For the second time in two years, the WTO has rejected USDA’s efforts to implement the Congressionally mandated country of origin labeling (COOL) for meat.  The WTO again said the U.S. can have such a labeling program for beef and pork, but the current program forces U.S. packers to discriminate against Canadian cattle and hogs and Mexican cattle.  The Canadian government is preparing to place retaliatory tariffs on U.S. exports to Canada when the WTO approves them, probably not before late 2015.

Mandatory country of origin labeling for meat was passed by Congress as part of the 2008 farm bill.  The governments of Canada and Mexico immediately initiated WTO dispute settlement proceedings against the U.S. in December of 2008.  In November 2011 a WTO dispute resolution panel confirmed the U.S. right to have a program, but disagreed with the way the U.S. designed its requirements and determined that the rules provide less favorable treatment to Canadian and Mexican livestock than U.S. livestock.   A 2012 WTO Appellate Body ruling confirmed that position.  In May 2013, USDA implemented a revised program it believed was consistent with U.S. law and the previous WTO ruling.  A WTO compliance panel has now found that the COOL requirements for beef and pork continue to discriminate against Canadian and Mexican livestock exports.

Part of the problem for Canadian and Mexican cattle producers and Canadian hog producers is that the industries had achieved a high level of industry integration under NAFTA.  In an Economic Research Service of USDA report in 2009 NAFTA at 15: Building on Free Trade (a report mandated by Congress), the economists explained, “High degree of integration in cattle, beef, hogs, and pork.  Expanded Canadian hog exports to U.S. include larger proportion of feeder animals that are completed in U.S.  Growing two-way trade in cattle and beef.  High degree of integration regarding U.S. producers and the Mexican market.  Medium degree of integration regarding Mexican producers and the U.S. market, except feeder cattle (high).”   Disease control was the limiting factor for Mexican pork exports to the U.S.  The resource efficiencies created by NAFTA are being undone by COOL which creates losers who had previously responded to market forces and public policies.

The U.S. is a two time loser at the WTO on this issue, which indicates the need for a substantial course correction.  USDA Secretary Vilsack has told the media that he has requested his staff to seek a fine line between the U.S. law about specific labeling and the WTO issue of importers’ segregation costs.  As a member of management in the Executive Branch, he an obligation to carry out the law as passed by Congress and signed by the President.   But this sounds too much like the first two failed attempts to have a creditable program.

The Canadian Minister of Agriculture and Agri Food Canada, Mr. Gerry Ritz, has been vocal in pushing the COOL issue.  He told AgriTalk radio, according to an unofficial transcript,” Nothing short of full repeal will actually make this thing go away. We’re not going to spend the next years looking over our shoulder waiting for another shoe to drop.  “He went on to say that he expects the U.S. to appeal the ruling to string out the process.  He will continue to talk about retaliatory tariffs so U.S. industries know who will pay if COOL is not repealed.

A reasonable assumption is that COOL will be changed in some substantive manner.  The most strait forward approach would be to adopt a NAFTA label.  All beef and pork produced in the three countries would carry the label and all exports from the three countries would be under a common system.  That would recognize the integrated industries that exist and seek to maximize those efficiencies.  This would be forcefully opposed by some of the biggest supporters of the current system.  This option will not be chosen.

Minister Ritz made two critical points.  Canada wants COOL ended and it’s up to the U.S. to propose an alternative or face retaliation.  The U.S. just ended a twelve year dispute with Brazil over cotton farm policy and export credit programs.  The final agreement does not look like what either side expected twelve years ago.  The only important point is that both sides agreed on the settlement.  Ritz has his bottom line – COOL repeal or tariff retaliation.  What can the U.S. propose?

One easy answer is for Congress to repeal the law.  That would take action by Congress that has been deeply divided on the issue for over a decade.  However hard or easy that may be to do politically, that would an acceptable solution from a trade policy perspective.   Minister Ritz would have no complaints.

Another easy answer is to make administrative changes under current law.  That is a version of the Vilsack solution mentioned earlier.  Those who support that solution have not put specific ideas on the table.  This could be viewed by the Canadians as a delaying tactic.

Others are asking Secretary Vilsack to suspend the COOL rule indefinitely while efforts are made to work out an agreement.  This would remove the option of retaliatory tariffs for Canada.  An offshoot of this idea is to have Congress to pass legislation to authorize and direct the Secretary to rescind elements of COOL that have been determined to be noncompliant with international trade obligations by a final WTO adjudication.  This would supposedly allow more Members of the House and Senate to vote for more open trade rather than opposing COOL directly.  If this creates the political opportunity to have good trade policy, it has to be seen as a positive option.  Whether the Canadians can live with some level of uncertainty remains to be seen, but it should better than the status quo and retaliation.

Companies in Canada may be less willing to have retaliatory tariffs than Mr. Ritz believes.  In the cotton and export credit case with Brazil, their industries were reluctant to pay higher tariffs that would increase their cost of doing business.  Just as the pork and beef industries in Canada have become highly integrated, non-agricultural Canadian industries have highly integrated supply chains with U.S. partners.  U.S. and Canadian businesses may have more influence than expected just like the Brazilian industries.

As losers of two WTO rulings, the U.S. government must find an agreement with Canada that honors our WTO commitments.

Ross Korves is a Trade and Economic Policy Analyst with Truth About Trade &Technology (www.truthabouttrade.org). Follow us: @TruthAboutTrade on Twitter |Truth About Trade & Technology on Facebook.