Product labelling: What has the Appellate Body wrought?

14 October 2015

Do the recent WTO rulings related to product labelling provide enough flexibility for Members to achieve various non-trade policy objectives? 

WTO Members and consumers have largely ignored the implications for product labelling emanating from the Appellate Body’s decisions in US-Tuna II and US-COOL, giving proof to Aldous Huxley’s maxim in Brave New World that, “Most human beings have an almost infinite capacity for taking things for granted.” [Ref 1] These two cases could have a profound effect on how WTO Members regulate product labelling and on how manufacturers use labels to influence consumer behaviour, including for environmental and other social purposes.

US-Tuna II

In 2012 the Appellate Body found that a US “dolphin safe” labelling programme designed to prevent dolphin deaths arising from tuna fishing practices in the Eastern Tropical Pacific (ETP) violated the non-discrimination obligation found in Article 2.1 of the WTO Agreement on Technical Barriers to Trade (TBT Agreement). The decision is noteworthy as the Appellate Body found nothing wrong with a WTO Member applying its law to regulate the labelling of how a product is manufactured outside its jurisdiction but sold within. Instead, the US trade measure was struck down under Article 2.1 on the grounds that it was discriminatory; it only applied to tuna caught in the ETP, where Mexico primarily fished, but not in other waters where dolphin mortality faces a comparable risk. Many WTO Members, as well as the environmental community, appear to have underestimated the significance of US-Tuna II. This decisionimplicitly authorises Members to regulate “labelling requirements as they apply to a product, process or production method” even if a product’s manufacture or production takes place outside the Member’s territory, provided that the labelling is not discriminatory within the meaning of Article 2.1. The measure must also be necessary within the meaning of Article 2.2 TBT, but the Trilogy Cases mentioned below, demonstrate that this test is now relatively easy to meet.

US-Tuna II provides support, under the correct legal circumstances, for product labelling for environmental and conservation purposes, provided that any discrimination that results is based on a legitimate regulatory distinction (LRD). If products can be labelled to reflect dolphin safety and other domestically defined norms, there is no reason why labels cannot be applied to reflect whether the manufacture of a product complies with human rights norms, international labour agreements, or other norms derived from public international law. The separate issue as to whether a Member can ban imports based on “product characteristics or their related processes and production methods” ­– in other words, in the absence of labelling requirements ­– remains to be resolved by the Appellate Body. [Ref 2]

US-COOL

If US-Tuna II opens the floodgates to the labelling of qualities associated with the manufacture of products in trade – what trade lawyers refer to as the processes and production methods – US-COOL acts to hold back some of the more dangerous floodwaters by further clarifying the meaning of an LRD. As the TBT Agreement lacks the explicit rule/exception relationship of GATT Article XX, the Appellate Body was forced in the Trilogy Cases to craft a means to permit a Member to apply technical regulations that fulfilled a legitimate regulatory objective such as protection of the environment, protection of human health, and prevention of deceptive practices, even if a technical regulation results in de facto discrimination. [Ref 3] The Trilogy Cases accept that Article 2 TBT, which regulates technical regulations, may permit discrimination provided that it is even-handed and stems exclusively from an LRD. In determining whether a labelling scheme stems exclusively from an LRD, adjudicators should examine the “design, architecture, revealing structure, operation, and application” of the scheme.

In US-COOL, the US government-labelling scheme at issue established origin labelling rules reflecting where livestock from Mexico, the United States and Canada were born, raised, and slaughtered. In 2012 the Appellate Body found that the US labelling scheme resulted in de facto discrimination against certain Mexican and Canadian meat products due in part to increased recordkeeping and other costs associated with the need to segregate cattle and hogs during the production process. In short, the labelling scheme resulted in a detrimental impact on the sale of Canadian and Mexican meat products – they became more expensive – and the Appellate Body determined that this negative impact did not stem exclusively from an LRD promoting consumer information.

Exclusively from a legitimate regulatory distinctions?

The US-Tuna II and US-COOL rulings developed a strict non-discrimination standard. To pass muster, the detrimental impact from a labelling scheme must stem exclusively from a legitimate regulatory distinction. However, in instances when de facto discrimination is at issue, it may be difficult to craft a measure that satisfies Article 2.1. US-COOL offers a case in point. Most cattle at issue were born, raised, and slaughtered in the US and the slaughterhouses had to schedule separate processing runs for Mexican and Canadian beef in order to correctly label the meat products. Any labelling scheme that disproportionately increases the cost for foreign beef, such as requiring segregation until the day that Mexican or Canadian beef is processed as well as additional paperwork, is likely to have a detrimental impact on price. Even if information in the form of notifying consumers of criteria related to the origin of the beef is a legitimate objective, it will be difficult as long as the economics favour US beef, to argue that Washington’s measure stems exclusively from a legitimate regulatory distinction. De facto discrimination will always be a potent argument.

Shades of grey

As applied by the Appellate Body, upon first reading the “stems exclusively” standard seems to be flat and reasonable as a means to assure that technical regulations, including labelling schemes are not applied for protectionist purposes. As with the individual sub-paragraphs in Article XX of the General Agreement on Tariffs and Trade (GATT-1994), the LRD allows a Member to regulate to achieve a policy objective that may violate the non-discrimination obligation, and the “stems exclusively” standard may be a means of policing arbitrary and unjustifiable discrimination. However, when one looks closer, one sees that problems may arise in cases involving de facto discrimination. Trade law is seldom black or white – there are various shades of grey involved in the law-making process and parliamentary majorities often reflect a variety of motives and views. It is not uncommon for a regulation that furthers a legitimate policy goal, such as environmental protection or consumer information, to also have a detrimental effect on certain producers be they foreign or domestic. The “stems exclusively” standard, which owes its origins to the Appellate Body and not to WTO Members, may be too inflexible to manage expectations and to give Members the regulatory autonomy they need in cases where a regulation – including labelling schemes – while origin neutral, ends up favouring one or more domestic or foreign producers.

Arthur E. Appleton, J.D., Ph.D. is an Adjunct Professor at Johns Hopkins University School of Advanced International Studies (SAIS – Europe), and a visiting professor at the University of Barcelona (IELPO), and the University of Bern (WTI) on whose Board he serves. He is also a founding Partner at Appleton Luff – International Lawyers.

[Ref 1] Appellate Body Report, United States - Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products, WT/DS381/AB/R (adopted 13 June 2012), Appellate Body Reports, United States - Certain Country of Origin Labelling (COOL) Requirements (WT/DS384,386/AB/R, (adopted 23 July 2012; Article 21.5 adopted report 29 May 2015).

[Ref 2] The quoted language is from Annex 1.1 of the TBT Agreement.

[Ref 3] Article 2.1 discrimination is now the most important element when a panel or the Appellate Body determines the TBT-legality of a technical regulation, including a label-related regulation. The Appellate Body decided all three of the “Trilogy Cases” based on this provision. The Trilogy cases are US – Tuna II, US – COOL (cited above) and US – Clove Cigarettes, Appellate Body Report, United States - Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406/AB/R, (adopted 24 April 2012).

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