COOL Repeal Is One Victory in a Larger Fight against Regulatory Protectionism

After years of embarrassing trade litigation and the threat of imminent sanctions by Canada and Mexico, Congress has finally repealed federal country of origin labeling regulations for meat.  Disguised as a way to help consumers, the COOL law was actually designed to protect a small segment of the U.S. cattle industry at the expense of everyone else.  But as this unfortunate episode comes to an end, it’s important to remember that disguised regulatory protectionism remains a major problem in the United States.

In the olden days, uncompetitive U.S. industries seeking protection from import competition would just lobby Congress for higher tariffs.  It works differently than that today in part due to international trade rules but also because there’s a broad consensus among economists and intellectuals that trade barriers harm our economy.  Still, our government is run by politicians who will always be willing to sacrifice the good of the public to help special interests.

Since transparent pleas for protection have gone out of vogue, businesses achieve the same aim by lobbying in favor of public interest regulation that disproportionately disadvantages their competitors.  This dynamic where altruistic motivation meets rent-seeking cronyism can be a powerful driver of public policy.  And when the biggest losers are foreign businesses, there’s very little organized resistance. 

The consequences of disguised regulatory protectionism are the same as imposing tariffs—higher prices and less variety for consumers, less opportunity and lower wages for workers.  While it may be impossible to count up all instances of regulatory protectionism, the pernicious nature of the problem can be seen clearly if we look at a few high-profile examples.

Dolphin-Safe Fraud

American consumers rely on “Dolphin Safe” labels to ensure that their tuna purchases don’t contribute to harmful fishing practices.  By defining what “dolphin safe” means, the federal government ostensibly ensures that the label is reliable.  In reality, the regulations benefit three major U.S. tuna companies by making it nearly impossible for their Mexican competitors to sell tuna in the United States. 

Hidden within the regulations is a double standard that gives those U.S. companies access to the label without having to meet stringent reporting or verification requirements.  It also prohibits the Mexican tuna companies from using any label that makes claims about how their fishing methods impact dolphins.  The law actually makes it illegal to provide consumers with information that some special interests don’t want them to have.

Big Tobacco’s Favorite Anti-Smoking Law

The 2009 Family Smoking Prevention and Tobacco Control Act greatly expanded federal control over people who smoke.  One of the law’s key features was a ban on flavored cigarettes, which anti-smoking activists claimed were designed to entice “children” to take up smoking. 

At the time the law went into effect, there were in fact only two kinds of flavored cigarettes on the market—menthols, which are predominantly made in the United States by American companies, and clove cigarettes, which come from Indonesia.  The law exempted menthols from the ban, so that the only cigarettes taken off the market were foreign.  The flavored cigarette ban actually benefited the very same tobacco companies that campaigners constantly malign by cementing their dominance of the flavored cigarette market.

To get a sense of just how senseless the menthol exception is from a tobacco control standpoint, it’s worth noting that 30% of American smokers regularly smoke menthols, while cloves are a niche product with miniscule market share.  Every other country with a ban on flavored cigarettes has included menthols.

Both of these protectionist regulations have been the subject of international disputes at the World Trade Organization.  In fact, just like with COOL, the United States lost these cases.  The threat of retaliation from Canada and Mexico prompted Congress to fix the worst parts of its court-of-origin labeling law, but the prospects are not as bright for the others.  Indonesia lacked the economic clout to impose sanctions on the United States, so when Washington refused to comply, Indonesia agreed to “settle” the case by dropping its complaint in exchange for nothing.  The WTO will soon determine the level of sanctions Mexico can impose in retaliation since the United States refused to comply in the tuna case.

Crony Catfish

Perhaps the most obvious example of disguised protectionism in recent years has been the process of moving catfish inspection from the Food and Drug Administration to the U.S. Department of Agriculture.  Why does this matter?  Because the USDA’s inspection service would place a moratorium on catfish imports until it certifies individual farming facilities.  That inspection can take years.  Consumers would face drastically higher prices.  And there’s no evidence that this new catfish inspection regime will improve the safety of catfish, which are not especially unsafe. 

Aside from the lack of scientific justification, what makes the catfish regulations a particularly obvious example of protectionist regulation is that its most ardent supporters are politicians from states with lots of catfish farms.  Those catfish farmers don’t like having to share the U.S. market with their Vietnamese and Chinese counterparts, and they’re willing to undergo more rigorous testing of their own facilities if it keeps out the competition. 

The good news is that the Obama Administration may have solved the catfish problem by agreeing to allow a grace period for Vietnamese catfish as part of the as part of the Trans-Pacific Partnership negotiations.  The grace period will let catfish imports continue for 18 months while the inspections take place.  This significantly reduces the possibility of a “catfish cliff” that would’ve caused a dramatic disruption for U.S. consumers and retailers.  It may also prevent the United States from having to defend another ridiculous regulation in a WTO dispute settlement case, which it would likely lose.

Finding a Solution

Unfortunately, these examples show how political forces are naturally aligned to disadvantage consumers.  When companies are asking Congress to regulate their own industry, you can be certain the result will not benefit consumers.  Trade negotiations and dispute settlement can surely help eliminate some forms of regulatory protectionism, but the results are mixed. 

Regulatory protectionism will persist until the public develops a greater skepticism for regulatory solutions to problems better dealt with in a free market.  Labeling laws impose a monopoly on definitions where competition among different labels would be more beneficial.  Paternalistic product bans are more likely to force consumers to expend extra energy to get what they want than to alter behavior.  And consumers are in a much better position than governments to respond reasonably to potential food safety scares.

As Sallie James and I wrote in our 2012 Cato Policy Analysis about the threat of regulatory protectionism:

Policymakers, commentators, and the public must be more willing to look past altruistic defenses of regulatory proposals to find the true winners and losers. When the winner is not consumers, then it must serve other ends; when the end is consumers, the regulation is probably unnecessary anyway.