Why and How Mandatory COOL Should Be Reinstated Through the NAFTA Renegotiations

EXECUTIVE SUMMARY

Congress passed the mandatory country of origin labeling (COOL) law in 2002 to provide consumers with information as to the origins of their food. However, it was not until early 2013 that the U.S. Department of Agriculture (USDA) finally implemented COOL in a manner that accurately distinguished beef that was exclusively produced in the U.S. from beef that was partially or wholly imported.

Because it empowered consumers to initiate demand signals for country-specific beef products. COOL ended the packers’ ability to unilaterally decide from which countries’ supply chain to source the cattle and beef necessary to satisfy the domestic consumers’ appetite for beef.

This loss of market control infuriated the multinational packers and the governments of countries from which those packers imported large volumes of beef and cattle. Together, the packer/foreign country duo embarked on a years-long campaign to repeal COOL. After numerous failures within the constitutionally established executive, legislative and judicial branches of government, these adversaries finally found a sympathetic ear on foreign soil, at the World Trade Organization (WTO). In response to the WTO, Congress reacted so haphazardly that it repealed COOL for beef and pork without bothering to ensure that its capitulation would result in a final disposition of the COOL complaint, which it did not.

Moreover, Congress’ knee-jerk repeal of COOL was accomplished without regard to the economic interests of independent U.S. cattle farmers and ranchers whose future viability is dependent on their ability to compete against the growing tide of foreign beef and cattle that multinational packers continuously import into the United States.

COOL should be reinstated for beef because it is necessary to ensure that marketplace competition begins with consumers’ buying preferences rather than the multinational packers’ command and control over global supply chains.

Importantly, COOL is a quintessential element for fulfilling President Trump’s directive to “Buy American.” Domestic consumers cannot choose to support the domestic cattle supply chain by choosing to buy American beef because American beef is undifferentiated among the beef from the more than 20 countries that multinational packers are currently sourcing cattle and beef. Empowering consumers to buy American beef with COOL will undoubtedly strengthen Rural America’s economy, especially since the U.S. live cattle industry is the largest segment of American agriculture.

During the short period that COOL was effectively implemented for beef and pork (2013-2015), the glaring loophole that previously allowed multinational packers to remove origin labels on imported beef was closed. Upon COOL’s repeal, however, packers were once again empowered to engage in the unscrupulous practice of withholding known origin information from consumers by removing the origin labels that were required as a condition of entry into the United States.

Because COOL differentiates meat products based on origin, it ends the deception created by the practice of affixing U.S. inspection stickers on both imported and domestic meat products, implying that all products are domestic. Further, by promoting competition, COOL reduces the multinational packers’ ability to exploit the domestic cattle industry’s ultra-sensitivity to changes in supplies, particularly imported supplies of cattle and beef. It also ends the packers’ ability to exploit the good names and reputations of U.S. farmers and ranchers by sourcing cheaper, undifferentiated imported products and selling them to unsuspecting consumers for the same price that domestic products would command.

Unfortunately, the multi-segmented nature of the combined cattle and beef industries preclude any voluntary solution to correct the market failure caused by the non-disclosure of origin information to consumers. Because the COOL-related, economic interests of farmers and ranchers within the domestic live cattle supply chain are diametrically at odds with the packers’ profit potential associated with the non-disclosure of origin information, a negotiated solution is not possible. Thus, COOL must be mandated for benefits to flow to cattle farmers and ranchers on one end of the multi-segmented supply chain and consumers on the other.

The renegotiation of the North American Free Trade Agreement (NAFTA) is the ideal forum with which to reinstate COOL for beef and pork. Given the chronic and substantive trade deficit the U.S. accumulates each year in the trade of cattle and beef with Canada and Mexico (that deficit was $2.25 billion in 2016 alone), the U.S. has considerable leverage with which to obtain concessions for accurate origin disclosures. The reinstatement of COOL would be a relatively straightforward negotiation: 1) The United States should first require in the NAFTA renegotiation that both Canada and Mexico formally withdraw their COOL complaints that are pending before the WTO as well as their WTO-sanctioned authorizations to impose retaliatory tariffs. 2) The United States should then prepare a NAFTA Renegotiation Implementing Act (Proposed Implementing Act) that includes the restoration of the previously repealed COOL statute governing the labeling of beef and pork and a directive ordering the USDA to immediately reestablish beef and pork as covered commodities under the COOL statute.

The Implementing Act could also be used to address known deficiencies in the COOL statute and regulations, some of which were identified and then exploited by the WTO to disparage COOL. Most of these deficiencies involve the overabundance of exemptions that limit the scope of beef products that were covered by the COOL law.

Additionally, the specific rule of origin contained in the NAFTA states that the origin of meat is the country where the animal was slaughtered. Thus, under the NAFTA, multinational packers can import live cattle from Canada and Mexico for immediately slaughter and the resulting beef can be sold domestically and abroad as a “Product of the USA.” This places U.S. cattle farmers and ranchers at an economic disadvantage. It allows multinational packers to steal the good names and reputations of U.S. farmers and ranchers while simultaneously undermining the U.S. live cattle supply chain. The NAFTA rule of origin for meat is patently unfair, deceptive, and seriously threatens the financial viability of U.S. cattle farmers and ranchers. To correct this inappropriate rule of origin, the United States should adopt the same origin standard in the NAFTA as was used in COOL – the origin of meat should be the country or countries in which the animal from which the meat was derived was born, raised, and slaughtered.

INTRODUCTION

Although Congress passed mandatory country of origin labeling (COOL) to inform consumers as to the origins of numerous food products in the 2002 Farm Bill, and most of those products were accurately labeled beginning in 2005, it was not until early 2013 that the U.S. Department of Agriculture (USDA) finally promulgated rules to accurately distinguish beef that was exclusively produced in the U.S. from beef that was partially or wholly imported.[1] It did this by requiring origin labels on beef to list the country or countries where the animal was born, raised, and slaughtered.

COOL effectively reduced the market power wielded by multinational packers, which are major importers of beef and cattle, by empowering consumers to initiate demand signals for country-specific beef products. This ended the packers’ ability to unilaterally decide from which countries’ supply chain to source the cattle and beef necessary to satisfy the domestic consumers’ appetite for beef.

This loss of buyer-power control over the market infuriated the multinational packers and the governments of countries from which those packers imported large volumes of both beef and cattle. Together, the packer/foreign country duo embarked on a years-long campaign to repeal COOL. After failing to repeal COOL in Congress, failing to sustain executive-branch regulations that undermined the COOL law, failing to defeat COOL in a U.S. district court, and failing to defeat COOL before a U.S. appellate court’s en banc panel, the packers and foreign countries finally found a sympathetic ear on foreign soil, at the World Trade Organization (WTO). This international tribunal’s adverse COOL ruling inexplicably caused Congress to react so haphazardly as to repeal COOL for beef and pork without even bothering to ensure that its wholesale capitulation would result in a final disposition of the COOL complaint, which it did not.

Moreover, Congress’ knee-jerk repeal of COOL was accomplished without regard to the economic interests of independent U.S. cattle farmers and ranchers whose future viability is directly dependent on their ability to compete against the growing tide of foreign beef and cattle that multinational packers are continuously importing into the United States.

WHY REINSTATE COOL FOR BEEF

COOL Creates Competition

Mandatory Country of Origin Labeling (COOL) answers the question, “Who decides from which country packers must source their cattle and beef inputs to satisfy domestic beef demand”?

Without COOL, packers unilaterally decide whether to purchase their inputs (i.e., cattle and beef) from the domestic supply chain or from any of the lower-cost foreign supply chains located in the more than 20 foreign countries from which packers annually import cattle and/or beef.[2]

With COOL, such unilateral market control is taken from the hands of the packers and placed into the hands of consumers. This occurs because COOL empowers consumers to express buying preferences for beef produced in a particular country. When consumers express such buying preferences, they send demand signals to the packers directing them to source cattle and beef from the supply chain in the particular country chosen by the consumers.

Thus, COOL creates marketplace competition. With it competition appropriately starts with the consumer, who sends origin-specific demand signals upstream into the beef supply chain. But without it, multinational packers obstruct consumer-driven demand signals, enabling them to provide the American consumer with beef sourced from whichever country the packer chooses. This destroys marketplace competition.

In other words, without mandatory COOL domestic cattle and beef supply chains cannot compete with foreign supply chains in the domestic market because consumers are deprived of any origin information with which to express a competitive buying preference. Consumers, therefore, are precluded from choosing to “buy American.” Instead, packers remain artificially insulated from competitive market forces and are free to import cheaper cattle and cheaper beef whenever they wish to leverage-down domestic cattle prices paid to U.S. farmer and ranchers. And, when they do this, they nevertheless continue selling undifferentiated, imported beef to unsuspecting American consumers for the same price as if the product were exclusively domestic. Thus, the packers are deceptively commandeering the good names and reputations of U.S. farmers and ranchers to market their imported beef and to reap windfall profits.

COOL Fixes a Gaping Loophole

Enacted long before COOL, the Tariff Act of 1930 requires imported beef to be labeled as to its origin to “an ultimate purchaser in the United States.”[3] However, prior to the passage of the COOL law, the USDA crafted the definition of “an ultimate purchaser” in such a way as to allow packers and retailers to remove origin labels before the beef is sold to American consumers.[4] The COOL law was passed by Congress in part to close this gaping loophole by requiring the origin labels on meat imports to remain on the product “through retail sale” (emphasis added).[5] However, Congress unwittingly reopened this gaping loophole for imported beef and pork when it repealed everything in the COOL law related to beef and pork. Thus, the gaping loophole remains closed for imported chicken, lamb, goat meat, and venison – American consumers will continue to be notified of the origins of those products because Congress did not repeal the COOL requirement for them. In other words, even though the WTO found no fault with the way the COOL law ensured that imported beef would retain its origin label all the way to the American consumer, Congress inexplicably flushed this important consumer notice when it repealed COOL for beef and pork.

COOL Stops Consumer Deception

It is not just the non-disclosure of origin information that harms both consumers and cattle producers by frustrating the competitive process; but also, consumers are being outright deceived in two ways:

First, a prominent “U.S.” or “USDA” inspection sticker is affixed to every package of beef sold at retail, including on all imported beef. Lacking other origin information, the only origin information available to consumers is the prominent “U.S.” or “USDA” sticker, which clearly and erroneously implies to unsuspecting consumers that the beef is of U.S. origin.

Second, the USDA has established internal policy guidelines to allow U.S. packers to mislabel beef derived from Mexican and Canadian cattle today; and, unless COOL is reinstated, Australian, Brazilian and Columbian cattle tomorrow. The USDA guidelines allow beef to bear a “Product of the USA” country of origin label if the beef is simply processed in the United States.[6] Today that means all the beef from the approximately 2 million head of live cattle imported each year from Canada and Mexico (including cattle imported for immediate slaughter that are not fed or grazed in the U.S.)[7], and which will produce about 1.5 billion pounds of beef[8], can be labeled as a USA product. This is the case even if the animals spent their entire lifetimes in a foreign country (except for the transportation time to a U.S.-based slaughtering plant). This clearly is deceptive.

COOL Reduces Market Manipulation

Multinational packers manipulate domestic cattle prices by importing foreign cattle and deceptively using them as identical substitutes for domestic cattle because the resulting beef from both is undifferentiated in the marketplace. Indeed, the packer lobby, which includes the National Cattlemen’s Beef Association (NCBA), argued to the U.S. district court in their unsuccessful 2013 lawsuit against COOL (American Meat Institute et al. v. USDA et al.) that, “In short, beef is beef, whether the cattle were born in Montana, Manitoba, or Mazatlán.” Thus, packers import hundreds of thousands of slaughter-ready cattle and transport them extraordinarily long distances to U.S. packing plants, even when domestic cattle supplies are plentiful and even when such long-distance transportation costs make individual shipments uneconomical. They do this because the presence of these imported cattle in the U.S. market reduces both the demand and price for domestic cattle. This occurs even if consumers would be unwilling to pay the same price for beef from imported cattle as they would beef from domestic cattle. This, of course, does not matter because the American consumer is kept in the dark as to the origins of beef from imported cattle.

Domestic farmers and ranchers witnessed first-hand the impact that imported cattle, from which meat is indistinguishable, have on their domestic cattle prices. Within just five months from the 2003 date that Canadian live cattle imports were banned from the United States because mad cow disease was detected in Canada, U.S. fed cattle prices jumped an unprecedented $26 per cwt, or about $325 per head.[9] The fact that this occurred even though Canadian cattle represented only about 5 percent of the U.S. annual slaughter volume reveals just how ultra-sensitive the U.S. cattle industry is to even slight changes in supplies – a factor that the packers can fully exploit when COOL is unavailable to consumers in the retail marketplace.[10]

COOL Facilitates Price Discovery

In 2010 the USDA conducted an investigation and found that, “Packers were not able to sell beef with ‘Canada’ or ‘Mexico’ labels for the same prices as beef produced entirely within the United States.”[11] In 2014 Oklahoma State University reported in its Food Demand Survey that “consumers valued beef that was born or born and raised in Canada $0.89 and $1.05 less, respectively, than beef that was born, raised, and slaughtered in the U.S.”[12] These two examples demonstrate a high probability that consumers will assign different values to different beef products depending on origin. However, this genuine form of price discovery, wherein consumers assign values to retail products based on their origin preferences, cannot occur unless consumers are first afforded COOL. Until such time, genuine price discovery, hence competition itself, remains stymied.

COOL Strengthens Rural America’s Economy

As stated above, COOL empowers consumers to exercise buying preferences that dictate to multinational packers where they must source the beef and cattle to satisfy consumers’ country-specific demand for beef. Thus, presuming U.S. consumers will heed President Trump’s directive to “Buy American,” COOL will empower consumers to support the domestic live cattle supply chain – hence the nation’s farmers and ranchers who raise and sell U.S. cattle. In addition, the U.S. appeals court in American Meat Institute et al. v. USDA et al. identified several compelling reasons U.S. consumers would consider making origin-specific purchasing decisions that would likely give U.S. cattle farmers and ranchers a home-court advantage in their home marketplace. The court explained, e.g., that COOL can empower consumers to express their patriotism by making origin-based purchasing decisions, take country-specific differences in safety practices into account, and COOL can confine the impact of a disease outbreak to only the specific country affected by the outbreak. Because the U.S. cattle industry is the single largest segment of American agriculture,[13] and because this industry operates in every state, increasing demand for beef sourced from the domestic live cattle supply chain holds substantial promise to positively impact the economy of Rural America.

COOL Cannot Be Voluntary

COOL benefits live cattle producers in the U.S. cattle supply chain because it enables beef from their animals to compete with the growing tide of lower-cost cattle and beef imported by the packers. However, the multinational packers that U.S. cattle farmers and ranchers rely on to purchase their cattle at competitive prices are the same packers that are importing increasing volumes of lower-cost cattle and lower-cost beef to leverage down domestic cattle prices. This effectively lowers the packers’ overall input costs – the largest of which is their cost of cattle and beef.

Thus, it is overwhelmingly contrary to the financial interests of packers to voluntarily differentiate the beef they produce from domestic cattle from the beef they produce from cheaper imported cattle and the cheaper beef they import as a commodity when they can price all the beef the same to unsuspecting consumers.

Now that it is established that COOL is not in the financial interests of multinational packers, it is important to note that the packer, and the packer alone, possesses the power to decide whether to voluntarily apply origin labels. This is because the packer owns the 15- to 20-month-old cattle, and thus the resulting beef, at the time of slaughter. The cow/calf producer, who represents the largest segment of the U.S. live cattle industry and who directly benefits from the competition that COOL creates, would have sold the cattle to the next segment in the live cattle supply chain 9 to 12 months before the packer purchased them from the cattle feeder, who represents the final segment of the live cattle supply chain. In other words, given the segmented nature of the U.S. live cattle supply chain, the farmers and ranchers who stand to benefit from COOL have no means to cause the downstream packers to affix labels on beef products derived from their cattle because the packers, and not the farmers and ranchers, own the cattle at the time of slaughter.

It is important to note that domestic packers and other COOL opponents want the beef they sell in export markets to be labeled as to their U.S. origin so foreign consumers can distinguish between U.S.-supplied beef and beef supplied by their competitors in Brazil, Canada, Mexico, Australia, Uruguay, Indonesia, New Zealand and elsewhere. The rational for wanting to label beef as a U.S. product in foreign markets is based on their belief that U.S. beef is coveted the world over because of the outstanding reputations U.S. cattle farmers and ranchers have earned for producing the best beef in the world under the best of conditions. The packers want to capitalize on the world markets’ preference for U.S.-produced beef. This position, of course, is totally inconsistent with their official mantra that consumers don’t care where their beef originates and beef is simply beef once it is removed from the animal.

HOW TO REINSTATE COOL FOR BEEF

The reinstatement of COOL would be a relatively straightforward negotiation: 1) The United States should first require in the NAFTA renegotiation that both Canada and Mexico formally withdraw their COOL complaints that are pending before the WTO as well as their WTO-sanctioned authorizations to impose retaliatory tariffs. 2) The United States should then prepare a NAFTA Renegotiation Implementing Act (Proposed Implementing Act) that includes the restoration of the previously repealed COOL statute governing the labeling of beef and pork and a directive ordering the USDA to immediately reestablish beef and pork as covered commodities under the COOL statute.

The Proposed Implementing Act could also be used to address known deficiencies in the COOL statute and regulations, some of which were identified and then exploited by the WTO to disparage COOL. For example, the WTO found that while importers were required to track the origins of all imported cattle, a significant percentage of the beef from those cattle was likely exempt from the labeling requirement. This was because the COOL statute only applied to certain retailers as defined by the Perishable Agricultural Commodities Act of 1930, did not apply to food service establishments such as restaurants, and because the USDA promulgated regulations that inexplicably exempted many meat products simply because they had undergone very minor processing steps.

The solution to this criticism would be to amend the COOL statute in the Proposed Implementing Act to: 1) broaden the definition of retailer to include more marketing outlets for meat; 2) require food service establishments to begin labeling meat as to its origin, or at least require packers to transfer accurate origin information to food service establishments so those establishments can choose to inform their customers as to the origins of the meat they are serving; and, 3) limit the amount of meat excluded from labeling requirement by the present exemption for meat that is considered an ingredient in a processed food item.

Additionally, the WTO alleged that the requirement to label beef and pork as to where the animals from which the meat was derived were born, raised, and slaughtered was not completely accurate because it did not take into account all the countries where the animals had been raised. This would be true in circumstances, e.g., where the animal had been raised for some time in Mexico or Canada prior to being raised for an additional period in the United States. This, of course, can be readily corrected by simply requiring all countries in which the animal had been raised for a certain duration to be included on the label.

Finally, the WTO criticized COOL because it believed the requirement for labeling each production step (i.e., where the animal had been born, raised, and slaughtered) increases the record keeping for upstream producers, the number of labels, and results in more segregation of meat and livestock. This can be resolved in the Proposed Implementing Act by directing packers to rely on whether or not live animals bear official import markings for purposes of making origin declarations, thereby minimizing the amount of record keeping and segregation required to affix accurate labels. The United States currently requires all imported cattle from Mexico and Canada to be permanently marked with a mark of origin and identified with an official ear tag from their originating country.[15] These mandatory markings and ear tags minimize, if not eliminate, the need for additional recordkeeping for the purpose of making origin declarations when the cattle are presented for slaughter. Of course, any animal presented for slaughter that is void of any such import markings and ear tags could be none other than domestic cattle that had been exclusively born and raised in the United States. This simple and accurate methodology for ascertaining the origins of live cattle is known as a presumption of domestic origin.

WHY AMEND THE NAFTA RULE OF ORIGIN FOR BEEF

The specific rule of origin contained in the NAFTA states that the origin of meat is the country where the animal was slaughtered, which results in the requisite change to a harmonized tariff heading denoting beef products from another chapter (in this case from the chapter comprised of live animals).[16] Thus, under the NAFTA, multinational packers such as Brazilian-owned JBS can import live cattle from Canada and Mexico, immediately slaughter the imported cattle in their U.S. plants, and then export the resulting beef anywhere in the world as a “Product of the USA,” or market it domestically also as a “Product of the USA.” This, of course, places U.S. cattle farmers and ranchers at a severe economic disadvantage. It allows multinational packers to steal the good names and reputations of U.S. farmers and ranchers while simultaneously undermining the integrity and viability of the U.S. live cattle supply chain. The NAFTA rule of origin for meat is patently unfair, deceptive, and is seriously threatening the financial viability of U.S. cattle farmers and ranchers.

HOW TO AMEND THE NAFTA RULES OF ORIGIN

The NAFTA rule of origin for beef should be amended to mirror the standard contained in the recently repealed COOL law that accurately identified the country of origin of beef as the country or countries in which the animal from which the meat was derived was born, raised, and slaughtered.

Contact Information:

Bill Bullard, CEO

R-CALF USA

P.O. Box 30715

Billings, MT 59107

billbullard@r-calfusa.com

406-670-8157

[1] COOL for beef was only partially implemented in March 2009 as the initial rules allowed beef that was exclusively of U.S. origin to be labeled as if it originated from multiple countries with a “Product of U.S., Canada, and Mexico” label. See, e.g., 78 Fed. Reg., 31377, col. 3 (May 24, 2013).

[2] Beef: Annual and Cumulative Year-to-date U.S. Trade – All Years and Countries, USDA Economic Research Service (showing the U.S. imported more than 3 billion pounds of beef on a carcass weight equivalent from Australia, Canada, New Zealand, Brazil, Uruguay, Mexico, Nicaragua, Costa Rica, Honduras, Chile, Denmark, Croatia, Japan, Ireland, Netherlands, Belgium, Poland, Thailand, China (Mainland), Lithuania, Philippines, and St. Lucia), available at https://www.ers.usda.gov/data-products/livestock-and-meat-international-trade-data/.

[3] 19 U.S.C. § 1304(a).

[4] See 19 C.F.R. § 134.1(d).

[5] 7 C.F.R. § 65.300(f)(2).

[6] Food Standards and Labeling Policy Book, U.S. Dept. of Agriculture, Food Safety and Inspection service (FSIS), August 2005, at 155-156 (indicating that packers can also apply a “Product of the U.S.” label on imported beef products that are subsequently subjected to minimal processing in U.S. plants), available at https://www.fsis.usda.gov/OPPDE/larc/Policies/Labeling_Policy_Book_082005.pdf.

[7] Cattle: Annual and Cumulative Year-to-date U.S. Trade – All Years and Countries, USDA Economic Research Service (note the U.S. imported 29 head of cattle from Australia in 2008 and 3 head of cattle from Ecuador in 2016), available at https://www.ers.usda.gov/data-products/livestock-and-meat-international-trade-data/.

[8] This is a conservative estimate using a 750-pound carcass weight for each animal slaughtered.

[9] See Under Siege: The U.S. Live Cattle Industry, Bill Bullard, South Dakota Law Review, Vol. 58, Issue 3, 2013, at 587-588, available at https://www.r-calfusa.com/wp-content/uploads/2013/04/130101UnderSiegeSDlAWrEVIEWBillBullard.pdf.

[10] See Under Siege: The U.S. Live Cattle Industry, Bill Bullard, South Dakota Law Review, Vol. 58, Issue 3, 2013, at 587 (stating that researchers have found that the farm level elasticity of demand for slaughter cattle is such that ‘each 1 percent increase in fed cattle numbers would be expected to decrease fed cattle prices by 2 percent.’), available at https://www.r-calfusa.com/wp-content/uploads/2013/04/130101UnderSiegeSDlAWrEVIEWBillBullard.pdf.

[11]USDA-GIPSA Investigative Report on COOL, at 1, 347, available at

https://www.r-calfusa.com/COOL/090205File3COOLstudy.pdf (there is a temporary technical problem with this link but this document can be provided by e-mail upon request).

[12] Food Demand Survey, Oklahoma State University, Vol. 2, Issue 7, November 2014, available at http://agecon.okstate.edu/faculty/publications/4934.pdf.

[13] See Under Siege: The U.S. Live Cattle Industry, Bill Bullard, South Dakota Law Review, Vol. 58, Issue 3, 2013, at 560, available at https://www.r-calfusa.com/wp-content/uploads/2013/04/130101UnderSiegeSDlAWrEVIEWBillBullard.pdf.

[14] The source of these data is the USDA Foreign Agricultural Service’s Global Agricultural Trade System. The author’s compilation of these data along with a chart depicting the 25-year trade deficit with Canada and Mexico are available by e-mail upon request.

[15] See 9 C.F.R. §§ 93.420, 93.427(c)(1), 93.429, and 93.436(b)(3).

[16] See Section B – Specific Rules of Origin, NAFTA Annex 401, available at http://tcc.export.gov/Trade_Agreements/All_Trade_Agreements/NAFTA_Annex_401_1.asp.

Why and How Mandatory COOL Should Be Reinstated Through the NAFTA Renegotiations