Uncool Rules: Second Thoughts on Mandatory Country of Origin Labeling

  • Downloads
Share

Introduction

The 2002 farm bill included a provision that mandates country oforigin labeling (COOL) for beef and certain other perishableproducts previously exempt from such requirements. Implementingregulations are scheduled to become effective on September 30,2004. However, late last year the House of Representatives passed amoratorium on implementing mandatory COOL for all products exceptfish until September 2006. The Senate is scheduled to begin debateon this bill on January 20.

Advocates of country of origin labeling are pointing to therecent case of mad cow disease as evidence that such rules shouldbe mandatory. But COOL has nothing to do with food safety. Byattempting to link the COOL issue to a health concern, particularlyone that generates hysteria and overreaction, advocates are hopingto scare up support for a complicated, controversial, and costlyidea.

Proponents argue that mandatory COOL is desired by bothproducers and consumers. A "made-in-the-USA" label, they contend,would help identify U.S. products for consumers who are otherwiseunsure and who may be willing to pay a premium to know they arebuying American food.

That sounds fair enough. But there's more to the story. If, infact, consumers are overwhelmingly in favor of country of originlabeling, then why haven't domestic producers voluntarily obliged?After all, if there is demand for it, why does there need to be alaw mandating it?

Proponents argue that the costs of implementing COOL are small,yet none of them has been willing to implement it voluntarily.Instead, they have been expending considerable time and money toforce those requirements further down the supply chain. Processors,wholesalers, and retailers-firms that buy and sell both domesticand imported products-would incur the costs of segregatinginventory, keeping records, constructing and maintaining compliancesystems, and often physically labeling products. Burdensomecompliance costs may induce those firms to limit their sources, insome cases to only domestic suppliers. In this regard, there isquestion as to the WTO legitimacy of this legislation. If productsof foreign origin are treated differently from U.S. products as aresult of domestic regulations, the principle of "nationaltreatment," a touchstone of the rules-based trading system, couldbe found to be violated.

Saddling others with what should be the marketing costs ofdomestic producers and reducing import competition are ultimatelywhat COOL is all about.

Current Country of Origin LabelingRequirements

For more than 70 years, federal law has required most itemsimported into the United States-including food items-to bear aconspicuous label identifying their country of origin to theultimate purchaser.[1] U.S. Customs and Border Protection (formerly theU.S. Customs Service) defines "ultimate purchaser" as the lastperson in the United States who receives the article in the form inwhich it was imported. It defines "country of origin" as thecountry of manufacture, production, or growth of any article offoreign origin entering the United States.

The law exempts from labeling requirements articles that wouldbe "economically prohibitive" to label.[2] Among those items are livestock,vegetables, fruits, nuts, live or dead animals, and fish.[3] Although thoseproducts are exempt from country of origin labeling requirements,their "immediate containers" are required to bear country of originlabels.[4] Sowhile the cartons containing oranges from Brazil or tomatoes fromMexico must be labeled, produce sold individually from thosecartons is exempted.

Expanding Country of Origin LabelingRequirements

In 2002 Congress passed the Farm Security and Rural InvestmentAct (the Farm Bill of 2002), which included language making countryof origin labeling mandatory for certain products that previouslyhad been exempt. The law requires retailers to notify theircustomers of the country of origin of covered commodities beginningSeptember 30, 2004. Covered commodities include muscle cuts of beef(including veal), lamb, and pork; ground beef, ground lamb, andground pork; farm-raised fish and shellfish; wild fish andshellfish; perishable agricultural commodities (fresh and frozenfruits and vegetables); and peanuts.[5]In accordance with the law, the U.S. Department of Agricultureissued proposed regulations for implementing this legislation,which were published in the Federal Register on October30, 2003.

In addition to requiring certain "retailers"[6] to notify their customers ofthe country of origin of covered commodities, the law stipulateshow certain products should be labeled if the various stages ofproduction are completed in more than one country or if the finalproduct includes covered commodities from more than one country(e.g., frozen mixed vegetables with carrots from the United Statesand peas from Canada). It also stipulates exemptions for certainprocessed food items derived from the covered commodities.[7]

Although covered meat products imported in consumer-readypackaging for retail are already required to bear a country oforigin label, the new rules for beef, pork, and lamb would requiregreater specificity with respect to the various stages ofproduction. Currently, if an imported cow, pig, or sheep isdestined for a U.S. processor where it will undergo "substantialtransformation" (e.g., the cow is slaughtered and its meat sold assteaks), that processor is considered the ultimate purchaser andU.S. origin is conferred upon the resulting value-added products.Under the new rule, however, such processing in the United Stateswill no longer confer U.S. origin to the resulting meat products ifthey are sold as covered commodities. Specific criteria must be metfor a covered commodity to bear a U.S.-origin label.

Covered beef must be derived exclusively from an animal that wasborn, raised, and slaughtered in the United States (including ananimal born and raised in Alaska or Hawaii and transported for aperiod not to exceed 60 days through Canada to the United Statesand slaughtered in the United States). Covered lamb and pork mustbe derived exclusively from an animal that was born, raised, andslaughtered in the United States. If any of the three stages ofproduction (born, raised, and slaughtered) occurred outside theUnited States, the label must identify where each of the threestages occurred.

Covered farm-raised fish and shellfish must be exclusively fishor shellfish hatched, raised, harvested, and processed in theUnited States, and covered wild fish and shellfish must beexclusively fish or shellfish either harvested in the waters of theUnited States or by a U.S.-flagged vessel and processed in theUnited States or aboard a U.S.-flagged vessel. If any of thesestages occurs outside the United States, the label must identifywhere each stage occurs.

Covered fresh and frozen fruits and vegetables and coveredpeanuts must be exclusively perishable agricultural commodities orpeanuts grown in the United States. If a fruit or vegetable productis comprised of covered commodities from multiple countries, thelabel must list the countries of origin for each ingredientalphabetically.

Published with the proposed regulations was an extensiveanalysis of the costs and benefits to directly affected companies.USDA estimates the costs of first-year implementation at somewherebetween $582 million and $3.9 billion.[8] Largely in response to thatanalysis, in December 2003 the House of Representatives voted toimpose a two-year moratorium on implementation of the mandatorycountry of origin labeling requirements stipulated in the Farm Billof 2002. The Consolidated Appropriations bill for 2004, whichcontains this moratorium language, will be debated in the Senatebeginning January 20, 2004.

COOL Is Not a Health Safety Measure

Included in USDA's proposed regulations on COOL are thefollowing description and disclaimer:

The intent of this law is to provide consumers with additionalinformation on which to base their purchasing decisions. It is nota food safety or animal health measure. COOL is a retail labelingprogram and as such does not address food safety or animal healthconcerns. Food products, both imported and domestic, must meet thefood safety standards of FSIS [Food Safety and Inspection Service]and/or the Food and Drug Administration (FDA), as applicable. Inaddition, all food products must also meet FDA labeling standardsas well as other FDA regulations and standards.[9]

But facts rarely stand in the way of a political agenda. Therecent case of bovine spongiform encephalopathy, otherwise known asmad cow disease, in Washington State has inspired opportunisticcalls for yet another layer of superfluous regulation of the foodsupply chain. Capitalizing on these fears, Sen. Tom Daschle (D-SD),one of COOL's most ardent proponents, offered the followingstatement on January 7, 2004:

In light of the Mad Cow incident, Senator Tom Daschle (D-SD)today called for the USDA to immediately implement a program thatwould essentially expand the "Made in the USA" labeling campaign tocover meat and produce. . . . The Canadian-born Holstein inWashington state that was diagnosed with Mad cow in December, couldnot have been labeled a U.S. product.[10]

That statement is half-baked. It is true that if COOL wererequired and this particular cow had been slaughtered in the UnitedStates for sale as a covered commodity in a qualifying retailestablishment, the packages containing its meat would have beenlabeled "born in Canada, raised in the United States, slaughteredin the United States." However, under the COOL provisions, thereare no guarantees that consumers would ever know this lineage.

If the meat were sold in a butcher shop-as opposed to a grocerystore-then no country of origin labeling would be required.Butchers are not covered by the definition of "retailer" asestablished by the legislation. If the meat were sold as a steak ata restaurant, no country of origin information would be requiredeither. Food service establishments are exempt, too. If the meatwere further processed as cold cuts, or sold as beef Wellington, itwould bear no country of origin label. Further-processed meatproducts also are exempt.

Furthermore, if a package of steak were labeled "born in theU.S., raised in the U.S., and slaughtered in the U.S.," the animalcould have lived in Canada for a period of 60 days without theconsumer knowing that. Cattle in transit from Alaska through Canadato the continental United States do not lose their U.S. originqualification, if the transit period does not exceed 60 days. Butduring that transit, the cow might eat Canadian feed, or walk onCanadian soil, or breathe Canadian air.

In addition, the COOL legislation doesn't apply at all tochicken, which is associated with a variety of bacterialillnesses.

Rep. Mary Bono (R-CA), who introduced mandatory COOL as anamendment to the House version of what became the Farm Bill of2002, relies on tactics similar to Senator Dachle's. She said, "Ata time when people have died or been taken ill due to the hepatitisA outbreak in Pennsylvania linked to imported produce, Congressshould lead the way in ensuring our health and safety rather thantaking actions to weaken these standards."[11] Of course, the hepatitis caseswere linked to certain green onions sold at a Mexican restaurant,an establishment that is exempt from the requirements of herlegislation.

The Food Safety and Inspection Service, an agency of USDA, istasked with ensuring that imported meat is just as safe asdomestically produced meat. In testimony concerning country oforigin labeling before the House Committee on Agriculture inSeptember 2000, then deputy under secretary of food safety, CarenWilcox, offered:

FSIS ensures that imported meat is every bit as safe asdomestically produced meat. FSIS requires imported meat to beinspected under a system that FSIS has determined-through arigorous and comprehensive process-to be equivalent to the U.S.system. Then, upon arrival at a U.S. port of entry, FSIS reinspectsall meat shipments. Almost all imported products, about 85 percent,then proceed to a U.S. plant for further processing intovalue-added products-all under FSIS inspection. So, approximately85 percent of imported product undergoes inspection threetimes.[12]

How Important Is COOL to Consumers?

Proponents of mandatory COOL argue that consumers overwhelminglysupport country of origin labeling. Without labeling, the argumentgoes, consumers are unable to make informed choices betweendomestic and imported products. In a letter to Congress, theConsumer Federation of America wrote that "many consumers may wishto purchase produce grown and processed in the United States ormeat from animals born, raised and processed here."[13]

Americans for Country of Origin Labeling, a group comprised ofagricultural trade associations, has on its website a documenttitled "Top Ten Reasons Why U.S. Consumers Deserve SwiftImplementation of Country of Origin Labeling." It states:"Overwhelmingly, consumers want to know where their food comesfrom. Recent polls found nearly four of every five consumerssupport mandatory country of origin labeling of fresh produce, and86 percent support country of origin labeling for meats."[14]

Bolstering this argument are academic studies that have foundconsumers willing to pay a premium for country of origin labelingof beef. One study reported that 73 percent of consumers in Denverand Chicago were willing to pay an 11 percent premium for steak anda 24 percent premium for hamburger that bears the country of originlabel.[15]

If those results are valid, why haven't U.S. beef producers andretailers instituted labeling and increased prices? For the pastthree years, USDA has had a voluntary program under which supplierslabel their meat products with declarations of U.S. origin.However, no suppliers have participated in the program.[16] In contrast,there has been a high level of participation by food suppliers inthe USDA's organic food labeling program, which covers products forwhich consumers have demonstrated a willingness to paypremiums.[17]

The same study that found consumers willing to pay more forU.S-labeled beef also showed consumers ranking the importance ofcountry of origin information 9th out of 17 factors.[18] Food safetyand freshness were deemed the most important,[19] which might help explainattempts at linking COOL with various food-borne illnesses.

Suppliers are unsure of the benefits of labeling,notwithstanding what some surveys purport to demonstrate. Whenfaced with actual purchasing decisions at grocery stores, consumersmight respond differently than they did in a hypothetical surveysituation. Real budgetary constraints become more apparent. Demandfor products of mixed origin-rather than of 100 percent U.S.origin-might be deemed a reasonable alternative. Substituteproducts, like chicken, might be more appealing. Visual comparisonsmight lead to buying decisions that were different from thosereported in the survey. Although consumers are inclined to favorknowing the country of origin of their food to the alternative ofnot knowing, the evidence suggests that that information is arelatively unimportant determinant of the purchasing decision.

If consumers preferred American beef or tomatoes to importedalternatives, they would be willing to pay higher prices forproducts they know are of U.S. origin. The allure of additionalrevenues would induce producers, intermediaries, and retailers toconvey that information voluntarily, provided that the additionalrevenue exceeded the additional cost of making country of origininformation available. The fact that firms that have a profitincentive to know what consumers prefer are unwilling to providecountry of origin information voluntarily suggests that anyincreased revenues would be outstripped by increased costs.

Why, then, would firms that are unwilling to provide thisinformation voluntarily support a law that would require them to doso? The reason is that the costs of labeling would be distributedvery differently under mandatory COOL than under a voluntarysystem-and in a way that would benefit U.S. producers. First,mandatory COOL would require foreign producers to bear labelingcosts; under a voluntary system, only U.S.-origin goods would belabeled. Second, mandatory labeling shifts much of the cost burdenonto processors, distributors, and retailers, particularly thosethat purchase and sell foreign commodities. Those firms willrequire more elaborate compliance management systems. Thus,mandatory COOL boils down to a scheme by U.S. food producers tomake imports less attractive and foist the tab for a "made in theU.S." marketing program on its competition and customers.

Projected Costs of Mandatory COOL

Proponents of COOL argue that the cost of implementing mandatorylabeling is immaterial. Americans for Country of Origin Labelingclaims it costs "virtually nothing." The group cites a FloridaDepartment of Agriculture study that concludes it costssupermarkets one to two man-hours per store per week and statesthat "the costs for producers and those who distribute or shipthese products are minimal."[20] As a reality check on those claims,consider the failure of U.S. firms to engage in voluntary labeling.If the cost is immaterial and the benefits are significant, whydoes labeling have to be imposed by legislative mandate?

Of the three broad groups of firms in the supply chain(producers, intermediaries, and retailers),[21] retailers will bear theheaviest burden, incurring projected first-year costs of between$49,581 and $396,089 per firm. Estimated first-year costs forintermediaries range from $4,048 to $50,086 per firm. Producerswill incur only an estimated first-year cost of $180 to $443 perfirm.[22]

The projected cost differences are intuitive. Producersgenerally have no suppliers. They know with certainty that theircommodities are domestic, and they may have to convey thisinformation to only a single intermediary. Their compliance systemscan be rudimentary. Firms further down the food supply chain, likeretailers, have more suppliers, more customers, and moretransactions, and they are more likely to buy and sell importedcommodities. This portends the need for elaborate inventorymanagement and compliance systems. Is it any wonder that producersfavor and retailers oppose mandatory COOL?

Still, the estimated costs are for only the first year ofimplementation. As firms will have to find ways to recover thosecosts, they will do so by charging higher prices to their customersor by offering lower prices for their inputs. In this sense,producers may ultimately pay for their labeling by realizingsmaller revenues.

Of the six broad industry groups of commodities covered by theseregulations (beef, pork, lamb, fish, fruits and vegetables, andpeanuts), firms operating in the beef industry, throughout thesupply chain, are projected to incur the largest aggregate costs.Those costs could reach as high as $1.7 billion, or 43 percent ofcosts for all industry groups combined.[23]

One explanation for the high costs projected for the beefindustry is that the industry is highly integrated in NorthAmerica. Cattle and hogs change hands and cross the border betweennorthern states and Canada frequently. When livestock is ultimatelybrought to slaughter, processors tend to segregate the animals byattributes such as weight and grade. A system that would requirethem to further segregate animals that were born in Canada or theUnited States, and raised in Canada or the United States, wouldeffectively quadruple the amount of physical segregation, tagging,and documenting that must take place. It also portends the need forquadruple the number of production runs at the processingstage.

To avoid significant changes to the processing stage andextensive record-keeping burdens, the optimal response of firms maybe to stop importing entirely. That is true for firms throughoutthe supply chain dealing with all covered commodities. The moresources used, the more likely some sort of segregation andverification system will be required. And since the cost ofcompliance is going to be lower for firms that deal exclusivelywith domestic products, demand for imports could dropsignificantly.

This outcome could lead to charges in the WTO that mandatoryCOOL regulations deny national treatment to U.S. trade partners.Given the number of high-profile WTO disputes in which the UnitedStates is a defendant-several of which have resulted in adverserulings that have yet to be implemented-a new dispute would beunwelcome. That is particularly true in light of U.S. concernsabout the European Union's labeling regulations for geneticallymodified organisms-a worthy position that is weakened by thislegislation.

Conclusion

Proponents of mandatory COOL are now resorting to scare tactics,exploiting recent concerns about mad cow disease to advance theiragenda. But the fact is that such labeling is neither a substitutefor nor a complement to the extensive network of U.S. food safetyregulations already in place. Any of the covered commodities canmake it to consumers' mouths without their knowledge of country oforigin by way of restaurants, butcher shops, fish markets, orvegetable stands-all exempt retailers under this law. Suchcommodities can find their way onto consumers' dining tables ascold cuts, fish sticks, frozen chicken vegetable medley, or beefWellington as processed food items, exempt under this law. Alldomestic and imported food items are subject to a rigorous set offood safety standards and inspections. Country of origin labelingwould not add any additional safety screening.

Although consumers may be interested in having country of origininformation, it is a relatively unimportant determinant of thepurchasing decision. If it were important, consumers would bewilling to pay higher prices for products labeled with thatinformation, and producers would supply that informationvoluntarily if the increase in revenues exceeded the increase inthe costs of providing it. That such information is not providedvoluntarily indicates that any preference for commodities of U.S.origin is marginal.

Mandatory labeling is nothing more than a scheme to pass on whatshould be the marketing costs of U.S. producers to other firms inthe supply chain. It is also intended to drive up the costs andreduce the revenues of businesses that produce, process,distribute, and retail imports. In this regard, it might violateimportant principles of the rules-based trading system.

The House-passed temporary moratorium on implementing COOL is agood start, and the Senate should follow suit. Eventually, though,Congress needs to repeal this ill-advised measure and put COOL onice permanently.


[1] 19U.S.C. § 1304 (a).

[2] 19U.S.C. § 1304 (a)(3)(C).

[3] 19U.S.C. § 1304 (a)(3)(J).

[4] 19U.S.C. § 1304 (b).

[5] Pub. L.No. 107-171, 116 Stat. 134, Subtitle D, § 281 (2)(A)(2002).

[6] The lawdefines retailers as they are defined under the PerishableAgricultural Commodities Act (PACA). PACA defines a retailer as"any person who is a dealer engaged in the business of selling anyperishable agricultural commodity solely at retail when the invoicecost of all purchases of produce exceeds $230,000 during a calendaryear." This definition excludes butcher shops, fish markets, andsmall grocery stores that either sell fruits and vegetables at alevel below this dollar volume threshold or do not sell any fruitsand vegetables at all. Food service establishments (restaurants)also are exempt.

[7] Pub. L.No. 107-171, 116 Stat. 134, Subtitle D, § 281 (2)(B) (2002).The law excludes items otherwise considered covered commoditiesthat are ingredients in a processed food item. USDA's proposedregulations define the term as "ingredients in a processed fooditem."

[8] Department of Agriculture (USDA), Agricultural Marketing Service,"Mandatory Country of Origin Labeling of Beef, Lamb, Pork, Fish,Perishable Agricultural Commodities, and Peanuts; Proposed Rule,"Federal Register, October 30, 2003, p. 61953 (to becodified at 7 C.F.R. pt. 60).

[9] Ibid.,p. 61945.

[10] TomDaschle, "Daschle Calls on USDA to Immediately ImplementCountry-of-Origin Labeling," news release, January 7, 2004.

[11] MaryBono, "Bono Criticized Deal to Kill Mandatory Country-of-OriginLabeling of Fresh Produce," news release, November 25, 2003.

[12] CarenA. Wilcox, Statement before the Subcommittee on Livestock andHorticulture of the House Committee on Agriculture, September 26,2000.

[13]Arthur Jaeger, Consumer Federation of America; Patty Lovera, PublicCitizen; and Linda Golodner, National Consumers League; "Dear Housemember" letter, February 1, 2002.

[14]"Fresh Trends 2002." The Packer, January 2002.

[15] WendyUmberger, Dillon M. Feuz, and Bethany M. Sitz, "Country of Originof Beef Products: U.S. Consumers' Perceptions," Journal of FoodDistribution Research, March 2003, p. 1.

[16] USDA,p. 61956.

[17]Ibid.

[18]Umberger, Feuz, and Sitz, p. 18.

[19]Ibid.

[20]Americans for Country of Origin Labeling, "The Reasons We NeedMandatory Country of Origin Labeling of Fruit and Vegetables,"http://www.americansforlabeling.org/resources/reasons.htm.Florida has had a mandatory country of origin program for fruitsand vegetables in place since 1979.

[21]Intermediaries include firms such as handlers, importers,processors, and wholesalers.

[22] USDA,p. 61956.

[23] Ibid., p. 61964.