The Obama Administration appears to be pursuing a regulatory approach to addressing a WTO ruling that the U.S. country-of-origin labeling (COOL) law for meat discriminates against hogs and cattle imported from Canada and Mexico.  Meat retailers are required to put labels on cuts of beef, pork and ground meat or to post signs in display cases that list the origin.  The U.S. lost a November 2011 WTO ruling on a case brought by Canada and Mexico that COOL placed a record-keeping burden on meat packers buying Canadian and Mexican livestock.

At the heart of the case is a simple principle known as ‘national treatment’ under the Technical Barriers to Trade Agreement.  The laws of a country must treat imported products the same way as domestic products are treated so they are not disadvantaged in the marketplace.  The issue is not about labeling laws; the federal government has the right to require labels stating sources of origin.  It is the market impact of the law on imported products that is in question.

An arbitrator for the WTO Dispute Settlement Body ruled on December 4 of last year on a request by Canada and Mexico for a ‘reasonable period of time’ that the U.S. has to establish how it will comply with the ruling.  The WTO Appellate Body had ruled on June 29 on an appeal of the November 2011 ruling against the U.S. law, but had not set a date for compliance.  The Dispute Settlement Body officially accepted the ruling on July 23.  The general guideline is that the time needed for compliance should not exceed 15 months.  Canada had requested a compliance date of late January and Mexico a March date.  The U.S. requested 15 months.  The arbitrator chose May 23, ten months after the ruling was accepted.

The WTO process is indifferent to a legislative correction or a regulatory one as long as the issue is resolved to the satisfaction of the impacted countries.  The COOL law was legislated in the 2002 and 2008 farm bills and went into effect in March 2009.  Attempts were made last year in the House and Senate to pass a new farm bill, but changes in COOL to address the WTO ruling were not part of the bills or the general debate.  A new farm bill is not likely to be enacted by the May 23 deadline for action and there is no other legislation that is expected to move before then to attach COOL changes.  A regulatory solution appears to be the default option.  If the U.S. is not in compliance by May 23, Canada and Mexico may begin proceedings to take retaliatory action against the U.S.

Some leaders of the Canadian livestock industry have proposed that the U.S. change the COOL law to allow all live animals slaughtered in the U.S. to be eligible for a U.S.-origin label.  That is not going to happen.  Under current law, that meat is labeled product of the U.S. and Canada and subject to compliance costs that lead to the reported lost incomes for Canadian producers.

Roger Johnson, the President of the U.S. National Farmers Union (NFU) and supporter of the current COOL law, told Inside U.S. Trade his organization believes USDA can adjust its labeling regulations and be in compliance with the WTO ruling.  His organization will provide specific recommendation for regulatory changes.

The NFU is also helping Senators Mike Enzi (WY-R) and Jon Tester (MT-D) circulate a draft letter to U.S. Trade Representative Ron Kirk and USDA Secretary Tom Vilsack.  While the authors disagree with the WTO ruling, they believe the Administration should adopt three critical principles in response to it.  These are a regulatory fix, providing consumers accurate information about the origin of all meat, and working with stakeholders on new regulations.  These are good principles, but do not provide the kinds of specific actions the Canadians and Mexicans expect.  Canadian industry officials are already complaining that they see little effort on regulatory changes.

The Canadian are preparing for retaliation.  The Canadian Pork Council has an analysis that shows accumulated direct costs of COOL to Canadians at $2 billion, plus an additional $442 million in reduced pork shipments and suppressed prices for feeder pigs.  Compensation rights are estimated at $500 million per year.  Any actual retaliation would be determined by the WTO, not the Canadian producers.

There are other factors beside COOL that have impacted movement of slaughter hogs and feeder pigs to the U.S.  Canadian hog inventories declined by over 20 percent from 2006 to 2011 after expanding rapidly the previous ten years.  The value of the Canadian dollar has also become much stronger and achieved parity with the U.S. dollar after being undervalued for years.  Iowa State Economist Dermot Hayes says that Asia has become a much larger market for pork meat and has led Canadian pig producer to feed pigs at home rather than ship them to the U.S.  A WTO analysis would sort out all of these issues to arrive at an appropriate compensation amount.

The WTO cannot force the U.S. Congress to change the COOL law.  The Dispute Settlement Body has already ruled the regulations are not consistent with U.S. commitments to the WTO.  The USDA has three options.  It can comply by changing regulations as suggested by the Canadians.  If that requires a change in law, the Congress would need to decide to make that change.  USDA could negotiate with the Canadians for some alternative compliance that would address their concerns while being less burdensome for the U.S.  The third option is to take no action and have Canadian and Mexican governments return to the WTO Appellate Body to establish the level of compensation.  That could be tariffs on U.S. pork product, other food products or general goods and services.  These would continue indefinitely if the regulations are not changed.

The best options are to fully comply with the ruling under the current COOL law or change the law and then the regulations.  Simply paying compensation is meant to only be used when the losing country believes that the ruling is clearly wrong or complying would place an inordinate burden on the country.  The goal of the WTO dispute settlement process is to work out differences, not to let them stay in place.

It is in the U.S. government’s best interest to find a solution as it expects other countries to do so when they lose cases.  A regulatory solution without a change in the law is the best option.  If that cannot be achieved, then a change in the law is the best outcome.

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