In a long-awaited action, The World Trade Organization (WTO) this week issued a preliminary ruling that, if adopted, determines that the U.S. country-of-origin (COOL) requirements violate provisions of the WTO’s agreement on Technical Barriers to Trade (TBT).

Furthermore, the panel ruled in its confidential report circulated to the parties involved that U.S. COOL requirements do not fulfill the stated U.S. objective of helping to inform consumers of the origin of meat, thus violating the TBT agreement that technical regulations not be more trade-restrictive than necessary to fulfill a legitimate objective, sources told the Daily Report for Executives.

The original complaint was filed by Canada and Mexico, which claimed the U.S. COOL provision discriminated against their beef and pork, causing the market to treat it less favorably than U.S.-origin beef and pork. The three-member WTO panel agreed, ruling that COOL violates the TBT.

While the ruling is only preliminary, WTO panels rarely alter their interim conclusions in the final ruling, according to the Daily Report. The panel is expected to issue its final ruling by mid-year, with the WTO making the ruling public sometime in September. The U.S. will then have 60 days to decide whether or not to appeal.

In June 2008, the U.S. passed the Food, Conservation and Energy Act, which imposed mandatory COOL for beef and other meats. Canada and Mexico initiated the WTO case in December 2008. In their arguments, Canada and Mexico said they weren’t challenging mandatory COOL as such, but argued that COOL requirements, as applied internally, act as a protectionist barrier and unfairly distort competition between imported and domestic cattle and pork.

One complaint focused on rules reserving the “U.S. Origin” label for animals exclusively born, raised and slaughtered in the U.S., denying that designation to beef or pork derived from livestock exported to the U.S. as feeder animals and subsequently raised there before slaughter, the Daily Report says.

Mexico told the panel this resulted in young cattle exported from Mexico to the U.S. – the overwhelming share of exported cattle – being denied U.S. designation. That’s despite the fact that 70% of the weight and value of the animal is added within U.S. territory.

“COOL ignores the fact that the Mexican cattle and U.S. are alike in every respect, except the place where they were born,” Mexico charged.

The practical effect of the discrimination has been to increase the handling cost, and lower the prices, of Mexican cattle because of segregation between U.S.-raised Mexican cattle and U.S.-born cattle during processing, Mexico added. In fact, the COOL rules have disrupted the previously integrated U.S.-Mexican market, with U.S. processors restricting the number of plants handling Mexican cattle and restricting the days on which plants will accept Mexican cattle. Meanwhile, U.S. processors have lowered the price of Mexican cattle expressly because of the cost of complying with the COOL measure. Mexico added that some U.S. packing companies and feedlot operators stopped purchasing Mexican cattle entirely because of the COOL rules.

According to the Canadian Cattlemen's Association (CCA), most U.S. meatpacking companies decided to avoid the cost of tracking Canadian cattle and refused to accept them after the COOL measures entered into force. Meanwhile, the remaining U.S. packers still willing to process Canadian cattle discounted prices and limited processing of Canadian livestock to certain days.

The combined impact of the lower prices and the increased cost of transporting livestock greater distances resulted in a loss of about C$90 ($92)/animal, while the annual cost of COOL to Canada's cattle industry as a whole is around C$400 million ($410 million), CCA added.

The complainants also charged that the COOL requirements have little to do with improving consumer information. Mexico told the panel that a “fundamental flaw” of the measure is that it failed to provide accurate information to consumers.

The “labeling requirements and rule of origin for muscle cuts of beef differ depending on the type of store in which they are sold, and whether the muscle cut was produced in the U.S. or a foreign country,” Mexico argued. “Moreover, different parts of the exact same animal, processed in the same slaughterhouse, also have different labeling and rule of origin requirements.”

Mexico added, “No reasonable person could conclude that the COOL measure provides accurate or clear information to consumers.”

The U.S. countered before the panel that Canada and Mexico have provided “inaccurate” and “limited” evidence that some processors have changed their policies in response to COOL and that the measure doesn’t require segregation of imported livestock or refusal to accept imported livestock. Furthermore, the U.S. argued, Canada and Mexico's assertions regarding the impact of the measures “cannot be reconciled with recent data showing Canadian and Mexican livestock exports and prices are up.”

The ruling, if maintained, has potential impact beyond the measure at issue. The U.S. noted in a panel hearing that nearly 70 WTO members have some sort of mandatory labeling requirements in place nationally and argued that, were the Canadian and Mexican claims accepted by the panel, “it is difficult to conceive of any COOL system that would survive WTO scrutiny.”

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