9 July 2012
On June 29, 2012, the Appellate Body of the World Trade Organization (WTO) circulated its decision in a dispute over US country-of-origin labeling (COOL) requirements for beef and pork products (WT/DS384/AB/R, WT/DS386/AB/R). This is the third decision this year by the Appellate Body dealing with the rules under the WTO Agreement on Technical Barriers to Trade (TBT Agreement). It is also the third time this year that the Appellate Body has found US technical (product) regulations inconsistent with the rules of the TBT Agreement. Through this trifecta of decisions, the Appellate Body has developed a more coherent approach to the interpretation of the TBT Agreement.
Mexico and Canada challenged the US mandatory labeling regime for beef and pork as inconsistent with the TBT Agreement before a WTO panel. The panel found that the COOL requirements were inconsistent with Articles 2.1 and 2.2 of the TBT Agreement. Article 2.1 requires WTO Members to ensure that technical regulations do not treat imported products less favorably than similar (i.e., “like”) domestic products. Article 2.2 mandates that technical regulations be no more trade restrictive than necessary to fulfill a legitimate objective. The United States appealed the COOL panel’s decision.
The Appellate Body has now upheld the panel’s finding under TBT Article 2.1, but reversed the ruling on Article 2.2. The Appellate Body’s decision brings the interpretation of these articles of the TBT Agreement in line with its recent decisions in two other cases against the United States—Mexico’s case against US dolphin-safe labeling requirements for tuna (the “Tuna-Dolphin” case) and Indonesia’s case against a US ban on clove cigarettes (the “Clove Cigarettes” case). See our earlier Legal Update for a discussion of these cases, The WTO Appellate Body Finds US Dolphin-Safe Label Rules Discriminatory, May 23, 2012.
On the Article 2.1 finding, the Appellate Body agreed with the panel that the COOL measure modifies the conditions of competition to the detriment of imported livestock because the measure’s recordkeeping and verification requirements create an incentive for meat processors to use exclusively domestic livestock, and a disincentive against using like imported livestock. However, the Appellate Body faulted the panel for not completing its analysis under Article 2.1.
The Appellate Body noted that the panel should have considered whether this de facto discrimination derives exclusively from a legitimate regulatory distinction, in which case it would not violate Article 2.1. Through its own analysis, the Appellate Body found that the COOL measure is not applied in an “even-handed manner” because the measure’s 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 labeling requirements for meat sold at the retail level. The detailed information that upstream producers record and transmit is not necessarily communicated to consumers on the COOL labels, either because the labels do not provide all of this information or because the meat products are exempt from the labeling requirements altogether. For these reasons, the Appellate Body concluded that the discrimination against imported livestock does not stem exclusively from a legitimate regulatory distinction and is inconsistent with Article 2.1 of the TBT Agreement.
On the Article 2.2 finding, the Appellate Body sided with the United States and reversed the WTO panel. The panel had agreed with Canada and Mexico that the COOL measure was inconsistent with Article 2.2 of the TBT Agreement because it is more trade-restrictive than necessary to fulfill the legitimate objective of providing information on origin to consumers. The panel found that the COOL measure does not fulfill this objective because it fails to convey meaningful origin information to consumers. The Appellate Body disagreed and found that the panel had erred in its interpretation of Article 2.2.
In its decision, the Appellate Body faulted the panel for incorrectly considering that a measure could be consistent with Article 2.2 only if it fulfilled its objective completely or exceeded some minimum level of fulfillment. Moreover, the Appellate Body noted that the panel appeared to ignore its own findings that the COOL measure does, to some extent, provide origin information to consumers. Because it lacked sufficient factual findings by the panel, the Appellate Body was unable to complete the panel’s analysis to determine whether the COOL measure violated Article 2.2 because it is more trade restrictive than necessary. For these reasons, the Appellate Body reversed the panel's finding on Article 2.2.
The Appellate Body’s report in the COOL case follows recent decisions in the Tuna-Dolphin and Clove Cigarettes cases. Before these decisions, there was scant WTO jurisprudence on the TBT Agreement. A framework for interpreting this agreement has emerged from these cases. First, in analyzing claims under Article 2.1, the Appellate Body has prioritized the competitive relationship between products subject to a technical regulation in its review of a panel’s decision. The Appellate Body in all three cases based its conclusion on whether imported products receive less favorable treatment by examining how the imported and domestic products compete in the marketplace. Second, when the Appellate Body finds that a technical regulation has a detrimental effect on imported products, it then considers whether there is a legitimate regulatory distinction for the disparate treatment. The Appellate Body has indicated that this is a necessary part of an analysis under Article 2.1. Finally, the Appellate Body has signified that a technical regulation need only make some contribution to its objective, and need not fulfill its objective completely or meet a de minimis level of fulfillment, to be consistent with Article 2.2.
The decisions in the COOL, Tuna-Dolphin, and Clove Cigarette cases will provide guidance not only to WTO Members bringing and defending against disputes under the TBT Agreement, but also to the panels who will preside over these disputes in the future.