US–COOL Retaliation: The WTO's Article 22.6 Arbitration

This paper examines the World Trade Organization's Article 22.6 arbitration report on the dispute over the United States' country of origin labeling (COOL) regulation for imported meat products. At prior phases of the legal process, a WTO Panel and the Appellate Body had sided with Canada and Mexico by finding that the US regulation had negatively affected their exports of livestock— cattle and hogs—to the US market. The arbitrators authorized Canada and Mexico to retaliate by over $1 billion against US exports—the second largest authorized retaliation on record and only the twelfth WTO dispute to reach the stage of an arbitration report. Our legal-economic analysis focuses on several issues in the arbitration report. First, the complainants requested that, to compute the permissible retaliation limit, the arbitrators consider a new formula that would include the effects of domestic price suppression. We present a simple, economics-based model to explain the arbitrators' rejection of this proposal. Second, we provide market context for the $1 billion finding. The arbitrators relied on the "trade effects" formula, which sets the retaliation limit as equivalent to the perceived loss of export revenue from the WTO violation. We argue that this amount was implausibly large, given the conditions in the US market for cattle and hogs during this period. We then describe the challenges facing arbitrators as they construct such estimates, including those likely to have arisen in this dispute.