Lakshmi Kumaran & Sridharan AttorneysAn ISO 9001 / 27001 certified law firm

The ‘COOL’ Dispute – Analysis and implications

By Sarah Mary Mathew

The ongoing dispute against the United States on Certain Country of Origin Labelling Requirements (COOL) was initiated in December 2008 when Canada and Mexico requested consultations with the US [see end note 1]. The dispute is presently at the implementation stage with the report of the compliance panel having been issued on 20th October, 2014 [see end note 2]. This article seeks to summarize the facts and issues in the COOL dispute and analyze the rulings of the Panel and the Appellate Body.

Factual Background: The disputed COOL Measures

The measure at issue deals with the export of hogs and cattle from Canada and Mexico used in the production of pork and beef in the U.S. It consists of the U.S. Agricultural Marketing Act, 1946 as amended by the 2008 Farm Bill and as implemented by the Interim Final Rule of 28 July, 2008 which made it obligatory for American retailers to inform customers of the country of origin of covered commodities, such as beef and pork [see end note 3].  In practical terms, it meant that products could only be labelled as originating from the U.S., if all the stages of production or rearing (i.e. birth, raising and slaughtering) took place within the U.S.  Both Canada and Mexico viewed this aspect of the measure as discriminatory since the market for livestock and meat among the North American Free Trade Agreement (NAFTA) [see end note 4] countries is greatly integrated [see end note 5].

Though there are no express restrictions to notify the consumers about the rules of origin under the WTO and the provisions were not considered discriminatory to the extent they were required to be implemented irrespective of whether the products were imported or produced locally, the quandary arose since compliance with the COOL measures required extensive record keeping and verification procedures leading to de facto discrimination against imported product vis-a-vis domestic like product.

The complainants alleged that mandatory COOL provisions were inconsistent with the obligations under Article III (National Treatment) of the General Agreement on Tariffs and Trade 1994 (GATT 1994) and Articles 2.1 and 2.2 of the Agreement on Technical Barriers to Trade (TBT Agreement) [see end note 6].

Reports issued by Panel and Appellate Body

The Panel agreed with the complainants that the COOL measure falls under the scope of a “technical regulation” under Annex, 1 Para. 1 of the TBT Agreement as it was mandatory in nature and laid down product characteristics by enforcing labelling requirements. Both Panel and the Appellate Body concluded that the essential requirement under Article 2.1 is whether the governmental measure affects the conditions under which like goods, domestic and imported, compete in the market [see end note 7]. It was held that the COOL measures changed the conditions of competition in the market between the domestic livestock and the imported livestock by influencing the decision of the private actors predominantly in favour of the former.

On appeal, Appellate Body observed that analysis under Article 2.1 cannot be complete without assessing if the discriminatory treatment to the imported product arose as a consequence of legitimate regulatory distinction [see end note 8]. The Appellate Body hence analysed the design, architecture and revealing structure and after noting the requirements regarding labelling for domestic livestock and the imported livestock and different categories of labels created to identify the origin, observed that the measure lacked even-handedness. It was held that the amount of burden imposed on the upstream supplier in relation to the identification of imported livestock did not correspond to the accuracy of the information passed on to the final consumer and thus, the detrimental impact on the imported product did not stem from the legitimate regulatory distinction of providing information regarding origin of product to the consumers [see end note 9].

The Appellate Body rejected the Panel’s understanding of Article 2.2 of the TBT Agreement that the measure must meet some ‘minimum threshold’ of contribution to the legitimate objective [see end note 10]. It was held that the contribution that the challenged measure makes to the achievement of its objective must be determined objectively, and then evaluated along with the other factors mentioned in Article 2.2, that is: (i) the trade-restrictiveness of the measure; and (ii) the nature of the risks at issue and the gravity of the consequences that would arise from non-fulfilment of the objective(s) pursued by the Member through the measure [see end note11]. Hence, the U.S. was requested to bring the COOL measure in conformity with obligations under the TBT Agreement [see end note 12].

Implementation proceedings

Following the Appellate Body report, the complainant countries requested binding arbitration, pursuant to Article 21.3(c) of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), to determine the reasonable period of time for the U.S. to implement the recommendations of the DSB [see end note 13]. On the last day of the 10 month period granted by the arbitrator, the U.S. notified that it had made changes to the COOL measures. The complainants however requested to proceed with the establishment of a compliance panel to determine whether the measures were in full compliance [see end note 14].

Findings of Compliance Panel

Subsequent to the Appellate Body report, the COOL statute remained untouched but certain provisions of the 2009 Final Rule were amended by the 2013 Final Rule [see end note 15]. The Compliance Panel established pursuant to Article 21.5 of the DSU, found that the changes increased the disadvantageous effect on the exporters by way of higher standards of segregation according to origin and a larger burden of recordkeeping and verification procedures [see end note 16] and hence discouraged the producers from opting for imported livestock, thereby according favourable treatment to domestic livestock and meat.

It was decided that the measures could not be justified by the obligation to inform consumers regarding the countries where livestock were born, raised and slaughtered respectively [see end note 17]. Relying on its previous findings, this panel concluded that the measures violated Articles 2.1 and III: 4 of the TBT Agreement and GATT 1994 respectively and led to nullification and impairment of benefits accruing to the complainant countries [see end note 18].

Implications and possible outcomes

The U.S. has 30 days to appeal, which again extends the leeway period for non-compliance with the DSB recommendations, or the complainant countries can impose retaliatory tariffs if the U.S. does not comply with the report of the compliance panel. It is most likely that the U.S. will appeal since there is substantial pressure domestically to appeal the ruling, which may also grant some time to the Office of the United States Trade Representative to take a final call on how best to handle the situation. In all likelihood, Canada and Mexico will proceed with the dispute, as their exports to the U.S. have halved since 2008, and the amendments to the 2009 Final Rule have only made the existing situation worse for them [see end note 19]. Canada has already decided to impose retaliatory tariffs if the U.S. does not comply with the WTO decision [see end note 20]. It remains to be seen what the ultimate outcome of the COOL dispute will be.

[The author is an Associate, Lakshmikumaran & Sridharan, Mumbai]

End notes:

  1. United States – Certain Country of Origin Labelling (COOL) Requirements, WT/DS384/R; WT/DS386/R (18 Nov., 2011). Since both the disputes dealt with the mandatory COOL provisions, the disputes were clubbed together and heard by the WTO Dispute Settlement Body.
  2. WT/DS384/RW; WT/DS386/RW.
  3. Id, at para. 7.77.
  4. North American Free Trade Agreement (NAFTA) is a trilateral free trade agreement between the United States, Canada and Mexico.
  5. Supra note 2, at para. 7.140.
  6. Supra note 2, at para. 7.61.
  7. WT/DS384/AB/R,  WT/DS386, 29 June 2012, para. 291 to 293
  8. Id, para 271
  9. Id, para 341 to 346
  10. Id, para. 496.
  11. Id, para 461
  12. Id.
  13. WT/DS384/21; WT/DS386/20 (9 Oct., 2012).
  14. Supra note 3.
  15. Supra note 3, at para. 7.1.
  16. Id, at para. 8.3.
  17. Id.
  18. Id, at para. 8.5.
  19. Id, at para. 7.358.
  20. Ottawa Threatens Tariffs against U.S. Ketchup, Chocolate, Wine, CTV News (Oct. 21, 2014).
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