internal procedures necessary to impose higher tariffs on imports of certain U.S. agricultural and industrial products, including apples, dairy, alcoholic beverages, and personal hygiene products. Canada issued a preliminary retaliation list in 2013, and is likely to select final candidates from that list (attached below). While WTO rules set out a general principle that Mexico and Canada’s retaliation should  target U.S. meat products, they are almost certain to go after a broader range of U.S. products, and exports from states whose Congressional delegations have been prominent COOL proponents, e.g. Michigan, Iowa, and North Dakota. Mexico also plans to employ a so-called “carousel” retaliation scheme, similar to the one the U.S. adopted in a WTO dispute involving EU – Hormones in January 2009. In a carousel, the sanctioning country regularly rotates the products subject to retaliatory duties, thus exposing a broader range of products to potential sanctions.

Any company exporting products to Canada, which are on Canada’s 2013 preliminary list, should try to get them cleared through Canadian customs before December 18. These companies should also be prepared to pay the punitive duties, or have precautionary arrangements in place in case their goods are subject to prohibitive duties and need to be shipped back to the U.S. Any company which is shipping goods to Mexico — including apples, dairy, alcoholic beverages, and personal hygiene products — should be prepared to make similar arrangements.

Background

The 2002 and 2008 Farm Bills adopted a new and highly restrictive COOL scheme for labeling certain meats, fish, and other agricultural and food commodities. COOL limits U.S. origin labels to meat from animals exclusively born, raised, and slaughtered in the U.S. In addition, it sets out rules for different labels based on whether some or all of the production steps (birth, raising, slaughter) take place outside the U.S., and if U.S. and foreign meat are mixed at various stages of production. Finally, COOL imposes stringent record-keeping, auditing, and verification requirements that in practice effectively require producers to segregate animals falling into different labeling categories, e.g. by placing them in separate pens, processing livestock of different origin categories on different days, or simply refusing to handle imported cattle or hogs. The effect has been to discourage U.S. meat processors from handling imported pigs and cattle.

USTR recognized from the outset that the WTO case was a loser and managed, with some difficulty, to settle it by making adjustments to USDA’s proposed COOL rules that were acceptable to Canada and Mexico. However, the settlement was disavowed by the incoming Obama Administration in a letter by USDA Secretary Vilsack in February 2009, which expressed concern about the rule’s exceptions, urged industry to “voluntarily” adopt more restrictive labeling practices, and hinted at upcoming “modifications.”  

Canada and Mexico immediately launched a WTO challenge to COOL. In 2011, a WTO Panel determined that COOL violated the WTO’s TBT Agreement because it afforded less favorable treatment to foreign cattle and pork products under TBT Article 2.1. This decision was appealed by the U.S. to the WTO’s Appellate Body, which modified certain aspects of the panel’s decision, but upheld its core finding that COOL discriminates against imported cattle and pork products in violation of TBT Article 2.1. 

On May 23, 2013, USDA announced a revised COOL regime to comply with the WTO’s decision. In effect, USDA doubled down on its original rule by making the labeling of meat even more restrictive.  Mexico and Canada immediately challenged the revised rule in a WTO compliance proceeding under DSU Article 21.5. On May 29, 2015, the appellate body upheld the WTO Panel’s finding that the U.S. had failed to comply with the original Panel and appellate body decisions. 

After Mexico and Canada made it clear that they would retaliate, USTR challenged Canada’s and Mexico’s estimates of the resulting trade damage in an arbitration proceeding under DSU Article 21.6. The dispute was heard by the original WTO panel. On December 7, the arbitrators found that the level of “nullification or impairment” (trade damage) for Canada amounted to CAN$1,054.729 million annually and the level of nullification or impairment for Mexico amounts to US$227.758 million annually. The damage levels found by the WTO fell short of Mexico's original request of US$713 million and Canada's of CAN$3.1 billion, in part because of the arbitrator's finding that any livestock price suppression in Mexico's and Canada's domestic markets could not be counted toward the trade damage caused by the COOL measure. Instead, the arbitrator found that the focus of DSU nullification and impairment is on Canada’s and Mexico’s lost export revenues from the COOL measure.2At the same time, the WTO found that the damages substantially exceeded the U.S. estimate of only US$91 million.

What Happens Next?

The DSB’s upcoming meeting on December 18 should be merely a formality. A consensus to disapprove the Arbitrator’s finding, which is what would be required under DSU Article 22.6 to overturn it, is extremely unlikely, as it would require Canada and Mexico to join such a consensus. Both are frustrated by the U.S. delays and repeated refusals by the U.S. Administration to address the WTO’s earlier findings. Under Article 22.6 the arbitrator’s decision is “final” and cannot be appealed to the Appellate Body, so the U.S. is likely at the end of the road in the WTO. 

While DSU Article 22.3(a) sets out a general principle that retaliation should be against the same sector in which the violation occurred, it gives WTO Members latitude to go beyond the immediate sector if sectoral retaliation would not be “practicable or effective.”3 As a result, retaliatory Canadian and Mexican duties of approximately US$1 billion are likely to go into effect by the end of the year on a far broader range of U.S. products, not just meat.  

The Mexican and Canadian duties would be lifted if Congress repeals COOL, but it is unclear whether this will occur. The U.S. House of Representatives has already passed legislation to repeal COOL, but the bill is stuck in the Senate because of opposition from certain Senators, including Senator Stabenow (D-MI) and Hoeven (R-ND), who have been seeking to replace COOL with a “voluntary” labeling scheme. While Senate Agriculture Committee Chairman Pat Roberts (R-KS) is pushing for the House repeal bill to be included in an omnibus federal spending package that Congress must pass before the end of this year, nothing can be taken for granted in the current political environment. Secretary Vilsack recently indicated that he favors replacing COOL with a voluntary scheme, although he did not provide specifics on exactly how this could be done in a way that would comply with U.S. WTO obligations. Given USDA’s track record on COOL, U.S. assurances that a “voluntary” COOL will comply with WTO rules is highly unlikely to satisfy either Canada or Mexico.  

We will continue to monitor COOL developments closely, including developments in Canada and Mexico on issuance of their final retaliation lists and well as the upcoming DSB meeting.

Preliminary Canadian Retaliation List (2013)

  • 02: live bovine animals;
  • 01.03: live swine;
  • 02.01: meat of bovine animals, fresh or chilled;
  • 02.02: meat of bovine animals, frozen;
  • 02.03: meat of swine, fresh, chilled or frozen;
  • 0207.13.10: cuts of offal, fresh or chilled, of spent fowl;
  • 0406.90: cheese, not including the following: fresh (unripened or uncured) cheese, whey cheese or curd; grated or powdered; processed cheese; blue-veined cheese or cheese containing veins produced by Penicillium roqueforti;
  • 0808.10: apples, fresh;
  • 0809.29: cherries, other than sour cherries (Prunus cerasus);
  • 0812.10: cherries, provisionally preserved (unsuitable in that state for immediate consumption);
  • 10.05: corn (maize);
  • 1006.30.00: semi-milled or wholly milled rice, whether or not polished or glazed;
  • 1602.32.11: prepared or preserved-prepared meals of spent fowl; prepared meals of specially defined mixtures;
  • 1602.32.92: prepared or preserved-specially defined mixtures, other than in cans or glass jars; spent fowl other than in cans or glass jars;
  • 1602.49: prepared or preserved swine cuts, other than ham and cuts thereof; other than shoulder and cuts thereof;
  • 1602.50: prepared or preserved meat of bovine animals;
  • 1702.20: maple sugar and maple syrup;
  • 1702.40.00: glucose and glucose syrup, containing in the dry state at least 20 percent but less than 50 percent by weight of fructose, excluding invert sugar;
  • 1702.60.00: certain fructose and fructose syrup, containing in the dry state more than 50 percent by weight of fructose, excluding invert sugar;
  • 1806.20: chocolate and other food preparations containing cocoa-preparations in blocks, slabs or bars weighing more than 2 kg or in liquid, paste, powder, granular or other bulk form in containers or immediate packings, of a content exceeding 2 kg;
  • 1806.90: other chocolate and other food preparations containing cocoa-ice cream mix or ice milk mix; chocolates; chocolate coated nuts and other confectionery;
  • 19.02: pasta, whether or not cooked or stuffed (with meat or other substances) or otherwise prepared, such as spaghetti, macaroni, noodles, lasagna, gnocchi, ravioli, cannelloni; couscous, whether or not prepared;
  • 19.04: prepared foods obtained by the swelling or roasting of cereals or cereal products (for example, corn flakes); cereals (other than maize [corn] in grain form or in the form of flakes or other worked grains (except flour, groats and meal), pre-cooked or otherwise prepared, not elsewhere specified or included;
  • 19.05: bread, pastry, cakes, biscuits and other bakers’ wares, whether or not containing cocoa; communion wafers, empty cachets of a kind suitable for pharmaceutical use, sealing wafers, rice paper and similar products;
  • 2004.10.00: certain potatoes, prepared or preserved otherwise than by vinegar or acetic acid, frozen;
  • 2009.11: frozen orange juice;
  • 2103.20: tomato ketchup and other tomato sauces;
  • 22.04: wine of fresh grapes, including fortified wines; certain grape must;
  • 2207.20: ethyl alcohol and other spirits, denatured, of any strength;
  • 2940.00.00: certain sugars, chemically pure, other than sucrose, lactose, maltose, glucose and fructose; sugar ethers, sugar acetals and sugar esters, and their salts;
  • 3504.00: peptones and their derivatives; other protein substances and their derivatives, not elsewhere specified or included; hide powder, whether or not chromed;
  • 71.13: articles of jewellery and parts thereof, of precious metal or of metal clad with precious metal;
  • 7306.40.00: certain tubes, pipes and hollow profiles, welded, of circular cross-section, of stainless steel;
  • 7321.90: parts for non-electric heating appliances;
  • 7326.11.00: grinding balls and similar articles for mills, forged or stamped, but not further worked, of iron or steel;
  • 9401.30: swivel seats with variable height adjustment;
  • 9403.30.00: wooden furniture of a kind used in offices; and
  • 9404.29.00: mattresses of materials other than cellular rubber or plastics, whether or not covered.