WTO Appellate Body Finds Revised US COOL Measure Violates Trade Rules

21 May 2015

The WTO’s highest court said on Monday that the amended version of the US’ country-of-origin labelling (COOL) regime continues to discriminate against livestock and meat imported from Canada and Mexico, confirming the bulk of an earlier compliance panel’s findings.

Nonetheless, citing a lack of sufficient undisputed facts on the panel record, the Appellate Body was unable to properly compare alternative measures proposed by Canada and Mexico with the US policy, and ultimately did not make a definitive conclusion of whether the amended COOL measure is an unnecessary international trade barrier.

Case history

Under the original COOL policy, which was actually a series of instruments enacted under the 2002 US Farm Bill and then revised in 2009, producers were required to inform US consumers of meat’s country of origin via a label on the sale package. The label could fall under five different categories, each divided into three sub-categories. The measure established, among others, that the consumer information regarding muscle cuts should be in the format of “product of” a specific country or multiple specific countries.

The measure was challenged at the WTO by Ottawa and Mexico City, with the Appellate Body finding in 2012 that Washington’s original COOL policy violated non-discrimination requirements under international trade rules, confirming a previous panel ruling from 2011. (See Bridges Weekly, 4 July 2012)

More specifically, the Appellate Body found that the level of information conveyed on the labels to consumers was far less detailed and accurate than the information required to be tracked and transmitted by upstream livestock producers and processors. The Appellate Body also explained that it was those same recordkeeping and verification requirements that made segregation necessary and, as a result, created an incentive for US producers to process domestic livestock over their imported equivalent.

In 2013, Washington revised the 2009 COOL statute, imposing new point of production requirements to “enhance” the labels’ accuracy. As a result, animals slaughtered in the US fall under three possible labelling categories of muscle cuts: US origin, US and other countries mixed origins, and imported for immediate slaughter. These labels would indicate where each production step – birth, raising, and slaughtering – occurred.

For animals slaughtered abroad, including specific location information related to the various production steps under the “foreign origin” label of muscle cuts is voluntary, provided that records to substantiate these claims are maintained.

The labelling requirements for the ground meat are maintained in the amended measure – all countries of origin of the meat contained must be listed based on the 60 day “inventory allowance.” According to this rule, when a raw material from a specific origin has not been in a processor's inventory for more than 60 days, that country shall no longer be included as a country of origin on the label.

Upon the requests of Canada and Mexico, a compliance panel consisting of the original dispute panellists was called to examine WTO consistency of the amended COOL measure. The panel ruled against the US last October, after which all parties respectively appealed various legal and factual aspects of the findings. (See Bridges Weekly, 23 October 2014)

Continued disproportionate burden

In Monday’s ruling, the Appellate Body rejected Washington’s arguments and agreed with the panel that the amended COOL measure’s recordkeeping and verification requirements continue to impose a disproportionate burden on livestock producers and processors.

Furthermore, they said, this burden cannot be explained by the need to provide consumers with information regarding where livestock are born, raised and slaughtered. Accordingly, the detrimental impact on imported livestock arising from these same requirements does not stem exclusively from “legitimate regulatory distinctions.” 

The Appellate Body confirmed that, compared with the original policy, the point-of-production labelling requirement increases the number of distinct labels for certain scenarios of muscles cuts with different foreign origins that were ultimately slaughtered in the US, thus resulting in more segregation.

In this regard, the Appellate Body rejected the US’ arguments that the panel conclusions were based on “incorrect hypothetical” scenarios, rather than actual trade situations.

The Appellate Body also observed that under the amended COOL measures, the provision of specific information of production steps for certain foreign muscle cuts derived from US-slaughtered animals, which was voluntary under the original COOL policy, is now mandatory. This, they said, means livestock and meat producers must keep more records to substantiate the origin claims. 

Possible label inaccuracy

On the consumer information side, the WTO judges also maintained the panel's conclusions regarding the potential for labelling inaccuracy under the amended COOL measure.

For instance, in the scenario where “animals are born and raised in another country and subsequently further raised in the United States, only the raising that occurs in the United States needs to be declared on the label,” the raising information is inaccurate given the evidence that feeder cattle exported to the US may spend up to 68 percent of their lifespan in their country of birth, yet the resulting meat products could still be labelled as raised only in the US.

In this regard, the panel had noted that between 57.7 and 66.7 percent of beef and between 83.5 and 84.1 percent of pork muscle cuts consumed in the US convey no consumer information on origin, despite imposing an upstream recordkeeping burden on producers and processors that hurts competitive opportunities for imported livestock.

For the Appellate Body, these exemptions incorporated into the COOL measure’s coverage – as part of the policy’s overall architecture – also supports a conclusion that its detrimental impact on imported livestock does not stem exclusively from legitimate regulatory distinctions.

COOL versus alternative measures

The Appellate Body clarified that the task of a panel under Article 2.2 of the WTO’s Agreement on Technical Barriers to Trade (TBT) is “determine whether the technical regulation at issue restricts international trade beyond what is necessary for that technical regulation to achieve the degree of contribution that it makes to the achievement of a legitimate objective.”

A technical regulation should, in principle, be reviewed in its entirety in order to assess its degree of contribution to its objective, the WTO judges said. The Appellate Body thus found that the panel incorrectly excluded two types of COOL labels from consideration when reaching its conclusion that the amended COOL measure makes a “considerable but necessarily partial” contribution to its objective of providing consumer information on origin. 

The Appellate Body recalled that an assessment of whether a proposed alternative measure achieves an equivalent degree of contribution to the relevant legitimate objective is essential in determining whether a technical regulation restricts international trade beyond what is necessary to help reach the degree of contribution that it makes to the achievement of a legitimate objective, under Article 2.2 of the TBT Agreement.

However, this does not mean that complainants “must demonstrate that its proposed alternative measure achieves a degree of contribution identical to that achieved by the challenged technical regulation,” the Appellate Body said.

For this dispute, the Appellate Body rejected the US’ arguments, agreeing with the panel that an alternative measure providing less information – or  less accurate information – but having significantly wider product coverage could qualify as making a degree of contribution “equivalent” to that of the amended COOL measure.

Risks of non-fulfilment

Article 2.2 also says that the risks from not fulfilling an objective must be taken into account in analysing a technical regulation. The Appellate Body says that this requires a panel to first identify the nature of the risks and the gravity of the consequences that would arise from non-fulfilment. 

In the earlier panel proceedings, the experts said the risk associated with non-fulfilment is that “consumers would be misinformed.” Nonetheless, they were unable to determine the extent of consumer interest in either general country of origin information or such information according to point of production, based on the evidence on the record.

For the panel, this meant that it could not ascertain the gravity of not fulfilling the amended COOL measures’ objective and consequently, it could not take such risks into account in the overall weighing and balancing under Article 2.2. The Appellate Body disagreed with this quantitative approach.

“In such contexts, it may be more appropriate to conduct a conjunctive analysis of both the nature of the risks and the gravity of the consequences of non-fulfilment” in qualitative terms, the Appellate Body said. The difficulties or imprecision that arise in assessing “the risks non-fulfilment would create” should not relieve a panel from its duty to assess this factor.

Analysis of alternatives

The Appellate Body reversed the panel's conclusion that Canada and Mexico failed to make a case that the amended COOL measure violated Article 2.2 of the TBT Agreement, citing the panel’s error in assessing “the risks non-fulfilment” factor.  

In particular, the Appellate Body found that this error effectively meant that the panel did not fulfil its duty to account for “the risks non-fulfilment would create” in assessing whether two proposed alternative measures would make an equivalent contribution to the amended COOL measure’s objective, compared to the US measure itself.

The Appellate Body added, however, that it was not in a position to assess whether the two proposed alternatives are less trade restrictive than the amended COOL measure; reasonably available to the United States; and make an equivalent degree of contribution to the objective, due to lack of sufficient facts on the panel record.

With respect to two other proposed alternatives, the Appellate Body found the panel mistakenly allocated too heavy a burden for the complainants to prove those alternatives are “reasonably available” and reversed the panel’s findings accordingly.

Ultimately, the Appellate Body made no finding as to whether the amended COOL measure is inconsistent with Article 2.2.

Next steps

The WTO’s Appellate Body is the court of last resort for international trade disputes. According to agreements the US reached with Canada and Mexico, respectively, in June 2013, should Washington lose in the compliance proceedings, the complainants may request authorisation to suspend the application of concessions or other obligations under the covered WTO agreements, as allowed under trade rules.

This option will be available even after the usual 30-day time period outlined in WTO rules, under the terms of these agreements. This is without prejudice to the US’ right to challenge the level of countermeasures by referring the matter to arbitration.

Back in Washington, domestic legislative efforts to repeal the amended COOL measure are already underway, with the House Committee on Agriculture passing a bill to that effect on Wednesday.

The legislation must still be approved by the full House, and an equivalent measure would need to be approved in the Senate at both the committee and floor levels, along with requiring the US President’s signature.

House Agriculture Committee Chairman Mike Conaway, who backed the bill, publicly called on Wednesday for the US to comply with the Appellate Body findings.

“[The Appellate Body ruling] follows on the latest in a series of economic analysis from the [US Department of Agriculture] demonstrating that this failed marketing program adds extraordinary costs with no – I repeat no quantifiable benefits,” he said, calling for swift action to avoid the possibility of retaliation from Canada and Mexico.

ICTSD reporting.

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