Border trade wars looming?

Photo courtesy of USDA.

By Gary N. Horlick*

Canada and Mexico have started formal processes in the World Trade Organization to seek authorization to impose prohibitive tariffs on possibly billions of dollars of U.S. exports.

This follows a decision by the Appellate Body of the World Trade Organization (WTO) that certain U.S. country-of-origin-labeling regulations (COOL) discriminate against imported products in violation of WTO rules.  The issue began as a “minor” section of the 2002 farm bill, one of those “must pass” mammoth pieces of legislation that attract all types of special-interest provisions.  Some NGOs and smaller farmer and rancher organizations pushed for the legislation (especially some cattle ranchers and swine producers in the northern United States who were distressed at the sight of live cattle and swine from Canada arriving for processing in the United States).  The legislation mandated labeling meat processed in the United States from imported animals following a complicated series of rules based on where the animal had been born, raised, and processed.  The effect, no doubt intentional, was to create a price penalty paid for Canadian and Mexican cattle compared to local cattle.

The United States imported hundreds of thousands of cattle and equally large amounts of swine from Canada because of differences in growing seasons, grazing, and feed availability.  Although Mexico was not particularly a target, the United States also imported nearly a million head of cattle from Mexico.  It is worth noting the United States exported more than $1 billion of beef to Canada and Mexico, as the production and consumption in North America is highly integrated.

Implementation of the new rules was effectively stalled under the Bush Administration, which was more responsive to strong farm-state opposition than the Obama Administration, which implemented the rules in 2009, accompanied by a letter from Secretary of Agriculture Tom Vilsack, threatening sanctions if certain flexibility in the rules was used.

The effect of the rules was to force U.S. processors to purchase Canadian or Mexican animals only on certain days of the week, which increased the expense of processing the live animals compared to locally born and raised animals, or to not purchase them at all.  This had the effect of reducing the imports from Canada and Mexico as well as the perverse effect of helping cause the closure of packing plants in the northern United States and Texas, thus raising costs for ranchers in those areas (since they have to pay the additional cost to transport their animals to more distant plants).

Canada and Mexico challenged both the new rules and the Vilsack letter in the WTO (interestingly, neither bothered to challenge under the NAFTA dispute resolution process, a comment on the perceived ineffectiveness of that system).  After extensive briefing and hearings, Canada and Mexico won their cases before a WTO panel and the Appellate Body in 2012.  The United States in September 2013 announced cosmetic compliance by changing the rules to a system even more onerous on imports, leading to the recent request to the WTO by Canada and Mexico to declare the U.S. response insufficient. If successful, this would be followed by a request for WTO authorization for retaliation by the two countries against imports to the United States.  In a recent dispute on trucking services, Mexico imposed tariffs of $2.4 billion on U.S. exports, carefully targeted to the congressional districts of the legislators responsible for the law, so presumably the retaliation will take a similar form this time if it occurs.

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* The author, in addition to teaching international trade law at Georgetown, is a private practitioner who is counsel to, among others, the National Cattlemen’s Beef Association, representing approximately 200,000 U.S. cattle ranchers.  Any views expressed in this piece are solely the responsibility of the author.