WTO Case Law on Product Standards and Labeling: New Cases, New Challenges

Date November 17, 2011
Speaker Andrew W. SHOYER(Partner, Sidley Austin LLP)
Moderator KAZEKI Jun(Director, Office for WTO Compliance and Dispute Settlement, Multilateral Trade System Department, Trade Policy Bureau, METI)


Andrew W. SHOYER's PhotoAndrew W. SHOYER

I will be talking about a few new cases that came before the WTO in order to explain how the rules of the organization might affect product standards, including eco-labeling.

Eco-labeling is not a new subject. There has been a focus on this for many years in Japan, and the Trade and Environment Committee of the WTO has been debating this for years. In the Doha Declaration, paragraph 32 (iii) deals directly with this issue as well. New excitement has been created regarding this topic lately due to the two new cases I will be discussing today. These two cases have addressed the questions of: 1) When are product standards/labels discriminatory? and 2) When are they "more trade-restrictive than necessary"? The phrase "more trade-restrictive than necessary" as part of Article 2.2 of the Agreement on Technical Barriers to Trade (TBT) has potentially sweeping implications, and no cases have arisen related to this phrasing until now. The cases that I will be discussing come out of panels, and they both take different approaches, so it is likely that the differences in approach will have to be resolved by the Appellate Body during appeals in 2012.

As a means of introducing the topic of labeling practices, consider the Eco Mark or Eco-Leaf, the two dominant cases of labeling standards in Japan. The Eco Mark is awarded to products by the Japan Environment Association if the product's life cycle meets ISO standards 14020 and 14024. The use of this label is subject to a contract with the Japan Environment Association. The Eco-Leaf is awarded by an industry organization that also implements ISO standards, the Japan Environmental Management Association for Industry. These are voluntary, not government-imposed labels.

On the other hand, the first case I will present today is related to a label created by government for use by the fisheries industry. The U.S. government created a label to mark dolphin-safe tuna. Yet no one uses it! The reason for this is that a number of environmental organizations rejected the label and entered into a campaign to tell companies not to use it. These organizations rejected the idea that the label helped to protect dolphins, saying that it did not communicate that tuna was caught in a manner that was truly dolphin-safe. The NGOs accused the government of not taking a strong enough stance toward helping dolphins, and now none of the major companies that sell canned tuna uses the government label.

I would like to briefly explain TBT Agreement terminology. There are three important terms to be aware of: 1) Technical regulation—for which compliance is mandatory; 2) Standard—for which compliance is not mandatory; and 3) Conformity Assessment Procedure—the process by which compliance with technical regulations or standards is determined. A technical regulation is defined as a "document which lays down product characteristics or their related processes and production methods, including administrative provisions, with which compliance is mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking, or labeling requirements that apply to a product, process, or production method." This definition is specific to the WTO. Many of the terms used regarding labeling come from the ISO which calls regulations "binding legislative rules adopted by authority."

One of the main questions arising from the WTO definition of regulation has to do with the phrase "processes and production methods." In trade law, a distinction is usually made between production methods that do and do not affect product characteristics. When we talk about climate change regulation, for example, we are often talking about regulations of non-product-related process or production methods (PPMs). Important questions for international trade law are: which trade rules discipline non-product-related PPMs, and if it matters that the PPM is related to a label.

The two principal types of disciplines in the TBT Agreement relating to technical regulations are found in Articles 2.1 and 2.2. I used to believe that Article 2.1 was largely a mere repetition of the most-favored nation and national treatment obligations from the General Agreement on Tariffs and Trade (GATT). As we will discuss, panels have understood it to be somewhat different. On the other hand, Article 2.2 contains a clause that we do not see anywhere else except in the case law that has emerged under Article XX of the GATT: "Technical regulations shall not be more trade-restrictive than necessary to fulfill a legitimate objective." The cases that I will be presenting offer the first opportunity we have ever had to understand this clause.

The three cases I will present are U.S.—Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products (DS381) ("Tuna II") (September 2011), U.S.—Measures Affecting the Production and Sale of Clove Cigarettes (DS406) ("Clove Cigarettes") (September 2011), and (Pending) U.S.—Certain Country of Origin Labeling (COOL) Requirements (DS384/386) ("COOL"). When explaining these cases, I want to address primarily the following five questions: 1) Is the measure at issue a technical regulation? 2) Are products involved "like" products? 3) Were such products accorded "no less favorable" treatment? 4) Is the objective legitimate? and 5) Is the measure more trade-related than necessary in order to pursue such objectives?

I will start with Tuna II.

1) Is the measure at issue a technical regulation?
Mexico was challenging a court ruling from the case Earth Island Institute vs. Hogarth, 494 F.3d 757 (9th Cir. 2007). The court's ruling had negated the effectiveness of the U.S. government standard, which led to Mexican tuna imports being regulated in a way that the Mexican government did not like. The panel looked at what the United States was doing, and said that it considered compliance with tuna-safe labeling mandatory, given that the document in which labels are defined has the effect of regulating in a legally-binding or compulsory manner the regulation at issue. Although the use of labels is not compulsory, the panel found that since the labels are defined as standards in law and protected by the U.S. government, they represent an issue of mandatory compliance. This was an unexpected outcome. It was interesting that the panel considered an amicus brief and one of the panelists wrote a dissenting opinion.

2) Are products involved "like" products?
When looking at "likeness," panels normally consider the four criteria of: 1) physical properties, 2) end uses, 3) consumer perception, and 4) tariff schedules. One issue the panel considered was whether consumers really favored dolphin-free tuna. In the end, it decided that Mexican tuna was the same as U.S. tuna.

3) Were such products accorded "no less favorable" treatment?
The panel then considered whether Mexican tuna accorded no less favorable treatment, and found that this was not the case. The panel felt that any discrepancy in the relative situation of U.S. and Mexican tuna was not a result of the measures in place but a result of Mexico's own choice—in other words, the practice was found to not be discriminatory as it was ruled that the Mexican fishermen were choosing not to catch tuna in a way that would provide the economic advantage of dolphin-safe labeling in the U.S. market.

4) Is the objective legitimate?
The U.S. claimed it had two objectives: 1) protecting the lives and health of dolphins; and 2) protecting against the deception of consumers. The panel felt these were legitimate objectives. We were not able to learn anything about which kinds of objectives may not be considered as legitimate.

5) Is the measure more trade-related than necessary in order to pursue such objectives?
The panel looked at the degree of trade restrictiveness, measured it against the amount necessary to meet the stated objectives, and examined alternative methods. On this topic, the complainant bears the burden of making these arguments, and Mexico had a very good argument. The label that is used says that tuna is dolphin-safe if no dolphin is set upon during fishing. As Mexico pointed out, no one is required to prove that no dolphins were hurt as long as other fishing methods are used. The panel agreed that the focus of the labeling was on a single method of fishing, not dolphin mortality. Second, Mexico proposed a good alternative, the Agreement on the International Dolphin Conservation Program (AIDCP) dolphin-safe label. The panel supported this alternative. So the United States won on Article 2.1, but lost on Article 2.2.

I will now move on to the clove cigarettes case.

What was the measure at issue? The United States had passed a law in 2009 that prohibited the production or sale of cigarettes that contained certain additives, and that included cloves, but permits the production and sale of others, including menthol.

I will go through the same questions.

1) Is the measure at issue a technical regulation?
The panel found that the 2009 law was a technical regulation as it laid down mandatory product characteristics.

2) Are products involved "like" products?
The panel made a decision that was different than what would have been made under the GATT. In the GATT, Article III, there are two main provisions on this topic, III: 2 on tax measures and III: 4 on other forms of regulation. The GATT says that measures may not be used so as to afford protection to domestic production. When we apply rules on national treatment, we must think in terms of whether the measures accord protection for domestic production. The panel looked at Article 2.1 of the TBT, found that it did not have similar language to Article III of the GATT, and argued that this meant a different method of analysis should be used to determine "likeness" than is employed under GATT Article III. It is worth noting that the panel said the fact that the measure was a technical regulation implemented for public health reasons should be taken into account.

3) Were such products accorded "no less favorable" treatment?
The panel eventually found that clove cigarettes and menthol cigarettes were "like" products under Article 2.1, and that by banning clove cigarettes and exempting menthol cigarettes, they were affording imported clove cigarettes less favorable treatment.

4) Is the objective legitimate?
The United States has said that the reason it banned clove cigarettes was to address youth smoking. The panel said that it was self-evident that measures to reduce smoking were aimed at human health, and that there was a genuine relationship of ends and means. On appeal, it will be interesting to see if Indonesia raises questions on this point. The panel concluded that Indonesia could not demonstrate that the U.S. objective was illegitimate.

5) Is the measure more trade-related than necessary in order to pursue such objectives?
Indonesia listed 25 alternative measures for the panel to consider. The panel was unsympathetic. It said that a mere listing was insufficient to meet the burden of establishing proof of alternatives, explaining that Indonesia needed to explain why a measure was a viable alternative, how it addressed the objective, and whether it would be successful in meeting the objective. The other thing that Indonesia failed to do, it noted, was show that there was not a greater risk of non-fulfillment. The panel noted in passing that the World Health Organization (WHO), an international body, recommended that governments prohibit the sale of flavored cigarettes. The panel ultimately ruled that it did not feel Indonesia could show the ban was more trade-restrictive than necessary. Indonesia lost on its Article 2.2 claim.

I will say a final word about the U.S. Country of Origin Labeling (COOL) rules case before accepting questions.

There is a range of labeling rules for various agricultural products at issue in this case, as well as a letter from the U.S. Secretary of Agriculture. All the measures have the effect of limiting what can be called a commodity of U.S. origin. Canada is arguing that the United States is at odds with its obligations under the GATT, the TBT Agreement, the Agreement on the Application of Sanitary and Phytosanitary Measures, and the Agreement on Rules of Origin.

In summary, I believe the most interesting questions now up for consideration are: what is "mandatory"? Should the "like" product analysis of the TBT deviate from the GATT III analysis? Does Article XX of the GATT apply to the TBT Agreement—is it available as a defense? Lastly, what are the lessons for regulators? We found in Tuna II that Article 2.2 is seriously enforceable and regulators must take it into account. We also learned in the U.S. Clove Cigarette case that relying on an international regime helps to give credibility to a case. We will have to wait to see how all of this ultimately plays out, especially with regard to the effect on labeling, in the Appellate Body in 2012.

Questions and Answers

Q: Regarding lessons for regulators, you said that relying on international regimes helped to reduce risk. However, it seems that the role of international standards is not very well articulated in the TBT. There is always debate about what "international standard" means in the TBT Committee. How much do international regimes really help?

Andrew W. SHOYER
The term "international standard" is indeed very vague. I would not suggest that linking a measure to an international standard offers complete protection under WTO rules. In the end, I think that it helped the United States in U.S.—Clove Cigarettes even though the WHO partial guidelines are not considered to be a standard. I believe that the United States associated itself with an international forum gave it some measure of protection with the panel. I believe that there is some level of protection for regulators if they can associate themselves with an internationally agreed statement or declaration that can be used to enhance credibility with a WTO panel.

Q: My question is about the unexpected ruling on dolphin-free labeling concerning the definition of "mandatory." It seems to me that if the ruling holds, then virtually all government labeling would be defined as mandatory in the TBT Agreement. What were the responses of each panel member to this ruling?

Andrew W. SHOYER
The facts of this case are such that the Appellate Body may uphold the panel's ruling without significantly affecting other measures. I believe that there would be an impact on other types of regulations if the idea that all labeling was mandatory was upheld. I have not heard whether certain WTO members expressed concern or dismay regarding this possibility.

Q: During the discussion, I was very interested in non-product-related PPMs. I expected the panel to avoid the question of non-product-related PPMs. I think at the final stage, the Mexican delegation tried to argue for a related term to exclude non-product related PPM. At the TBT Committee we have not heard a PPM discussion recently. Do you have any view on this?

Andrew W. SHOYER
Recently, I have started to hear much about sustainability criteria for biofuels, which is a good example of a non-product-related PPM. I think that more countries may start to think about this subject if they feel there is an advantage to having the TBT agreement apply.

How have these cases impacted the debate in the forum of trade and environmental or even the discussions between the EU and the United States on standards issues on a trans-Atlantic basis, or even the TPP? Could you elaborate on the impact of these rulings on legislation, particularly trans-Atlantic trade agreements?

Andrew W. SHOYER
One of the weaknesses of the WTO is that it has an overly-powerful judicial body with a weak legislative response. In a sense, the TPP may function like a legislative response, as it is a rule making exercise. Governments in the TPP negotiations might be concerned about incorporating the TBT's definition of technical regulation into the TPP. They may not be happy with the results of further WTO jurisprudence and may try to limit or control its interpretation in the TPP. Whether the EU or the United States will make similar efforts in a non-rulemaking setting, we have yet to see.

Q: I am interested in the issue of "no less favorable treatment" in relation to clove cigarettes. The ruling may indicate that applying any regulation to products of foreign origin is less favorable treatment. That means that any regulation could be viewed as violating this provision. I think there is a need to introduce a consideration of objectives. In this case, the consideration of legislative purpose was made separate from the "like" product issue. Do you think this method is sufficient to protect the regulatory autonomy of members?

Andrew W. SHOYER
I think there is a real risk to regulatory autonomy in this way. Perhaps we have become accustomed to the "like" product analysis under GATT, and by shifting the way it is conducted—I am not sure how it will affect regulators in different scenarios. I share the concern that it might really impact regulators.

Q: When assessing international standards, does the panel look into the international organization's structure and how legitimate they are?

Andrew W. SHOYER
In U.S.—Tuna II, it wasn't a hard question, because the agreement comes under the Inter-American-Tropical-Tuna-Commission. All of the countries involved were parties. It didn't require a great deal of investigation.

In U.S.—Clove Cigarettes, the panel did acknowledge that while a ban on flavored cigarettes is not one of the various measures set out in the WHO Framework Convention on Tobacco Control, the prohibition of the sale of flavored cigarettes is now one of the measures recommended under the convention's guidelines. The panel did not spend much time contemplating the nature of the WHO and its ability to set standards. There are legitimate questions about whether the panel should have considered the WHO guidelines as it did.

Q: You said that labeling created by an NGO is successfully competing with official labeling in the United States. It seems to me that nothing can be done if a country is unhappy with an NGO's labeling standards. The world is now seeing the rapid spread of private organization labeling. What do you think about this? Are you aware of any discussion that certain disciplines are necessary in terms of civil-society led initiatives?

Andrew W. SHOYER
First of all, the U.S. regulations that were challenged provide for the possibility of an alternative label. The law establishing the dolphin-free label anticipated the possibility that an alternative could replace the official label. Second, remember that an NGO label would still be disciplined as a standard, possibly under the Code of Good Practice. The TBT Agreement does provide discipline, although standards are disciplined in a more flexible way than technical regulations. So there still are certain issues to be discussed regarding NGO labeling.

Q: I have a few questions about dolphins. It was not clear what exact measure was proposed by Mexico and certified as being less trade restrictive. You mentioned an international standard. What kind of standard was it? Also, what is the implication for the United States if it follows this decision? Does it need to withdraw only the dolphin regulation? Would this solve the problem?

Andrew W. SHOYER
What was Mexico's alternative? The AIDCP has a certification program that says the term "dolphin safe" may not be used for any tuna caught in the eastern tropical Pacific Ocean by a pursuing vessel set on a dolphin on a fishing trip during which mortality occurs as documented by observers. Mexico argued that the United States, as part of its international obligations under the Panama Declaration, committed to change its dolphin safe definition from "no encirclement of dolphins" to "no dolphin mortality or serious injury." So the answer to the second question is that for the United States to comply, it needs to change its law. The United States disagreed with Mexico, saying that the Panama Declaration did not commit it to changing its law. In the U.S. view, the declaration only stated the signatories' intent to make certain changes to the law.

We will continue to have disciplines enforced under the GATT as well as the TBT Agreement. What is changing is that we are starting to see what TBT Article 2.2 might mean. Many issues still need to be resolved by the Appellate Body. I expect that Japan will continue to play a significant role in shaping the jurisprudence in a way that is sensible.

*This summary was compiled by RIETI Editorial staff.