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« WTO Rules Against Yet Another U.S. Consumer Protection Policy | Main | Railroading Sovereignty »

July 03, 2012

America, meet your meat master

Happy Fourth of July! As our fearless leader Rob Weissman articulates in this note here, your holiday meat could be much more mysterious come next Fourth of July:

If you’re looking forward to grilling up some hamburgers and hot dogs, think about this: Where does the food you’re eating come from?

That simple question is going to be a lot harder to answer after a ruling from the World Trade Organization (WTO), which decreed last week that such basic consumer information as country-of-origin labels on meat are “unfair trade barriers” to multinational corporate profits.

If you don’t eat meat, know that the WTO ruling could be extended to country-of-origin labels for produce. So maybe next summer it’s the potato salad and corn on the cob, too.

Like me, you might find this hard to swallow. If you’ll excuse a mixed metaphor, mystery meat (and lettuce) is not my cup of tea.

But it’s standard operating practice for the WTO, which in recent months has proclaimed that U.S. “dolphin-safe” tuna labels and a U.S. ban on clove-, candy- and cola-flavored cigarettes both violate WTO trade rules.

Last November, I shared some of my thoughts about the WTO's lower panel ruling against the country-of-origin labels (COOL) for beef and pork that were created by the 2008 U.S. Farm Bill. Canada and Mexico had challenged the U.S. law, claiming that it violated their rights under the WTO's Agreement on Technical Barriers to Trade (TBT). (See here also.)

Last Friday, that ruling was upheld by the WTO's Appellate Body - specifically, by an AB division composed of Ujal Singh Bhatia of India, Ricardo Ramirez Hernandez of Mexico and Peter Van den Bossche of Belgium. In fact, it's the third consecutive WTO attack on a popular U.S. consumer protection or information policy to go down this year. (See the attacks on dolphin-safe labels and cancer prevention through cigarette controls.)

Like in those other cases, the Appellate Body doubled down on key aspects of the lower panels' rulings. And like those other cases, the implications go far beyond the specific measure at issue. Indeed, many other country of origin labels and consumer information policies are now at greater risk of challenge in the future.

We'll go through some of the specifics after the jump.

Here’s a quick summary of how COOL works (note that all paragraph references are to the Appellate Body report):

“The COOL statute establishes four categories of origin for muscle cuts of meat… Category A is … reserved for meat derived from animals for which all production steps (birth, raising, and slaughter) took place in the United States. Both Categories B and C involve meat of mixed origin, in the sense that they have more than one country of origin. For each of these categories, at least one production step has taken place outside the United States, and at least one production step has taken place within the United States. They are distinguished based on whether the animals were born in a foreign country and then raised and slaughtered in the United States (Category B), or raised outside the United States and then imported into the United States for immediate slaughter, that is, to be slaughtered within two weeks of the date the animal enters the United States (Category C). Category D is reserved for meat produced from animals that are slaughtered outside the United States and imported into the United States in the form of meat.” (paras. 243-244)

However, because business groups (and Canada) complained about the burdensomeness of the recordkeeping and verification requirements, the U.S. instituted additional flexibilities into the COOL scheme:

“Under the 2009 Final Rule (AMS), additional labelling rules apply in respect of meat that is commingled on a single production day. Under these rules, when commingling occurs, the resulting meat may bear a different label from the one it should in principle bear under the above rules. More specifically, when Category A and Category B meat is commingled during a single production day, all of the resulting meat may be labelled as if it were Category B meat, even though a particular piece of meat may have been derived from a Category A animal. Further, when Category B and Category C meat is commingled during a single production day, all of the resulting meat may be labelled as if it were Category B meat, even though a particular piece of meat may have been derived from a Category C animal. In both cases, since the resulting meat may be labelled as if it were Category B meat, the declared countries of origin for all commingled meat may be listed in any order.” (para 246)

 Canada and Mexico (the "complainants") alleged that the U.S. country of origin labels (COOL) on beef and pork violated the following two key TBT provisions:

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.

2.2        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.

In the cigarette case, Indonesia alleged violations of both Articles 2.1 and 2.2 (but only won the 2.1 complaint, both at the panel and appeal levels). In the dolphin case, Mexico alleged violations of 2.1 and 2.2. At the panel stage, they prevailed on 2.2 but lost on 2.1. The Appellate Body then flipped the finding. In the COOL case, the complainants alleged violations of both 2.1 and 2.2 - winning both at the panel stage, but only of 2.1 at the appellate stage.

This adds up to three consecutive 2.1 violations for the U.S., and not a hecukva lot of clarity about what 2.2 even means. (For some of the head-scratching this has provoked in the trade community, see here and here.) 

 ++

On the 2.1 front, the lower panel had noted that “it would address in its analysis of whether the COOL measure affords less favourable treatment to imported livestock: (i) whether the different categories of labels under the COOL measure accord different treatment to imported livestock; (ii) whether the COOL measure involves segregation and, consequently, differential costs for imported livestock; and (iii) whether, through the compliance costs involved, the COOL measure creates any incentive to process domestic livestock, thus reducing the competitive opportunities of imported livestock…” (para. 257)

The panel did not find that segregation was required by COOL, but rather than it was a “practical way” to comply with the labeling regime. (para. 260) The compliance costs are “in principle” the same for domestic and imported meats, but that compliance costs increase the more meat origins and labels are involved. (para. 261) Analyzing five distinct “business scenarios” for producers under COOL, the panel concluded that “the least costly scenarios to be those involving either exclusively domestic livestock or exclusively imported livestock.” (para. 262)

In light of these conclusions, it would seem that the Article 2.1 claim would have been thrown out at this point. However, the panel went deeper, suggesting that – because Canadian and Mexican cattle have to travel longer distances to get to slaughterhouses, and because they have a lower market share as an input to meat than U.S. cattle – that the way that the COOL regime plays out in practice is to make an “all imported meat” scenario less attractive than an “all domestic meat” scenario. (para. 262)

(The panel said that this would have been enough to rule in the complainants’ favor, but went on to selectively examine some their anecdotal evidence as further support for the finding. (para. 263-264))

++

The Appellate Body largely upheld the approach taken by the panel, noting that:

“the national treatment obligation of Article 2.1 prohibits both de jure and de facto less favourable treatment. That is, ‘a measure may be de facto inconsistent with Article 2.1 even when it is origin-neutral on its face.’ In such a case, the panel must take into consideration ‘the totality of facts and circumstances before it’, and assess any ‘implications’ for competitive conditions ‘discernible from the design, structure, and expected operation of the measure’. Such an examination must take account of all the relevant features of the market, which may include the particular characteristics of the industry at issue, the relative market shares in a given industry, consumer preferences, and historical trade patterns. That is, a panel must examine the operation of the particular technical regulation at issue in the particular market in which it is applied.” (para. 269)

There must be a “genuine relationship” between the measure and the impact on competitive opportunities. If it creates “incentives for market participants to behave in certain ways,” it could trigger competition effects. (para. 270)

The Appellate Body upheld the lower panel’s findings, saying that,

“A market's response to the application of a governmental measure is always relevant to an assessment of whether the operation of that measure accords de facto less favourable treatment to imported products. That is, if a specific technical regulation adopted by a Member gives rise to adverse effects in the market, which disparately impact imported products, such effects will be attributable to the technical regulation for purposes of examining less favourable treatment under Article 2.1…. the Panel expressly found that ‘[i]t is the result of the COOL measure … that in the circumstances of the US market, market participants, when faced with the choice between a scenario involving exclusively domestic livestock and a scenario involving both domestic and imported livestock, opted predominantly for the former.’ Had it not been for the COOL measure, the Panel reasoned, ‘market participants would not have opted this way’.” (paras. 289, 291)

On the basis of this speculative finding, the Appellate Body ruled that the U.S. COOL violated Article 2.1.

++

But this was not the end of the story, since the AB in the cigarette and dolphin cases had articulated a sui generis concept that Article 2.1 violations could be excused if the “detrimental impacts on competitive opportunities stemmed exclusively from a legitimate regulatory distinction.” We’ve taken to calling this the DIOCOSEFLRD test, in tribute to the unwieldiness of the concept.

In the present case, the AB wrote that if “the regulatory distinctions drawn by the COOL measure are designed or applied in a manner that constitutes arbitrary or unjustifiable discrimination, those distinctions cannot be considered ‘legitimate’, and the COOL measure will be inconsistent with Article 2.1. In order to make this determination, we proceed to scrutinize ‘the particular circumstances’ of this case, including ‘the design, architecture, revealing structure, operation, and application’ of the COOL measure.” (para. 340)

At this point, the AB’s logic kind of fell apart. It noted that restaurants and smaller retailers would not have to list COOL, and that certain processed meats would be exempt. (para. 334) It noted that Labels B and C were confusing. (para. 337) Accordingly…

“As designed and applied, however, the COOL measure does not impose labeling requirements for meat that provide consumers with origin information commensurate with the type of origin information that upstream livestock producers and processors are required to maintain and transmit.” (para. 343) [Some meat will be exempted from being labeled precisely (because of regulatory flexibilities) but] upstream producers do not, and likely could not, distinguish between livestock that will be used to produce a product exempt from the labelling requirements, and livestock that will be used to produce covered commodities that must be labelled when sold at retail… we consider the manner in which the COOL measure seeks to provide information to consumers on origin, through the regulatory distinctions described above, to be arbitrary, and the disproportionate burden imposed on upstream producers and processors to be unjustifiable.” (para. 344-347)

What is a government supposed to do with this line of argument? Participants in all sorts of markets are regularly required to keep records that may not be fully disclosed to the public. As a consumer group, Public Citizen wants all the info we can get about where meat and other products come from. But as observers and occasional participants in the legislative and regulatory process, we know that there are instances where more information will be collected than what is disbursed. This doesn’t make a measure arbitrary – especially when all upstream producers (domestic and foreign) are exposed to the same uncertainty of whether the information they retain will be shown to the public.

++

The 2.2 "wins" have prompted celebration in some quarters - see here, for instance. And here.

This enthusiasm seems misplaced, on several levels.

First, it likens trade disputes to sports matches, with lawyers scoring points. But such an arithmetic approach fails to appreciate that getting ruled against on even one count is enough for a violation finding.

Indeed, it seems that Article 2.2 claims – when coupled with claims under other WTO provisions – are especially suited to giving fodder for faux victory laps. After all, there are at least nine different hurdles in Article 2.2 analysis. A respondent could win on one or more, and have something to be able to put on its press release – even when it is ruled against on the meatier WTO provisions like Article 2.1 (pun intended).

In US-COOL, the Appellate Body has developed a test that gives panelists high degrees of flexibility to rule for or against national policies.

From what I can read, here is the process, and how it was applied to this case:

  1. Identification of the "objective." Panels can't take respondents' word for what their objective actually is, but rather they have to look to "the texts of statutes, legislative history, and other evidence regarding the structure and operation" of the technical regulation at issue (paras. 371-372). In this case, the panel and AB found that the objective of the measure was the “provision of consumer information on origin.” (para. 408)
  2. Is the objective "legitimate"? If the objectives are among the list in Article 2.2, then the objective can be presumed “legitimate” (para 370). If not, then a panel has to make up some test, since the objectives listed in Article 2.2’s text lack any obvious commonality. (para. 444) The AB dodged this problem by linking COOL (and consumer information generally) to the prevention of deceptive practices – an objective specifically envisioned in Article 2.2. (para. 445, 453) (In so doing, however, it cast aspersions on the possibility that consumers actually want COOL, see para. 450)
  3. The assessment of “necessity… involves a ‘relational analysis’ of the following factors: the trade-restrictiveness of the technical regulation; the degree of contribution that it makes to the achievement of a legitimate objective; and the risks non-fulfilment would create.” (para 374)
  4. The standard for “trade restrictiveness” has not been precisely defined, but it appears to be any “limiting effect on trade” but that some limits are allowed. How much is not defined, and the AB failed to rule on the panel’s approach to this issue (para. 375, 381) However, it appeared to signal that it would be willing to use a similar standard as to Article 2.1 analysis. (para. 477)
  5. Trade restrictiveness is then compared to reasonable available alternative policies. (para 376) The AB ruled that the lower panel had not done the requisite work to compare COOL to the complainants’ proposed alternatives: voluntary COOL, labels as they existed under the old “Products of USA” standard [i.e. substantial transformation], some mix of the previous two, or a trace-back regime. (para. 480). While stating that there was insufficient facts on the record to determine whether voluntary COOL would be less trade restrictive, the AB suggested that it would be. (para. 483) The substantial transformation standard was deemed less trade restrictive. (para. 485) A trace-back system was agreed by all parties to be more trade restrictive (para. 490).
  6. Does the measure fulfill the objective? The complainants and the lower panel assumed that the U.S. must fulfill its objective (say, consumer information) 100 percent. But the Appellate Body allows that there can be degrees of achievement of the objective – but that panels have to examine the “design, structure, and operation of the technical regulation” and “evidence relating to its application” to determine that degree. (para. 373) While acknowledging that Labels B and C are confusing, the AB accepted that consumers had more information relative to the status quo ante, and reversed this part of the panel’s ruling – citing insufficient evidence. (paras. 466-468, 479)
  7. Degrees of achievement of the objective are compared to possible reasonable available alternative policies (para. 376) The AB suggested that voluntary COOL could achieve the objective if the labels were widely used and accurate, (para. 483) but that the substantial transformation standard (i.e. CODEX standard) would not achieve the U.S. objective. (para. 486) A trace-back system would likely achieve the U.S. objective, and then some. (para. 490)
  8. The “risks non-fulfilment will create” involve identifying “the nature of the risks at issue and the gravity of the consequences that would arise” from non-fulfilment.” (para 377) The AB strongly suggested that the risks posed by not having COOL in place “would not be particularly grave” (para. 478)
  9. These risks should be then compared to reasonable available alternative policies. (para 377) The AB did not analyze the risk profiles of the alternative policies.

These tests seem to lack any element of the political science of consumer protection. As the European Union stated: “With respect to voluntary labelling, the European Union maintains that the essential difference between voluntary and mandatory labelling is that an individual consumer lacks the power to demand labelling with respect to particular information. Thus, the fact that a domestic political process leads to legislation on mandatory origin labelling may indicate that consumers indeed demand such labelling. Moreover, contrary to the complainants' assertions, there is no obligation under the TBT Agreement on the defending Member to demonstrate that their consumers want a particular technical regulation.” (para. 227)

++

Here's what I see as the key implications of this case:

More information can lead to WTO complaints. The U.S. used to label beef as “Product of the USA” even when the cattle was born or raised abroad. Indeed, only minimal U.S. “value added” was required to earn that label. (para. 253) Require more information, and you might see WTO complaints.

The U.S. is reduced to the policy space of Iowa. The earlier iterations of COOL enacted by Tennessee, Oregon, Iowa and Nebraska got struck down because of being burdensome for interstate commerce. (See Tupman Thurlow Co. v. Moss, 252 F.Supp. 641 (D.C.M.D.Tenn.1966); Ness Produce Co. v. Short, 263 F.Supp. 586, (D.C.Or.1966); International Packers, Limited v. Hughes, 271 F.Supp. 430 (D.C.S.D.Ia.1967) and Armour & Co. v. State of Neb., 270 F.Supp. 941 (D.Neb.1967). The decision involving the Oregon statute was appealed to and was affirmed by the Supreme Court, per curiam, in Short v. Ness Produce Co., 385 U.S. 537, 87 S.Ct. 742, 17 L.Ed.2d 591 (1967).)

Unlike states, the federal government is authorized by the Constitution to burden commerce when Congress feels it is appropriate. (Or at least, that was the case until last week’s Supreme Court ruling on the Affordable Care Act.)

But with a line of disputes culminating with US-COOL, the WTO’s Appellate Body has made clear that the U.S. has the same policy space as Iowa (and arguably less) to regulate in the global economy: even a drop of inadvertent, private market-driven, so-called “discrimination” is a drop too much.

No protectionist intent or effect necessary. As observers of WTO national treatment jurisprudence have known for a while, a measure can still be deemed discriminatory when there is no protectionist intent or effect. Indeed, the Appellate Body in US-COOL determined that the econometric evidence was not particularly solid that Canadian and Mexican exports to the U.S. were being demonstrably harmed by COOL. Instead, a neoclassical economics-derived “conditions of competition” analysis is used, which may or may not show discrimination or protectionism as those terms are commonly understood.

Regulatory inflexibility hurts, and so does regulatory flexibility. Impose too strict a COOL, and it might be too burdensome to commerce. Impose a flexible COOL (even when made at the request of business or with an eye towards cost-benefit analysis), and a discrimination argument can be concocted (as at the lower panel level), or an argument that it is arbitrary (as at the appellate level).

Governments are on the hook for factors beyond their control. COOL applies to imports and domestic meats alike. And even under restrictive assumptions about how slaughterhouses would comply, the compliance costs are similar for both. The only reason that COOL was found to discriminate was because foreign cattlemen face potentially longer distances to the slaughterhouse, and had a lower market share when COOL went into effect. The implication is that governments can’t regulate in WTO-compliant ways if the effect could be differentially felt in the marketplace for factors beyond the government’s control.

In USTR’s words, this logic “could ‘have severe unintended consequences’ by potentially rendering ‘common technical regulations’ inconsistent with the TBT Agreement. This is because nearly all technical regulations impose compliance costs, and such costs are almost never uniform, are affected by external factors, and also depend on how market participants respond.” (see paras. 19 and 22 and 25) The European Union added that: “the interpretation of the national treatment obligation should not lead to a result whereby large Members are more susceptible to a finding of violation simply because they have large markets in which indigenous production often has a relative large market share. The European Union adds that it would seem incongruous if a measure adopted in accordance with international standards, and thus consistent with Articles 2.2 and 2.5 of the TBT Agreement, would nevertheless be inconsistent with Article 2.1 simply because it entails compliance costs that are not evenly distributed among market actors.” (para. 220)

Are we doomed to a future of megamixing of meat? Under the WTO’s logic, COOL will almost always be more burdensome for operations that use dozens of animals from multiple countries in every package of meat. While this is repulsive to many consumers, the WTO is dooming the U.S. to have to shelter that type of business practice when we design public interest regulations.

WTO chills policy innovation. The U.S. appears to have succumbed to the chilling effect of trade deals. As we detail in this post, the Obama administration sent a letter to industry representatives (known as the “Vilsack letter”) urging them to voluntarily include more information on origin that was legally required under the more lenient Bush Farm Bill. This a pretty cheap date as far as consumers are concerned – nothing binding at all. But Mexico and Canada successfully challenged the mere writing of this letter as a violation of the WTO’s General Agreement on Tariffs and Trade (GATT), and the U.S. reports that it “withdrew” the Vilsack letter. (paras. 198, 251) The implications for politics are huge. In any democracy, a new administration is likely to put a political spin on the actions of the previous administration, without necessarily or immediately undoing everything that came before them. They’re also likely to try to appease stakeholders without starting all-out wars with business. Under the WTO ruling, non-binding political speech can wind up costing trade sanctions.

COOL necessarily WTO violating? I can’t say for sure whether segregation is the only or best way for complying with a COOL requirement. (Indeed, USTR maintains that it was not.) But, it does seem that segregation is going to be in the toolkit of any producer trying to comply with COOL for a well-mixed product like muscle cuts. What the decision implies is that, while providing information on origin is legitimate, any incentive to comply in a common way will violate WTO rules.

Facts, schmackts. The U.S. noted that COOL can’t necessitate segregation if in fact, comingling is significantly used. (para 27) It also noted that the price differential between U.S. and the complainants’ meat had narrowed post-COOL. (para. 311, 320) Mexico argued that – because the comingling flexibilities still require records as to origin – that the flexibility doesn’t help. (para 289) the panel found that these flexibilities lessened but did not eliminate the impact on competitive opportunities. (para. 304) The AB noted that empirical evidence was of limited value in establishing less favorable treatment, (para. 323-325) and that the comingling provisions actually contributed to the finding that the COOL regulatory distinctions were illegitimate.

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Comments

Don Juan of Austria

Your in-depth analysis is greatly appreciated, but at the end of the day, the point of the AB is to have two-three non-Americans vote on American laws. The actual legal principles they are supposed to uphold (the already horrendous WTO rules) won't even matter. You can be pretty sure any sensible U.S. law will be struck down.

And of course, U.S. leaders will go along with it because they want their chance to strike down other nations' laws also.

watstain2474

I Like me, you might find this hard to swallow. If you’ll excuse a mixed metaphor, mystery meat (and lettuce) is not my cup of tea.

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