The World Trade Organization (WTO) Appellate Body has issued a ruling upholding an earlier WTO Panel finding that the United States’ Country of Origin Labeling (COOL) requirements for beef and pork muscle cuts violate WTO rules because the U.S. COOL scheme discriminates against imported livestock.1 The Appellate Body upheld the Panel’s overall finding of non-compliance with WTO rules, but did so using reasoning that diverged somewhat from the Panel’s. Under WTO rules, the United States must now revise its COOL regime to comply with WTO rules.
The U.S. COOL requirements are derived from the 2008 Farm Bill, which adopted a new and much more restrictive scheme for labeling the country of origin of certain meats, fish, agricultural commodities, and other food commodities. Mexico and Canada challenged the application of the 2008 law to beef and pork products. For these products, COOL limited U.S. origin labels to meat from animals exclusively born, raised, and slaughtered in the United States. The law further set out rules for determining the origin of meat when some or all of the production steps (birth, raising, and slaughter) take place outside the United States, and created four different COOL labeling categories for muscle-cut and ground meat, depending on its country of origin and whether U.S. and foreign meat is mixed. Finally, the measure imposed record-keeping, auditing, and verification requirements that in practice effectively required producers to use various methods 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. Because different stages of North American livestock and meat production frequently take place in more than one country, and because there is substantial cross-border trade in livestock, the COOL law proved disruptive.
After enactment of the 2008 Farm Bill, the U.S. Trade Representative (USTR) initially averted a WTO challenge by negotiating a compromise with Canada and Mexico for implementing COOL, which was set out in Interim and Final Rules by the USDA’s Agricultural Marketing Service (AMS). However, the settlement collapsed when incoming U.S. Secretary of Agriculture Vilsack sent a letter suggesting that U.S. meat producers “voluntarily” include additional information going beyond the AMS rule.
Canada and Mexico then challenged the law under the WTO’s Dispute Settlement Understanding (DSU). A WTO Panel determined that the COOL requirements violated the WTO Agreement on Technical Barriers to Trade (TBT Agreement) because it afforded less favorable treatment to foreign cattle and pork products and was an unnecessary obstacle to international trade, and that the Vilsack letter violated GATT Article X:3(a) because it did not administer the COOL measure in a “reasonable manner.”2
The WTO Appellate Body upheld the Panel’s overall finding that the U.S. COOL regime violated WTO rules, but modified certain aspects of the Panel’s findings and recommendations as follows:
- The Appellate Body ruled that the COOL requirements violated Article 2.1 of the TBT Agreement because COOL imposes unjustifiable and arbitrary requirements that result in less favorable treatment for imported Canadian cattle and hogs and imported Mexican cattle.
- The Appellate Body was unable to determine from the Panel’s factual findings whether COOL violated Article 2.2 of the TBT Agreement and therefore reversed the Panel’s decision on this provision. The Appellate Body ruled that providing consumers with information on country of origin is a legitimate objective for TBT purposes. But, using the Panel’s findings and undisputed facts on the record, the Appellate Body could not determine whether the COOL requirements were more trade-restrictive than necessary under the test adopted in US-Clove Cigarettes.
- The Appellate Body found it unnecessary to rule on the Vilsack letter because it had already found that the COOL measures violated the TBT Agreement.
The earlier WTO Panel decision
On 18 November 2011 a WTO Panel issued a decision declaring several aspects of the COOL requirements, as they pertain to cattle and hog muscle cuts, in violation with WTO rules. In this ruling, the WTO panel identified three primary international trade agreement violations:
- the Panel ruled that the COOL requirements violated Article 2.1 of the TBT Agreement by giving imported Canadian cattle and hogs and Mexican cattle less favorable treatment than domestic products;
- the Panel ruled that COOL violated Article 2.2 of the TBT Agreement by creating “unnecessary obstacles to international trade.” In this regard, the WTO Panel found that providing consumers with clear and accurate information on the origin of imported products is a “legitimate objective” for purposes of Article 2.2, but the United States failed to show that COOL in fact provided accurate and meaningful information on the origin of imported meat products and thus had not shown that COOL fulfilled a legitimate TBT objective; and
- the Panel ruled that the 2009 Vilsack letter recommending that industry adopt additional voluntary labeling violated the Article X:3(a) of the General Agreement on Tariffs and Trade (GATT) because it was not a “reasonable” administration of the COOL measure.
The United States appealed the Panel decision to the WTO Appellate Body. Canada and Mexico cross-appealed certain issues, while simultaneously requesting that the Appellate Body uphold the Panel’s core decision that COOL violated WTO rules.
The WTO Appellate Body decision
Article 2.1 of the TBT Agreement—Less Favorable Treatment of Foreign Cattle and Products
The WTO Appellate Body upheld, on different grounds, the Panel’s ultimate finding that COOL violated Article 2.1 of the TBT Agreement. In reviewing the Panel’s findings, the Appellate Body applied its new “even-handedness” test from US-Clove Cigarettes. Under this test, a “detrimental impact” on imported products alone is not sufficient to find a violation of Article 2.1 of the TBT Agreement. Rather, the Appellate Body held that for the detrimental impact to constitute less favorable treatment, the regulatory distinction also must be designed and applied in a “non-even-handed” manner.
Applying the US-Clove Cigarettes test, the Appellate Body concluded that COOL lacked “even-handedness” because, based on the Panel’s findings, it was designed and applied in a manner that constitutes arbitrary or unjustifiable discrimination against imported beef and pork products. The detrimental impact on imported products stemmed from COOL’s extensive recordkeeping and verification requirements. COOL requires livestock and meat producers to track and transmit information regarding the country in which each production step took place for each individual livestock. However, based on COOL scheme’s overall architecture and design, the Appellate Body found a “lack of correspondence” between COOL’s heavy-handed upstream record-keeping and verification requirements, and the actual country-of-origin labeling information provided to consumers in retail establishments under the U.S. labeling scheme. As a result, it found “the informational requirements imposed on upstream producers under the COOL measure are disproportionate as compared to the level of information communicated to consumers through the mandatory retail levels.”3 In practice, the disproportionate and costly recordkeeping and verification burdens on upstream producers meant that the least costly way to comply with COOL was to avoid imports and instead rely exclusively on domestic cattle and hogs.
These recordkeeping and verification burdens could not be explained by a need to provide origin information to consumers because the information so obtained was not actually conveyed in the labels provided under the law in U.S. retail establishments. Instead, the 2008 Farm Bill exempted large amounts of meat from COOL to avoid burdening small U.S. retailers, while in other cases the commingling of meat with various countries of origin meant that the label did not convey the meat’s actual origin or what production steps had been undertaken in what country.
The Appellate Body thus found the recordkeeping and verification requirements of COOL to be (1) arbitrary and (2) the cause of the detrimental impact on the competitive opportunities of imported livestock. Because it found no basis to justify these requirements, the Appellate Body upheld the Panel’s ultimate finding that the COOL requirements afford less favorable treatment to Canadian and Mexican cattle and hog muscle cut imports than domestic products in violation of Article 2.1 of the TBT Agreement.
Article 2.2 of the TBT Agreement—County of Origin Labeling Is a Legitimate Governmental Objective, but the Panel’s Factual Findings Left the Appellate Body Unable to Determine Whether COOL Imposes Unnecessary Burdens on Trade.
The WTO Appellate Body reversed the Panel’s decision that the COOL requirements violate Article 2.2 of the TBT Agreement because they are more trade restrictive than necessary, and thus lead to unnecessary obstacles to trade. While the Appellate Body agreed that origin labeling is a legitimate objective, it concluded that the Panel’s decision provided an insufficient basis to evaluate whether COOL is more trade-restrictive than necessary.
In its Article 2.2 analysis, the Appellate Body upheld the Panel’s articulation of the U.S. objective in COOL as providing consumers with information about the origin of meat products. It noted that such a determination should be made on the basis of “the measure’s text, design, architecture, structure, and legislative history, as well as its operation,” as opposed to relying solely on the defending party’s characterization of the measure’s ostensible purpose.4 The Appellate Body observed that several provisions of international trade agreements support the legitimacy of providing country of origin information to consumers, including Article 2.2 of the TBT Agreement and Article XX(d) of the GATT.5 As such, the Appellate Body confirmed that requiring origin labeling for imported goods is, in appropriate circumstances, a permissible means of regulating trade in goods under WTO law.
However, the Appellate Body rejected the Panel’s approach to determining whether COOL results in unnecessary barriers to trade, which focused on whether the U.S. measure fulfills its ostensible objective completely or at least, satisfies some minimum level of fulfillment. Rather, the Appellate Body declared that the focus of analysis should be on the actual contribution made by the measure towards achieving its objective. Along these lines, the Appellate Body highlighted the Panel’s findings that some COOL-mandated labels fulfill the U.S. objective by clearly designating the country of origin of products, while other labels, such as those for comingled products, provide at least some origin information not previously available to consumers. Thus, the labels contribute towards COOL’s purpose, at least to some extent. Having found that COOL makes an “actual contribution” to a legitimate objective, the Appellate Body found that the Panel also was required to evaluate the factors set out in its decision in U.S.-Tuna II (Mexico), including (i) the degree of contribution made by the measure to the legitimate objective at issue; (ii) the trade-restrictiveness of the measure; and (iii) the nature of the risks at issue as well as the gravity of the consequences that would arise from non-fulfillment of the objective pursued.6
The Appellate Body noted that the Panel had found that that the U.S. scheme provides unclear, imperfect, or inaccurate information in a number of situations, and that because of commingling, a consumer can never be sure of the precise origin of meat, whatever it says on the label. This suggests that, at least in the Appellate Body’s view, COOL’s degree of contribution to its objective of providing consumers with information is weak. The Panel also found the U.S. scheme was trade-restrictive. However, the Panel did not make specific findings on the degree of contribution of COOL to the U.S. objective, and did not examine whether there are potential alternative measures to accomplish this objective.7 For this reason, the Appellate Body was unable to complete the analysis, and did not reach a final finding on Article 2.2. The Appellate Body’s reasoning, however, suggests that the U.S. faces an uphill battle under this Article as well if it chooses to maintain COOL in its current form.
A WTO Appellate Body decision does not invalidate a U.S. law or regulation per se. Instead, under WTO procedure, the United States is entitled to a reasonable period of time to comply with this Appellate Body decision.8 To comply with the ruling, the United States must amend the 2008 Farm Bill and the COOL regulations to conform U.S. law to the WTO Appellate Body’s decision or may otherwise resolve this dispute with Canada and Mexico. Because there is no further level of appeal within the WTO, if COOL is not brought into conformity with the DSB decision or the dispute is not otherwise resolved through a negotiated settlement, Canada and Mexico will be entitled to implement retaliatory trade restrictions on an equivalent amount of U.S. products. This would invite a repeat of the Mexican Trucking debacle, where a decision by Congress and the Obama Administration to restrict Mexican truck services in violation of U.S. NAFTA obligations led to costly restrictions on a broad range of U.S. farm exports to Mexico.
Finally, given the fundamental WTO violations cited by the Panel and the Appellate Body and their apparent skepticism about other aspects of the U.S. scheme, Congress and the Obama Administration would need to undertake major revisions to COOL in order to salvage it.