Doesn't pay to be COOL - Will the U.S. comply with the decision?

The Country of Origin Labelling (COOL) decision is back. I had blogged about it here and here. In November 2011 the Panel of the WTO had found the country of origin labelling legislation in contravention of US' obligations under the TBT Agreement basedon a challenge by Canada and Mexico. The U.S. had appealed against the decision. The Appellate Body of the WTO on 29th June 2012 upheld the decision of the Panel and found that the COOL measure was not consistent with Article 2.1 of the TBT Agreement.

The decision itself is more than 200 pages. I am relying on the summary on the WTO website:

"The Appellate Body upheld, albeit for different reasons, the Panel's finding that the COOL measure violates Article 2.1 of the TBT Agreement by according less favourable treatment to imported Canadian cattle and hogs than to like domestic cattle and hogs.  The Appellate Body reversedthe Panel's finding that the COOL measure violates Article 2.2 of the TBT Agreement because it does not fulfil its legitimate objective of providing consumers with information on origin, and was unable to complete the legal analysis and determine whether the COOL measure is more trade restrictive than necessary to meet its objective. 

In its analysis under Article 2.1 of the TBT Agreement, the Appellate Body agreed with the Panel that the COOL measure has a detrimental impact on imported livestock because its recordkeeping and verification requirements create an incentive for processors to use exclusively domestic livestock, and a disincentive against using like imported livestock.  The Appellate Body found, however, that the Panel's analysis was incomplete because the Panel did not go on to consider whether this de facto detrimental impact stems exclusively from a legitimate regulatory distinction, in which case it would not violate Article 2.1.  In its own analysis, the Appellate Body found that the COOL measure lacks even-handedness because its recordkeeping and verification requirements impose a disproportionate burden on upstream producers and processors of livestock as compared to the information conveyed to consumers through the mandatory labelling requirements for meat sold at the retail level.  That is, although a large amount of information must be tracked and transmitted by upstream producers for purposes of providing consumers with information on origin, only a small amount of this information is actually communicated to consumers in an understandable or accurate manner, including because a considerable proportion of meat sold in the United States is not subject to the COOL measure's labelling requirements at all.  Accordingly, the detrimental impact on imported livestock cannot be said to stem exclusively from a legitimate regulatory distinction, and instead reflects discrimination in violation of Article 2.1.  For these reasons, the Appellate Body upheld the Panel's finding under Article 2.1."

The Appellate Body explained the gist of "less favourable treatment" in para 269 of the decision:

"269. The Appellate Body recognized in US – Clove Cigarettes and US – Tuna II (Mexico) that relevant guidance for interpreting the term "treatment no less favourable" in Article 2.1 may be found in the jurisprudence relating to Article III:4 of the GATT 1994.As under Article III:4, 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."

270.In the context of both Article III:4 of the GATT 1994 and Article 2.1 of the TBT Agreement, for a measure to be found to modify the conditions of competition in the relevant market to the detriment of imported products, there must be a "genuine relationship" between the measure at issue and the adverse impact on competitive opportunities for imported products. In each case, the relevant question is whether it is the governmental measure at issue that "affects the conditions under which like goods, domestic and imported, compete in the market within a Member's territory". While a measure may not require certain treatment of imports, it may nevertheless create incentives for market participants to behave in certain ways, and thereby treat imported products less favourably. However, changes in the competitive conditions in a marketplace that are "not imposed directly or indirectly by law or governmental regulation, but [are] rather solely the result of private entrepreneurs acting on their own calculations of comparative costs and benefits", cannot be the basis for a finding that a measure treats imported products less favourably than domestic like products.In every case, it is the effect of the measure on the competitive opportunities in the market that is relevant to an assessment of whether a challenged measure has a detrimental impact on imported products."

The de facto de jure distinction is important since measures that are not overtly discriminatory in terms of the country of origin can still be violative of Article 2.1 of the TBT Agreement if the competitive opportunities are detrimentally impacted by the measure.

How will the U.S. comply with the Appellate Body report. After the Cloves Cigarette case, Tuna decision the COOL measure is  another decision that has gone against the U.S. Will it comply or face a retaliation? Will it exercise it's "reasonable period" before it complies with the decision? Will it modify the requirements to ensure compliance with the decision? The Eyes on Trade blog predictably criticized the Appellate Body decision as infringing on US consumer interests and right to know.The IELP blog has an excellent analysis on the decision here.

The announcement on the USTR website titled "Appellate Body Affirms American Consumers Rights' to Information About Groceries" gave an indication that the U.S. had actually succeeded in the Appellate Body proceedings. It, however, concluded on a more realistic note:

"The United States Department of Agriculture (USDA) has worked closely with the Office of the United States Trade Representative on this case. We look forward to continuing to work with USDA to ensure that American consumers have relevant information to inform their food purchasing decisions. The next step in the process is for the WTO Dispute Settlement Body to adopt its recommendations and rulings. The United States will then have a reasonable period of time to comply."

Compliance time, yet again, for the United States? Or can compliance be a matter of interpretation? Robert Howse commenting on the IELP blog here opines:

"One general comment: my sense is that the US basically won this case even if a violation was found (a bit like Shrimp/Turtle I), because the only violation of TBT was that the documentation and tracking requirements for upstream suppliers/producers had a detrimental effect on imports and were unnecessarily burdensome in that a lot of the information was not strictly speaking needed to ensure the accuracy of the kind of labeling that COOL required. This is a violation that it appears can be completely cured by the US tweaking the paperwork requirements and streamlining them."

This suggests that "compliance" for the U.S. does not necessarily mean doing away with the labelling requirement all together. Rather, if the U.S. reworks the procedural aspects of the labelling rules which would not impact the competitive conditions for meat from Canada and Mexico, it could bring its regulation in conformity with Article 2.1 of the TBT Agreement. Is this going to lead to another long winding round of disputes as to what constitutes "compliance"? In both the Cloves Cigarettes case as well as COOL, can the U.S. continue with it's existing measures but still in fact claim to be "complying"?