Info Service on WTO and Trade Issues (Dec11/06)
Geneva, 23 Nov (Kanaga Raja) -- A dispute panel of the World Trade Organisation (WTO) last week ruled that certain country-of-origin labelling (COOL) requirements imposed by the United States on meat products from Canada and Mexico were inconsistent with its WTO obligations.
In a ruling issued on 18 November, the panel found that the United States had acted inconsistently with Articles 2.1 and 2.2 of the Technical Barriers to Trade (TBT) Agreement and Article X: 3(a) of the GATT 1994.
It recommended that the Dispute Settlement Body (DSB) request the United States to bring the inconsistent measures into conformity with its obligations under the TBT Agreement and the GATT 1994.
"We are pleased that the panel affirmed the right of the United States to require country of origin labelling for meat products," said Andrea Mead, Press Secretary for the Office of the US Trade Representative (USTR), in a press release.
"Although the panel disagreed with the specifics of how the United States designed those requirements, we remain committed to providing consumers with accurate and relevant information with respect to the origin of meat products that they buy at the retail level. In that regard we are considering all options, including appealing the panel's decision," she added.
In a background to the dispute, the panel said the claims brought by Canada and Mexico concern the United States' country of origin labelling (COOL) requirements for meat products.
On 7 and 9 October 2009, respectively, Canada and Mexico each requested the establishment of a panel concerning this dispute. At its meeting on 19 November 2009, the DSB established a single panel.
Canada had requested that the panel find that: (a) the COOL measure of the United States is inconsistent with its obligations under the TBT Agreement, in particular Articles 2.1 and 2.2; and (b) the COOL measure of the United States is inconsistent with its obligations under the GATT 1994, in particular Articles III: 4, X: 3(a) and XXIII: 1(b).
Mexico had requested that the panel find that: (a) the COOL measures are inconsistent with Articles III: 4 and X: 3 of the GATT 1994 and Articles 2.1, 2.2, 2.4 and 12 of the TBT Agreement; and (b) the COOL measures nullify or impair benefits accruing to Mexico under the GATT 1994 within the meaning of Article XXIII: 1(b) of the GATT 1994.
According to the panel, the complainants argued that the measures accord imported livestock treatment less favourable than that accorded to like domestic livestock inconsistently with Article 2.1 of the TBT Agreement, as well as Article III: 4 of the GATT 1994.
The complainants asserted that this is because complying with the COOL requirements results in higher segregation costs for imported livestock, which in turn affects the competitive conditions of imported livestock in the market.
Furthermore, said the panel, the complainants claimed that the COOL requirements are inconsistent with Article 2.2 of the TBT Agreement.
According to the complainants, the true objective of the COOL requirements is to protect domestic industry, not to provide consumer information on origin as stated by the United States, and that, in the circumstances of this dispute, the provision of consumer information is not legitimate. The complainants stated that there are less trade restrictive alternatives and, in any event, the COOL requirements do not fulfil the objective of providing consumer information on origin because labels under the COOL requirements convey confusing and inaccurate information on the origin of meat products.
The "provisions" that both Canada and Mexico claim constitute the "COOL measure" are: the Agricultural Marketing Act of 1946, as amended by the 2002 Farm Bill and 2008 Farm Bill; the Interim Final Rule (AMS); the 2009 Final Rule (AMS); and the Vilsack letter (letter from Thomas Vilsack, Secretary of Agriculture, United States Department of Agriculture to Industry Representatives - 20 February 2009).
According to the panel, the Vilsack letter, in relevant part, states: "This letter pertains to the implementation of the ... (COOL) Final Rule. ... I am suggesting ... that the industry voluntarily adopt the following practices to ensure that consumers are adequately informed about the source of food products: … processors should voluntarily include information about what production steps occurred in each country when multiple countries appear on each label. … Even if products [that are otherwise exempt] are subject to curing, smoking, broiling, grilling, or steaming, voluntary labeling would be appropriate. … Reducing the time allowance [during which a processor is allowed to reference all of the reasonable possible countries of origin on its ground meat] to ten days would enhance the credibility of the label."
In its analysis, the panel concluded that the measures at issue in this dispute comprise the COOL statute, the 2009 Final Rule (AMS), and the Vilsack letter.
The complainants submitted that the products at issue in this case are imported Canadian cattle and hogs and imported Mexican cattle, which are used in the United States to produce beef and pork, commodities covered by the COOL measure.
Specifically, Canada submitted that its complaint concerns the application of the COOL measure to "beef and pork produced in the United States from cattle and hogs imported from Canada". In response to a question from the panel, Canada elaborated that this dispute concerns Canadian cattle and hogs, whether for immediate slaughter or for feeding in the United States, and not imports of Canadian beef or pork into the United States.
Canada further defined the imported products at issue as cattle and hogs falling into one of the following categories: (i) born in Canada and raised in the United States; (ii) born and raised in Canada; or (iii) born in the United States and raised in Canada. Domestic cattle and hogs, argued Canada, are those born, raised and slaughtered in the United States.
Mexico also specified that its claims relate to exports of Mexican live feeder cattle (i. e. cattle born in Mexico, and then raised and slaughtered in the United States, including cattle partially fed in Mexico and subsequently raised and slaughtered in the United States).
The panel noted that the market for livestock and meat of Canada, Mexico and the United States is highly integrated. Different stages of the North American livestock and meat production are often performed in more than one country. Trade in livestock takes place between, on the one hand, the United States and Canada and, on the other hand, the United States and Mexico. Both Canada and Mexico export cattle to the United States to be processed into meat. Canada additionally exports hogs to the United States. The United States also exports a very limited amount of livestock to Mexico and Canada, but this is not at issue in the current dispute.
Both Canada and Mexico brought claims under Articles 2.1 and 2.2 of the TBT Agreement. In addition, Mexico advanced claims under Articles 2.4, 12.1 and 12.3(a) of this Agreement.
The panel conducted an analysis of the above-listed claims with an assessment of whether the COOL measure and the Vilsack letter qualify as technical regulations within the meaning of the TBT Agreement.
Noting that the United States does not contest that compliance with the COOL measure is mandatory, the panel, following its analysis, said that as it had found that the COOL measure fulfils all three criteria of the thee-pronged test under Annex 1.1 to the TBT Agreement (which defines the term "technical regulation"), it concluded that the COOL measure is a technical regulation.
The panel also found that the complainants have not demonstrated that the Vilsack letter qualifies as a technical regulation within the meaning of Annex 1.1. Accordingly, it refrained from reviewing the Vilsack letter under the provisions of the TBT Agreement invoked by the complainants in this dispute.
The panel went on to address the complainants' claims under the provisions of the TBT Agreement.
Article 2.1 of the TBT Agreement states: "With respect to their central government bodies: 2.1 Members shall ensure that in respect of technical regulations, products imported from the territory of any Member shall be accorded treatment no less favourable than that accorded to like products of national origin and to like products originating in any other country."
The United States contends that "the complaining party must show that the imported and domestic products in respect of which the measure applies are 'like' products". According to the United States, the complainants have not demonstrated this, since they compare the treatment accorded to cattle and hogs (livestock), whilst the COOL measures apply to beef and pork (meat).
The United States also contends that the term "in respect of technical regulations" in Article 2.1 of the TBT Agreement should be interpreted on the basis of the dictionary meaning of the term "respect". According to the United States, the COOL measures contain labelling requirements that "relate to" the labelling of meat, but are not "in respect of" livestock.
The United States also argues that the language "in respect of" in Article 2.1 of the TBT Agreement means that any less favourable treatment not directly attributable to a measure, such as that resulting from a private market actor's independent decision on how to comply, does not give rise to a breach of this provision.
The panel concluded that the term "in respect of technical regulations" in Article 2.1 of the TBT Agreement does not have the specific function suggested by the United States. This term merely clarifies that the obligation in Article 2.1 of the TBT Agreement applies to a specific type of measure: technical regulations. In particular, it does not serve to limit the relevance, for Article 2.1 of the TBT Agreement, of the "relatively broad product scope" attached to the term "like products" under Article III: 4 of the GATT 1994.
The panel said that in any event the COOL measure applies not only to beef and pork but also to cattle and hogs. Formally speaking, the category of "covered commodities" under the COOL measure includes only beef and pork, not livestock, and the labelling requirements under the COOL measure apply to beef and pork only "at the final point of sale of the covered commodity to consumers".
As the panel explained, however, without upstream livestock producers and processors providing the necessary information on origin as defined by the COOL measure, these retail labelling requirements are impossible to fulfil. The COOL measure recognizes this by creating obligations not only for retailers of beef and pork but also for the broad category of "any person engaged in the business of supplying [these] to a retailer".
According to the panel, the latter category of upstream market participants "shall provide information to the retailer indicating the country of origin of the covered commodity". The COOL measure supports this obligation with an enforcement mechanism, including fines - again, applicable to both retailers and their suppliers.
On whether the imported products are accorded less favourable treatment than that accorded to like domestic products, Canada argued that the COOL measure treats Canadian cattle and hogs less favourably than US cattle and hogs. Mexico argued the same with regard to Mexican and US cattle.
The parties suggested that the panel interpret the term "less favourable treatment" contained in Article 2.1 of the TBT Agreement in light of Article III: 4 of the GATT 1994. The complainants argued that "treatment no less favourable" should be assessed in light of whether the measure in question "modifies the conditions of competition in the relevant market to the detriment of imported products", by addressing whether the measure "gives domestic products a competitive advantage in the market over imported like products".
The panel had concluded that Article III: 4 of the GATT 1994 provides relevant context for interpreting Article 2.1 of the TBT Agreement - in particular, for interpreting the term "treatment no less favourable than that accorded to like products of national origin".
"In analysing the complainants' claims under Article 2.1, we do not consider it necessary to address the country of origin labelling measures of other WTO Members referenced by the parties. Our findings under Article 2.1 of the TBT Agreement address only the COOL measure of the United States as challenged by the complainants in the current proceedings," said the panel.
Turning to whether the COOL measure requires segregation according to origin, the panel concluded that, for all practical purposes, the COOL measure necessitates segregation of meat and livestock according to origin, even though this segregation is subject to certain flexibilities, and the cost implications of which the panel also addressed.
"In any event, the complainants are not arguing, and we do not find, that segregation per se would be a violation of Article 2.1 of the TBT Agreement."
As the Appellate Body held in Korea - Various Measures on Beef, the "separation [of imported and domestic products], in and of itself, does not necessarily compel the conclusion that the treatment thus accorded to imported [products] is less favourable than the treatment accorded to domestic [products]". Rather, the question is whether such separation "modifies the conditions of competition ... to the disadvantage of the imported product" by imposing higher costs on imported than on domestic livestock, said the panel.
On whether the segregation of livestock - to the extent it is necessitated by the COOL measure, and taking also into consideration the commingling flexibility - imposes higher costs on imported livestock than on like domestic livestock, the panel noted that in the context of the COOL measure, there are five possible business scenarios in terms of whether the livestock being processed has domestic or imported origin: (a) processing domestic and imported livestock and meat irrespective of origin and solely according to price and quality; (b) processing meat from exclusively domestic livestock; (c) processing meat from exclusively imported livestock; (d) processing exclusively domestic and exclusively imported livestock at different times; or (e) processing both domestic and imported meat by commingling the two on the same production day.
These business scenarios involve different levels of segregation and, accordingly, different relative compliance costs, it added.
In its overall assessment of the costs of segregation under the different business scenarios, the panel said that the above five business scenarios involve segregation of livestock and meat of domestic and imported origin at different levels of intensity and at different compliance costs. Three of the five scenarios involve processing meat from both domestic and imported livestock; one involves meat from exclusively domestic livestock; and another involves meat from exclusively imported livestock.
The more origins and labels involved, the more intensive the segregation and the higher the compliance costs with the COOL measure throughout the livestock and meat supply chain. Commingling might reduce these costs at specific stages, but overall it still involves higher costs than processing single origin livestock only.
Accordingly, said the panel, as a direct result of the COOL measure, business scenarios involving more than one origin or muscle cut label result in generally higher costs than scenarios involving only one origin. The relatively less costly business scenarios are the ones that involve processing meat from either exclusively domestic or exclusively foreign livestock at all times.
Turning to the scenarios involving either exclusively domestic or exclusively imported livestock, it seems logical that the scenario of processing exclusively domestic livestock and meat is in general less costly and more viable than processing exclusively imported livestock. Livestock imports have been and remain small compared to overall US livestock production and demand, and US livestock demand cannot be fulfilled with exclusively foreign livestock.
And even if it could be, in light of the evidence before it, the panel said that it appears that this scenario would in all likelihood involve more than one foreign origin, and thus in general more segregation and higher compliance costs than processing exclusively domestic livestock, which by definition has one single origin. Also, in general, US livestock is often geographically closer to most if not all US domestic markets, so processing exclusively imported livestock and meat remains a relatively less competitive option.
As a result, overall, the least costly way of complying with the COOL measure is to rely on exclusively domestic livestock. Thus, in general, business scenarios involving imported livestock, including the scenario involving exclusively imported products, are overall more costly than the exclusively Label A approach ("United States Country of Origin").
Under the COOL measure and all other things being equal, either consumers pay more or livestock producers receive less for the livestock they sell to processors, said the panel, adding that it appears that the additional costs of the COOL measure cannot be fully passed on to consumers.
The fact that consumers are not ready to bear all the costs of country of origin labelling of beef and pork is also demonstrated by the lack of interest in a voluntary COOL regime. This is acknowledged by the US Department of Agriculture (USDA) itself in the 2009 Final Rule (AMS), the panel added.
"In fact, there is direct evidence of major slaughterhouses applying a considerable COOL discount of USD 40-60 per head for imported livestock. This proves that major processors are passing on at least some of the additional costs of the COOL measure upstream to suppliers of imported livestock. We have no evidence of a similar discount being applied to suppliers of domestic livestock, nor has the United States responded to the evidence submitted by Canada and Mexico in this respect."
The COOL measure creates an incentive for participants to process domestic rather than imported livestock because, under the COOL measure, processing meat from exclusively domestic livestock is less costly than other business scenarios. Passing on these costs at least in part to imported livestock in turn creates a reduction in the competitive opportunities of imported livestock, relative to domestic livestock, said the panel.
The panel preliminarily concluded that the COOL measure creates an incentive to use domestic livestock - and a disincentive to handle imported livestock - by imposing higher segregation costs on imported livestock than on domestic livestock. Consequently, the COOL measure affects competitive conditions in the US market to the detriment of imported livestock.
According to the panel, the competitive opportunities of imported livestock are reduced as the additional costs of compliance with the COOL measure incurred when handling imported livestock are, at least in part, passed on to suppliers of imported livestock.
Further evidence of the reduction of competitive opportunities for imported livestock includes statements by imported livestock suppliers that some plants and companies are simply refusing to process any imported livestock any more. For instance, a major US hog processor informed its Canadian livestock suppliers that "[d]ue to Country of Origin Labeling (COOL)", it will only process US-born, raised and slaughtered hogs.
Moreover, as a result of the COOL measure, fewer US processing plants are accepting imported livestock than before. "Although the United States contests the specific figures submitted by the complainants in this regard, it does not call into question the complainants' case on the overall reduction in the number of plants processing imported livestock as a result of the COOL measure," said the panel.
The panel also said that it had evidence before it showing that, as a result of the reduction of available processing plants, certain suppliers had to transport imported livestock longer distances than before the COOL measure. Further, several plants that continue to process imported livestock do so at specific, limited times, namely only on specific days of the week (typically at most one or two days per week), or only after specific hours of the day.
Processing imported livestock only at specific times as a result of the COOL measure has created logistical problems and additional costs for certain imported livestock suppliers. Due to the congestion resulting from limited specific-time deliveries, certain imported livestock suppliers find it more difficult to obtain trucks for their deliveries or to use their trucks in an efficient way, said the panel.
Congestion has also increased waiting time for imported livestock crossing the border, and thus created transportation delays for certain suppliers of imported livestock. In turn, these have increased the transportation costs of certain suppliers of imported livestock, and have had a negative impact on the welfare and quality of imported livestock as a result of long waiting times in extreme temperatures and shrinkage, sometimes leading even to increased mortality.
In light of the above considerations, the panel preliminarily concluded that the COOL measure reduces the competitive opportunities of imported livestock relative to domestic livestock.
The panel said that before making a definitive finding on this matter, though, it needed to address the counter-arguments advanced by the United States in this regard.
According to the panel, the United States argues that various phenomena prevent the COOL measure from creating the above-described negative incentives and from reducing the competitive opportunities of imported livestock.
The panel said that it had already addressed some of these arguments, e. g. the United States' arguments that any (technical) regulation creates costs and that costs might be distributed differently among market participants. It turned to the additional arguments raised by the United States, namely: (a) the continued processing of imported livestock; (b) the lack of a legal necessity for private market participants to choose Label A; (c) the influence of factors distinct from the COOL measure; (d) pre-existing segregation programmes; and (e) exceptions from the COOL measure.
With respect to exceptions under the COOL measure, the panel noted that the United States argues that it had narrowed the originally envisaged coverage of the COOL measure to reduce compliance costs. The COOL measure requires "retailers" to affix labels on the "covered commodity", which in relevant part is defined as "muscle cuts of beef... and pork" and "ground beef ... and ground pork".
However, as the United States points out, the COOL measure excludes from its scope any otherwise covered commodities that serve as an "ingredient to a processed food item". Further, not all actors selling beef and pork at retail level are subject to the COOL measure. In the context of the COOL measure, an individual "retailer" is covered only when the invoice cost of all of its purchases of perishable agricultural commodities exceeds $230,000 during a calendar year. "Food service establishments" are also exempt from the COOL measure.
The panel concluded that the exceptions to the coverage of the COOL measure do not alter the distribution of compliance costs for livestock and meat producers and processors in a way that would modify the incentives created by the COOL measure.
In light of its analysis of the parties' arguments, the panel found that, in the context of the muscle cut labels, the COOL measure creates an incentive in favour of processing exclusively domestic livestock and a disincentive against handling imported livestock. Accordingly, it also found that, in the context of muscle cut labels, the COOL measure de facto discriminates against imported livestock by according less favourable treatment to Canadian cattle and hogs, and to Mexican cattle, especially Mexican feeder cattle, than to like domestic livestock.
Noting that unlike for muscle cuts, there is one single label for ground meat under the COOL measure, and that this label applies equally to ground meat of imported and domestic origin, the panel found that the complainants have not demonstrated that the ground meat label under the COOL measure results in less favourable treatment for imported livestock.
Following an analysis of actual trade effects of muscle cuts and ground meat labels under the COOL measure, the panel concluded that the COOL measure, in particular in regard to muscle cuts, violates Article 2.1 of the TBT Agreement.
The panel then went on to address the complainants' claims under Article 2.2 of the TBT Agreement.
Article 2.2 provides: "Members shall ensure that technical regulations are not prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade. For this purpose, technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create. Such legitimate objectives are, inter alia: national security requirements; the prevention of deceptive practices; protection of human health or safety, animal or plant life or health, or the environment. In assessing such risks, relevant elements of consideration are, inter alia: available scientific and technical information, related processing technology or intended end-uses of products."
The panel noted that Canada and Mexico argue that the true objective of the COOL measure is to protect domestic industry, while the United States identifies providing consumer information on origin as the objective that it seeks to achieve through the COOL measure.
In its analysis, the panel concluded that the objective pursued by the United States through the COOL measure is to provide as much clear and accurate origin information as possible to consumers.
On the legitimacy of the objective as identified by the United States, the panel concluded that providing consumer information on origin is a legitimate objective within the meaning of Article 2.2.
In its overall assessment, the panel said that the mandatory labelling scheme under the COOL measure falls short of providing consumers with information on the country of origin of meat products in an accurate and clear manner.
"We acknowledge that labels required to be affixed to meat products according to the requirements under the measure provide additional country of origin information that was not available prior to the COOL measure. We also agree that the labelling requirements under the COOL measure may have reduced consumer confusion that existed under the pre-COOL measure and USDA grade labelling system."
However, the panel agreed with the complainants that origin information on labels as prescribed by the measure does not ensure meaningful information for consumers, except origin information on Label A.
Specifically, considered in light of the origin definition as determined by the United States for meat products, the description of origin for Label B ("Multiple Countries of Origin") and Label C ("Imported for Immediate Slaughter") is confusing in terms of the meaning of multiple country names listed in these labels. Moreover, the possibility of interchangeably using Label B and Label C for all categories of meat based on commingling does not contribute in a meaningful way to providing consumers with accurate information on origin of meat products.
therefore conclude that the COOL measure does not fulfil the identified
objective within the meaning of Article 2.2 because it fails to convey
meaningful origin information to consumers. Given this conclusion, we
do not consider it necessary to proceed with the next step of the analysis,
namely whether the COOL measure is 'more trade-restrictive than necessary'
based on the availability of less trade-restrictive alternative measures
that can equally fulfil the identified objective," said the panel.
In its overall findings and recommendation with regards to Canada's claims under the TBT Agreement, the panel concluded that: (a) the COOL measure is a "technical regulation" within the meaning of Annex 1.1 to the TBT Agreement, whereas the Vilsack letter is not; (b) the COOL measure, particularly in regard to the muscle cut meat labels, violates Article 2.1 because it affords imported livestock treatment less favourable than that accorded to like domestic livestock; and (c) the COOL measure violates Article 2.2 because it does not fulfil the objective of providing consumer information on origin with respect to meat products.
With respect to Canada's claims under the GATT 1994, the panel concluded that: (a) it need not make a finding on the COOL measure under Article III: 4 in light of its finding that the same measure violated the national treatment obligation under Article 2.1 of the TBT Agreement; (b) the Vilsack letter violates Article X: 3(a) because it does not constitute a reasonable administration of the COOL measure; and (c) having found that the Vilsack letter falls within the scope of Article X: 3(a), it refrained from examining whether it is inconsistent with Article III: 4.
The panel also refrained from examining Canada's non-violation claim under Article XXIII: 1(b) of the GATT 1994.
The panel concluded that to the extent that the United States has acted inconsistently with Articles 2.1 and 2.2 of the TBT Agreement and Article X: 3(a) of the GATT 1994, it has nullified or impaired benefits accruing to Canada under these agreements.
Having found that the United States has acted inconsistently with Articles 2.1 and 2.2 of the TBT Agreement and Article X: 3(a) of the GATT 1994, the panel recommended that the Dispute Settlement Body request the United States to bring the inconsistent measures into conformity with its obligations under the TBT Agreement and the GATT 1994.
to Mexico's claims under the TBT Agreement, the panel concluded that:
(a) the COOL measure is a "technical regulation" within the
meaning of Annex 1.1 to the TBT Agreement, whereas the Vilsack letter
is not; (b) the COOL measure, in particular in regard to the muscle
cut meat labels, violates Article 2.1 because it affords imported livestock
treatment less favourable than that accorded to like domestic livestock;
(c) the COOL measure violates Article 2.2 because it does not fulfil
the objective of providing consumer information on origin with respect
to meat products; (d) Mexico has not established that the COOL measure
violates Article 2.4; (e) Mexico has not established that the United
States acted inconsistently with Article 12.3; and (f) in light of its
finding on Mexico's claim under Article 12.3, Mexico has not established
its claim under Article 12.1.
The panel also refrained from examining Mexico's non-violation claim under Article XXIII: 1(b) of the GATT 1994.
The panel concluded that to the extent that the United States has acted inconsistently with Articles 2.1 and 2.2 of the TBT Agreement and Article X: 3(a) of the GATT 1994, it has nullified or impaired benefits accruing to Mexico under these agreements.
Having found that the United States has acted inconsistently with Articles 2.1 and 2.2 of the TBT Agreement and Article X: 3(a) of the GATT 1994, the panel recommended that the Dispute Settlement Body request the United States to bring the inconsistent measures into conformity with its obligations under the TBT Agreement and the GATT 1994. +