Canada Retaliates Against U.S. Country of Origin Labelling Requirements

by Blake, Cassels & Graydon LLP
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SUMMARY

Since 2008, the Canadian government has challenged country of origin labelling (COOL) requirements imposed by the United States Department of Agriculture (USDA). On May 18, 2015, the World Trade Organization (WTO) Appellate Body ruled that these requirements violate Articles 2.1 and 2.2 of the Agreement on Technical Barriers to Trade (TBT). On May 20, 2015, in response to the May 18 ruling, the U.S. Congress approved Bill H.R. 2393 — a bill to repeal the requirements.

BACKGROUND

In 2002, the U.S. Farm Security and Rural Investment Act (Farm Bill) came into effect. It was later amended in 2008 and became mandatory in 2009 for all retailers, including grocery stores and warehouse clubs. Among other things, the Farm Bill required food labelling on certain products, including beef, pork, veal, lamb, goat, chicken, fish, etc. For example, only products derived from an animal that was exclusively born, raised and slaughtered in the U.S. could be designated as having a U.S. origin. Other regulated products include fruits, vegetables and many nuts, legumes and plants. The USDA argued that the objective of these requirements was to facilitate informed decision-making by consumers.

Canada and other exporters of meat products to the U.S. argued that the requirements were too intrusive and cumbersome and were, in practice, designed to identify and discriminate against foreign meat products.

Additionally, the COOL requirements imposed a significant burden on the livestock industry by requiring the implementation of comprehensive internal labelling and tracking procedures, as well as imposing cumbersome audits and large fines for retailers. The Canadian pork and cattle industries incurred estimated annual costs of over C$500-million and C$630-million, respectively, in order to comply with the COOL requirements.

APPEAL HISTORY

Shortly after the Farm Bill was amended in 2008, the Canadian government commenced its challenge against the U.S. at the WTO on the COOL requirements, particularly those measures affecting meat products. Canada argued that the U.S. was in violation of three obligations under the WTO member agreements, which include the General Agreement on Tariffs and Trade (GATT), the TBT, and the Agreement on Rules of Origin:

  1. Articles III:4, IX:2, IX:4 and X:3 of the GATT of 1994
  2. Article 2 of the TBT
  3. Article 2 of the Agreement on Rules of Origin

All three sets of obligations aim to ensure that trade within the WTO member countries is not discriminatory in any way. The GATT articles address the required equal treatment of all WTO member products and the mandate that any marks of origin regulations not overly inconvenience commerce. Similarly, Article 2 of the TBT states that any regulations governing products should not result in the less favourable treatment of imported products and should have a “legitimate objective.” Finally, the Agreement on Rules of Origin addresses the impermissibility of rules that are “unduly strict” or that create “restrictive, distorting, or disruptive effects” on trade (among other things).

The WTO’s Dispute Settlement Board (DSB) focused its attention on Articles 2.1 and 2.2 of the TBT.

Below is a summary of the sequence of events to date:

  • December 2008 – November 2009: Canada commenced a challenge against the U.S. at the WTO, involving several third parties — Argentina, Australia, China, Columbia, India, Japan, Korea, Mexico, Peru and New Zealand initially, and Brazil, the European Communities, Guatemala and Chinese Taipei later — and a DSB panel examined the dispute.
  • November 2011: The panel found the COOL requirements violated Article 2.1 of the TBT because they offered less favourable treatment to Canadian cattle and hogs than to equivalent U.S. products. Additionally, the panel found the COOL requirements violated Article 2.2 of the TBT since they did not perform the USDA’s “legitimate objective” of informing consumers in whole.
  • March – June 2012: The U.S. appealed the entirety of the DSB’s decision, and Canada appealed part of the finding related to Article 2.2 of the TBT. The Appellate Body of the WTO upheld the panel’s finding related to Article 2.1 and reversed the finding related to Article 2.2. The COOL requirements were found to violate Article 2.1 because they imposed a “disproportionate burden” on producers as compared to the informative benefit to consumers, while the requirements were not found to violate Article 2.2 since it was sufficient for them to contribute to the “legitimate objective” in part.
  • December – May 2013: The parties agreed that the U.S. would implement recommendations of the DSB and Appellate Body by May 23, 2013. Accordingly, the USDA instituted a new COOL requirement, which demanded more specificity and had a broader scope than the original COOL requirements. The new rule had three main components:

1. Further specifications for muscle cut covered condiments derived from animal products slaughtered in the U.S.

2. Disallowance of commingling of muscle cuts of different origins

3. Changed definition of “retailer” to be any retailer who is licensed under the Perishable Agricultural Commodities Act

Canada, arguing that this new requirement did not bring the U.S. into compliance with Articles 2.1 and 2.2 of the TBT, requested that the WTO establish a compliance panel.

  • October – November 2014: The compliance panel found the new COOL requirement to also be in violation of both Article 2.1 and Article 2.2 of the TBT. The U.S. appealed to the Appellate Body.
  • May 18, 2015: The Appellate Body upheld the compliance panel’s report in favour of Canada. At this point, the U.S. had exhausted all appeal options.

U.S. REACTION

On May 20, 2015, U.S. Congress approved Bill H.R. 2393 to repeal the COOL requirements implemented under the 2008 amendment to the Farm Bill.

Despite Congress’s decision, U.S. Secretary of Agriculture Tom Vilsack indicated that the U.S. may consider implementing voluntary country of origin labels. It is unclear at this early stage whether Secretary Vilsack will encourage producers to voluntarily label and whether this practice will take hold.

CANADIAN RETALIATORY MEASURES

Since 2013, Canada’s Minister of Agriculture and Agri-Food Gerry Ritz has signalled that Canada is considering retaliatory measures against the U.S. in light of COOL requirements. In order to do so, Canada would need permission from the WTO under Article 22 of the Dispute Settlement Understanding (DSU). Canada could only submit such a request if the U.S. does not comply with a WTO ruling, after which the WTO would have 30 days to review any such request. Any retaliation would have to be proportionate to the “impairment” caused by U.S. violations, as determined by the original panel. In light of Congress’s vote to repeal the offending provisions of the Farm Bill, it remains to be seen whether Canada will continue to pursue retaliation in the form of a tariff or otherwise.

PUSH TO DIVERSIFY CANADA’S TRADING RELATIONSHIPS

The COOL requirements have re-energized the movement for Canada to address its trade imbalance with the U.S. One notable effort in this regard was Canada’s announcement in September 2014 to enter into the Canadian-European Union (EU) Comprehensive Economic Trade Agreement (CETA), expected to be effective as of late 2015 or early 2016, which is anticipated to increase trade between Canada and the EU by approximately 28 per cent. The EU is currently Canada’s second-largest trading partner and the creation of CETA could be a first step to replacing the U.S. as Canada’s primary trading partner.

The authors wish to acknowledge and thank Ayeesha Lalji (Summer Law Student) for her contribution to this Bulletin.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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