How Not to Settle Trade Disputes

Last year, the United States lost three cases at the WTO in which domestic regulations were challenged by our trading partners as disguised protectionism.  In each of the three cases—a ban on clove cigarettes, dolphin-safe labels for tuna, and country-of-origin labels for meat—the WTO found that the challenged regulation impacted the competitiveness of foreign goods significantly more than domestic like products and that this discrimination did not further the goals of the regulation.  The United States must amend each of these regulations in the next few months or the complaining governments will be able to pursue WTO-authorized trade sanctions against us. 

The offending regulations don’t have to be repealed to be made WTO-compliant, but the United States must do at least one of three things for each of them:

  1. Diminish the negative impact on foreign products,
  2. Increase the negative impact on domestic products, or
  3. Better validate the different treatment.

In  the first attempt at reform, the Administration chose Option 3.  Existing regulations require that meat sold in grocery stores carry country-of-origin labels that differ based on the national origin of the animal before it was slaughtered in the United States.  Last year, the WTO determined that tracking and recording requirements in the law made it more costly for U.S. slaughterhouses to purchase foreign-raised cattle, and that the burden was not proportional to the amount of origin-related information ultimately passed on to consumers.  The Department of Agriculture proposed in early March to “comply” with the WTO ruling by increasing the amount of information the labels would carry.  The reforms would require labels on meat sold in grocery stores to say specifically where the animal was born, where it was raised, and where it was slaughtered.

It’s vitally important to recognize that this new regulation will do absolutely nothing to improve market access for foreign cattle or to reduce the discriminatory nature of the regulation.  What it will do is make the discrimination somewhat less obviously protectionist.  It will not reduce that protectionism, settle the dispute, or in any way liberalize trade.  On the contrary, the Administration took the opportunity to further privilege the special interests behind the original law.

For the second and most recent attempt at reform—this time for the dolphin-safe label requirements—the administration chose Option 2 (Increase the negative impact on domestic products).  Packaged tuna sold in the United States can only be labeled dolphin-safe if it is caught according to specific guidelines mandated by law.  These guidelines are different depending on where the tuna is caught and are particularly onerous for fisheries operating off the coast of Mexico.  The WTO found that the U.S. regulation’s lax standards for tuna caught in the rest of ocean did not further the goal of protecting dolphins but rather demonstrated the law’s protectionist nature.

The new regulation continues to single out the Eastern Tropical Pacific for special treatment but also makes it slightly more difficult for fisheries operating elsewhere to earn a dolphin-safe label.  The Mexican government has yet to respond to the reform proposal.  The Mexican tuna industry, however, has unsurprisingly voiced its continued opposition.  The reform is definitely not as robust as it could have been—and quite likely not enough to make the regulation sufficiently even-handed—but at least it does something to diminish the discrimination.

The third restriction the United States must reform is the ban on clove cigarettes.  In 2009 Congress passed a new tobacco control law, which gave the FDA the power to regulate tobacco products and banned flavored cigarettes—except for menthols.  There are basically two kinds of flavored cigarettes.  One is clove cigarettes made almost exclusively in Indonesia and smoked by less than 1% of American smokers.  The other is menthol cigarettes made almost exclusively in the United States and smoked by around 25% of American smokers.  The ostensible purpose of the ban was to discourage youth smoking by removing flavored cigarettes from the market, but the judges at the WTO couldn’t figure out how that goal was furthered by exempting the most popular kind of flavored cigarette from the ban.

In the cigarette case, none of the compliance options seems likely.  Option 1 would see the U.S. ending the ban on clove cigarettes while Option 2 would see the U.S. banning menthols.  Perhaps Option 3 could be pursued if the FDA can conjure up a study showing that kids who would have taken up smoking because they liked cloves will now turn away from tobacco altogether instead of just smoking menthols or regular cigarettes.  Options 1 and 2 face significant political hurdles.  Option 3 faces significant reality hurdles.

In each of these regulations, the protectionist aspect frustrates the goals of the activists initialing supporting them.  How did these laws come to be passed in the first place if they do such a bad job meeting their own goals? Sallie James and I try to answer that question in a brand new Cato Policy Analysis on regulatory protectionism.  We also propose a number of legal and political tools that can help prevent progressive causes from unwittingly generating unnecessary trade barriers.  You can come hear about these and other unfortunate examples and, if you are so inclined, critique our proposals at a forum we’re hosting at Cato this Thursday.