Global Business 3rd Edition by Mike Peng

Exercise 49

Canada argues that the US country of origin labeling (COOL) requirements discriminate against Canadian imports, and complains to the World Trade Organization (WTO). Why do these two friendly countries fight over the labeling of pigs?
The Closest Trading Relationship in the World Sharing the world's longest undefended border, Canada and the United States are the best of friends. Their bilateral trading relationship is the world's largest, with approximately $600 billion in volume. The two-way traffic that crosses the Ambassador Bridge between Windsor, Ontario, and Detroit, Michigan, equals all US exports to Japan. Approximately 73% of Canada's exports (about a quarter of its GDP) go to its southern neighbor, making it the largest exporter to the United States. Canadian products command approximately 20% of the US import market share. In comparison, China, the second largest exporter to the United States, commands slightly over 10%. Canada is also the largest importer of US products, absorbing about a quarter of US exports (which represent over 60% of Canadian imports). The United States runs a trade deficit with Canada, at $36 billion in 2011. Despite such a close relationship, they fight like "cats and dogs" in trade disputes. Most recently, they have traded blows over pigs.
Is COOL Discriminatory?
In an effort to tighten food labeling, the US Department of Agriculture (USDA) in 2009 implemented the Mandatory Country of Origin Labeling (COOL) legislation, requiring US firms to track and notify customers of the country of origin of meat and other agricultural products at each stage of production, including at the retail level. Unfortunately, such a seemingly innocent move in the name of protecting consumers provoked fierce protests from the Canadian government, hog farmers, and other agricultural producers. In a normal year, Canada would export approximately $3 billion hogs (live pigs) to the United States. In the first three quarters of 2009, such exports suffered from a disastrous 60% drop.
The reason is that many young Canadian pigs are exported to the United States, and they are mixed and raised together with indigenous US pigs for fattening and slaughter. After several months, separating the (immigrant) Canadian pigs from the (native-born) US pigs is challenging and costly. The USDA estimates that it will cost the food industry $2.5 billion to comply with the new rules. When facing such hassles, several major US pork producers, including the top five that account for more than half of all pork sold in the United States (Cargill, Hormel, JBS SA, Seaboard, and Smithfield), simply stopped buying hogs from Canada or gradually phased out such purchases. In addition to damaging livestock exports, processed meat products from Canada, including the legendary Canadian bacon, were also broadly affected.
Starting in May 2009, the Canadian and US governments negotiated. While the United States modified some rules to alleviate Canadian concerns, the negotiations eventually broke down. Canada's frustrated Trade Minister Stockwell Day said in October 2009:
The US requirements are so onerous that they affect the ability of our hog and cattle exporters to compete fairly in the US market. The US law leaves the Canadian government with no choice but to escalate its first formal trade dispute with the Obama administration by pressing charges at the WTO.
In response, US Trade Representative Ron Kirk and Agriculture Secretary Tom Vilsack in a joint statement in October 2009 argued:
We believe that our implementation of COOL provides information to consumers in a manner consistent with our WTO commitments. Countries have agreed since long before the existence of the WTO that country-of-origin labeling is a legitimate policy. It is common for other countries to require that goods be labeled as to their origin.
The Gains (and Losses) from Trade
The COOL pig fight is not the only dispute between Canada and the United States. The first edition of Global Business reported disputes over salmon and softwood lumber. The list of Canada's trade grievances has since grown to include (1) "Buy American" purchasing rules, (2) generous US biofuel tax breaks for paper mills, and (3) the Obama administration's stalling on approval for the Keystone oil pipeline from Alberta to Texas.
While Canada and the United States fight over item by item on their long list of trade grievances, a useful mental exercise is to ask: What if these two friendly countries stopped trading altogether? Normally, scholars studying this intriguing question would have to use simulation methods based on hypothetical data to entertain what would happen if they stopped trading. But because of 9/11, such an unthinkable scenario did take place so we know what could happen. Immediately after the terrorist attacks on September 11, 2001, the United States closed all airports, seaports, and land crossings with Canada (and Mexico). The world's largest bilateral trading relationship literally shut down. When the borders reopened days later, US officials undertook intensive inspections of commercial traffic that, among other things, delayed truck carriers for up to 18 hours. An exhaustive study found that Canadian exports to the United States in the fourth quarter of 2001 were 20% lower than what they would have been in the absence of the border security consequences of 9/11. Even in 2005, when US exports to Canada had resumed their "normal" level, exports from Canada were $12 billion less than they would otherwise have been had 9/11 and the US security responses not occurred. In other words, Canadian exporters will suffer disproportionate damage due to any unilateral tightening of the border by the United States-whether for security reasons in the post-9/11 period or for food safety reasons at present.
The Outcome and the Appeal of the COOL Case
In October 2009, Canada formally complained to the WTO and requested that a dispute resolution panel be composed. In May 2010, a panel consisting of three trade officials-from Switzerland (serving as chairman), Pakistan, and Portugal-was appointed by the WTO's Director-General. In November 2011, the panel issued its report. It determined that the COOL measure was inconsistent with the WTO obligations of the United States, because it provided less favorable treatment to imported Canadian hogs, cattle, and meat products than to similar domestic livestock and products. In March 2012, the United States announced its decision to appeal the panel's decision. As of this writing, the appeal is still in progress. It remains to be seen whether cool heads will prevail when fighting over COOL.
Case Discussion Questions
While 98% of Canada-US trade flows smoothly, trade disputes only affect the remaining 2%. Some argue that the Canadians have overreacted in this case. What do you think?