WTO Ruling Might Impact U.S. Wine Exports

On May 18, the World Trade Organization (WTO) issued a report finding the U.S. in violation of the General Agreement on Tariffs and Trade (GATT) and the WTO Agreement on Technical Barriers to Trade (TBT). On May 29, the body concluded its proceedings. On June 7, Canada's agriculture and international trade ministers released a statement threatening to impose tariffs on American products. These fighting words are the latest development in a six-year, multinational dispute that arose when the U.S. Department of Agriculture adopted rules requiring country of origin labeling (“COOL”) of muscle cuts of meat, including beef and pork. So how did an argument over bovines and swine get us to the point of retaliatory tariffs on wine? What’s at stake (no pun intended) here?

This is a long post, so here's a cocktail party version: the WTO found that the COOL requirement treated Canadian and Mexican beef and pork worse than it treated American pork and was, therefore, inconsistent with the United States’ obligations under the TBT. The GATT allows for imposition of tariffs, among other sanctions, if the disputing parties do not reach an agreement on compensation within a reasonable period of time after the adoption of the WTO ruling. Canadian officials have already threatened to seek sanctions in the form of tariffs on a broad range of products, including wine, but they’ll have to meet and negotiate before any tariffs are approved. So yes, there’s a possibility of sanctions on American wine, but it’s not a fait accompli. In fact, a bill to bring the COOL requirements into compliance with the WTO agreements passed the U.S. House of Representatives last week. Read on for a few details.

Background: Relevant GATT and TBT Provisions

The U.S., Canada, and Mexico are parties to the GATT and the TBT. The GATT established broad principles of free trade among the states that signed and ratified it (now called WTO members). The GATT also established a protocol for the resolution of disputes among WTO members, creating a Dispute Settlement Body ("DSB") that has jurisdiction over controversies arising under any WTO agreement.[1] The TBT is more specific and, as you might guess from its name, technical. It was intended to ensure that regulations, standards, testing, and certification procedures do not create unnecessary obstacles to trade.

Although Canada and Mexico alleged violations of four agreements (the GATT, the TBT, the Uruguay Round Agreement on Rules of Origin, and the Uruguay Round Agreement on the Application of Sanitary and Phytosanitary Measures) the appellate body ultimately focused on Article III:4 of the GATT and Articles 2.1 and 2.2 of the TBT.

Article III:4 of the GATT provides, in relevant part:

The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.

If this reminds you of the “dormant” or “negative” Commerce Clause inferred from Article I, Section 8, Clause 3 of the U.S. Constitution, congratulations! You have a pretty good understanding of the GATT. Article III:4 basically says that WTO members agree not to hinder international trade by discriminating against foreign goods. A WTO member cannot make laws or regulations that treat foreign products any worse than they treat domestic ones. “Less favorable” treatment can be obvious, as in the case of a blatantly discriminatory law or regulation that imposes unequal financial or administrative burdens on imports, or it can be more nuanced, such as when a government fails to provide the infrastructure needed for open competition.

Article 2.1 of the TBT provides:

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.

A “technical regulation” is “a [d]ocument which lays down product characteristics or their related processes and production methods, including the applicable administrative provisions, with which compliance is mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method.” [TBT Annex 1.]

Article 2.2 addresses intent and effect: “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.” It also requires that technical regulations be no more trade-restrictive “than necessary to fulfil a legitimate objective.” It then enumerates legitimate objectives.

The “Unnecessary Obstacles”: Mandatory Country of Origin Labeling

There are several federal actions at issue in the COOL dispute: a federal statute and a series of federal regulations implementing the contested statute.[2] They are collectively referred to as the “COOL measure.”

In 2008, Congress passed the Food, Conservation and Energy Act of 2008 (“2008 Farm Bill”), which requires that retailers of certain commodities "inform consumers, at the final point of sale of the covered commodity to consumers, of the country of origin of the covered commodity." [7 U.S.C. § 1638a(a)(1).] This is a labeling requirement. The statute provides, in part:

(A) United States country of origin
          A retailer of a covered commodity that is beef, lamb, pork, chicken, goat, or venison meat may designate the covered commodity as exclusively having a United States country of origin only if the covered commodity is derived from an animal that was-

(i) exclusively born, raised, and slaughtered in the United States;
(ii) born and raised in Alaska or Hawaii and transported for a period of not more than 60 days through Canada to the United States and slaughtered in the United States; or
(iii) present in the United States on or before July 15, 2008, and once present in the United States, remained continuously in the United States.[3]

[7 U.S.C. § 1638a(a)(2)(A).] Basically, a cut of meat must be derived from an animal that was born, raised, and slaughtered in the U.S. in order to be eligible for a U.S. country of origin label, unless the animal was “grandfathered” in or spent a short time in transit through Canada to the continental U.S. from Alaska or Hawaii.

In order to implement these stringent mandates, the U.S. Department of Agriculture (USDA) published interim final rules on August 1, 2008, and August 28, 2008, specifying how it would apply and enforce the statutory COOL requirement. The rules also imposed recordkeeping requirements: suppliers must maintain records relied upon at the point of sale to prove a product’s country of origin for at least one year from the date of the transaction. [§ 65.500(b)(2).] Records must also be maintained either at the retail facility or at another location for as long as the product is on hand. [§ 65.500(c)(2).] On January 15, 2009, the USDA replaced the interim rules with a final rule that imposed the same label and recordkeeping requirements.

During the course of the WTO proceedings, on May 24, 2013, the U.S. informed the DSB that it had issued another final rule that it asserted brought the COOL requirements into compliance with the TBT. For a complete history of the COOL requirement, see the USDA's FAQ document.

The 2015 Appellate Body Report

The COOL dispute has a long procedural history, and this is the fourth time that the WTO has found the COOL measure in violation of treaty obligations. On May 18, 2015, the DSB Appellate Body circulated a report concluding that the COOL measure was inconsistent with the terms of the TBT. With respect to Article 2.1 of the TBT, the Appellate Body found that:

  1. the COOL measure treats imported livestock less favorably than it treats domestic livestock;
  2. the COOL measure has a detrimental impact on imported livestock; and
  3. there was no legitimate reason for this discrimination.

The Appellate Body analyzed the impact of the COOL measure in terms of incentives. It found that the measure’s recordkeeping and verification requirements create an incentive for processors to use only domestic livestock, while establishing a disincentive against using like imported livestock. It also concluded that the burden imposed by the requirements is disproportionate to the amount of information that is ultimately conveyed to consumers.

With respect to Article 2.2 of the TBT, the Appellate Body found that while the objective of the COOL measure—“to provide consumer information on origin”—is legitimate and the measure does, to some extent, achieve this objective, there is not enough information to determine whether the measure is more trade restrictive than necessary to fulfill its purpose.

For procedural reasons, the Appellate Body made no findings with respect to Article III:4 of the GATT.

What’s wine got to do with it?

As mentioned above, the GATT allows for imposition of tariffs as a retaliatory measure. Under Article 22.2 of the Dispute Settlement Understanding ("DSU"), if the parties cannot agree to adequate compensation after a reasonable period of time, the aggrieved party may request authorization from the DSB to impose trade sanctions (or to “suspend concessions”) against the noncompliant party. Article 22.3.a., however, establishes the general principle that the complaining party should first seek authorization of countermeasures with respect to the same sectors as those in which the panel or Appellate Body has found a violation. This means sanctions would probably begin with beef and pork.

Upon release of the Appellate Body report, Canadian and Mexican officials made it clear that they intend to seek redress. In a joint statement issued last month, they indicated that they would be “seeking retaliatory measures.” On June 4, Canadian Agriculture Minister Gerry Ritz met with Secretary Vilsack, members of the House and Senate Agriculture Committees, the COOL Reform Coalition, and the Barnyard Coalition to press for repeal of the COOL measure. On the same day, Canada and Mexico issued a joint press release stating that Canada would seek to impose over $3 billion in retaliatory measures, while Mexico would seek $653 million in sanctions.

On June 7, Minister Ritz and Minister of International Trade Ed Fast, issued a statement that included a list of American products that might be targeted if the U.S. fails to comply with the WTO ruling. On the list was wine.

On June 10, the U.S. House of Representatives voted to repeal most of the COOL statute. Rather than simply relaxing the reporting and verification requirements, H.R. 2393 would repeal the meat labeling requirement altogether with respect to beef, pork, chicken, and goat meat, making the livestock portion of the COOL requirements applicable to lamb only.

What’s at stake (besides steak)?

Canada claims that the COOL measure has cost its industry as much as much as $1 billion in lost sales each year. Jornada, the newspaper of the National Autonomous University of Mexico, reports that COOL cost Mexico’s livestock industry $111 million dollars last year alone. . According to the June 4 press release, “[i]n 2014, agriculture and agri-food trade between Canada and the United States was $51 billion.” Furthermore, the Wine Institute reports that U.S. wine exports to Canada totaled $487 million in 2014.

There's a lot of money at stake not only for the U.S. livestock industry, but possibly for our wine industry and many others. If we do not bring our COOL scheme into compliance with the TBT and sanctions ensue, we stand to lose a large share of two large markets. We also risk souring trade relations with our neighbors (i.e., our most logistically convenient trade partners) to the point of compromising other relationships and agreements. If we comply by passing H.R. 2393 in its current form, however, retailers will no longer have to disclose the country of origin of most of their meat products.

So that’s how bovines and swine relate to wine, at least in the world of international trade agreements.

[1] Annex 2 of the WTO Agreement, Understanding on rules and procedures governing the settlement of disputes (also known as the Dispute Settlement Understanding, or the DSU)

[2] There was also a letter from U.S. Secretary of Agriculture Tom Vilsack to “Industry Representative” regarding implementation of the contested statute. This letter, issued on February 20, 2009, suggested that suppliers “voluntarily adopt” additional protocols. This letter was withdrawn during the DSB proceedings.

[3] The statute and regulations apply to many foods and to beef, pork, lamb, chicken, and goat meat. This dispute arose over beef and pork.