Country of Origin Labeling

August 13, 2003

PAER-2003-8

John M. Connor

The Country of Origin Labeling (COOL) provisions in the 2002 Farm Bill require retail sellers of several food commodities to inform consumers of the country of origin. There has been considerable debate and several competing claims regarding the benefits and costs of this program. Moreover, the final USDA labeling regulations will have significant effects on U.S. companies involved in meat production and distribution. The 2003 discovery of an animal infected by “Mad Cow Disease” in Canada has heightened the pressures to implement a sensible and effective system of traceability, particularly meats derived from foreign sources.

The law applies to beef, pork, lamb, fish (farm-raised or wild), peanuts, fruits and vegetables. These commodities must be exclusively produced and processed within the United States to be deemed of U.S. origin. The primary “information provision” of the law mandates that retailers provide information to consumers as to the country of origin of the covered commodities. The method by which consumers are to be notified is through a “label, stamp, mark, placard,” or other type of signage that is “clear and visible” at the point of sale.

The other information provision of the Labeling Legislation requires that “any person in the business of supplying a covered commodity to a retailer shall provide information to the retailer indicating the country of origin of the covered commodity.” This provision seems to impose a duty upon direct suppliers, rather than upon all upstream suppliers, because only direct suppliers to retailers can, in practice, provide the information to a specific retailer.

In addition, this legislation says that the Secretary of Agriculture “may” require that any entity “that prepares, stores, handles, or distributes a covered commodity for retail sale maintain a verifiable record keeping audit trail that will permit the Secretary to verify compliance with” the law. The purpose of the verification provision is obviously to maintain reasonable integrity and credibility in the labeling scheme.

However, more specific identification systems are prohibited. This prohibition was included in the bill to avoid the concerns of livestock producers who feared potential liability arising from the ability of regulators and others to trace back meat products to the farm of origin. Thus, while the Secretary must propound regulations to allow consumers to identify the country of origin, the regulations cannot go further to identify the farm of origin.

Virtually every business in the stream of commerce of covered commodities is

subject to regulation under the Legislation after the ownership of the product is transferred from the producer to the first buyer; that is, the Law applies to processors, wholesalers, and retailers of the covered commodities. In general, farmers, ranchers, growers and fisherman are likely not within the purview of the Labeling legislation because they are not specifically identified as a regulated entity. On exception to the producer exemption is vertically integrated operations. Vertically integrated producers are regulated entities if they also perform the functions of preparing, storing, handling or distributing the products. Examples include vertically integrated pork production and processing companies such as Smithfield Foods in pork and many vegetable producers that also pack and ship their own, and perhaps others’ produce.

The labeling program will not be mandatory until September 30, 2004. Retailers and other covered entities will have to comply at that time. Until then, labeling will be voluntary. The United States Department of Agriculture (USDA) was required to propound guidelines (not regulations) for voluntary labeling by September 30, 2002, and did so on October 11, 2002. By September 30, 2004, the USDA is to have in place regulations to implement this law.

The enforcement regime is quite relaxed. The law is enforceable against retailers only if they “will-fully” violate the law. A fine cannot be levied unless the Secretary has first provided the retailer with notice of a violation as well as a 30-day opportunity to correct the problem. This requirement of “willfulness” is significant in that retail supermarkets have to engage in conduct that is affirmatively fraudulent before they may be fined, and then only up to $10,000. Retailers will not be liable for negligent violations or innocent mistakes. Processors and wholesalers are subject to a slightly different enforcement standard. A 1999 law requires that the Secretary must consider several factors before issuing a fine, including “the gravity of the offense, the size of the business involved, and the effect of the penalty on the ability” to continue in business. It is likely that the Secretary will require a finding akin to willfulness.

COOL Implementation

The government is now designing the final rules for COOL. A desirable regulatory scheme should:

  1. comply with the Labeling Legislation and international trade laws;
  2. lessen the burdens on private entities to the extent possible;
  3. lessen the burden on USDA to the extent possible; and
  4. make the risk of misrepresentation to consumers low.

The debate during the implementation period has focused upon three basic regulatory alternatives:

  1. a Third Party Verification Rule where all representations as to the origin of all covered commodities is verified by third parties;
  2. a Self Verification Rule where all representations as to the origin of all covered commodities are merely represented by the market participants in the chain of commerce; and
  3. a Presumption of U.S. Origin Rule where the regulations presume that all products are of U.S. origin unless a foreign mark of origin is on the product.

 

Third Party Verification Rule

The early stages of the COOL implementation debate included serious discussions of the potential for requiring third party verification of all covered commodities at the producer level. However, the Labeling Legislation itself does not require third party verification, and of late the debate seems to have moved away from this possibility.

A Third Party Verification Rule would be the most expensive system for the food sector to implement. It would foster a whole new industry of third party verifiers.

While third party verification may be the most likely to reduce the risk of misrepresentation, most commentators believe that such a system’s costs would far outweigh the benefits of reduced risk. Moreover, it is at variance with other USDA reporting rules. The Livestock Mandatory Price Reporting Act of 1999, for example, requires meat packers to report prices without third parties verifying the truthfulness of the reporting. The income tax reporting system is another example of a self verifying “honor system” subject to potential audit.

Self Verification Rule

The regulatory option most often discussed in the current debate is one that would require producers and others to self verify the country of origin of all transactions involving the covered commodities. This system would presumably require all sellers, including producers, to provide country of origin information to all buyers. Ultimately the retail food store receives that information and conveys it to the consumer in some form. The system would be policed by the practice of periodic audits by the USDA and the subsequent possibility of civil penalties. Because this rule does not need third parties to verify truthfulness in every transaction, it would be far less costly than a third party system.

In addition, with self verification there is no need to create a whole new record-keeping system. Regulated entities keep a number of records in the regular course of business. Those records are likely sufficient to allow them to identify the origin of the product. For producers of covered commodities, production records are more than sufficient. Processors and distributors will simply need to add a line on their purchase documents to indicate the country of origin of the product. Information as to the origin of a product can be placed on a bill of lading, an invoice, an affidavit, or on any standardized transaction-relevant form. The records listed are those that any properly run business keeps in the ordinary course of operations.

A potentially serious criticism of the Self Verification Rule has arisen because meat packers and retail food stores have publicly expressed their intention to require their suppliers to consent to open their books for random private audits by the buyers. USDA officials have stated that they cannot control private conduct. However, USDA could remove any justification for such intrusive business practices by merely allowing buyers to rely in good faith upon the representations of sellers as to the country of origin of the product. There would then be no business justification for allowing such private random audits.

A more serious problem with the Self Verification Rule is that it may not be lawful under the Labeling Legislation. Producers are not specifically named as entities that the Secretary may regulate under the law. In other areas of the federal agricultural statutes, Congress specifically identified producer if it intended them to be subject to a regulatory scheme. Further, producers of livestock do not produce the covered commodities specified in the Law, but rather live animals.

The Presumption of U.S. Origin Rule

The Presumption of U.S. Origin Rule is a shorthand title for a regulatory reporting scheme in which all products are presumed to be of U.S. origin unless they carry a mark from another country. The corollary to this presumption is a duty to maintain the mark of origin that is currently required on most imported products as a condition of entry into this country. This scheme avoids the problem of lack of USDA COOL jurisdiction over U.S. producers, complies with international trade norms, and minimizes the regulatory burden caused by the program.

First, the regulatory burden is significantly reduced by the Presumption of U.S. Origin Rule by eliminating a large number of affected entities. U.S. producers are a whole category of entities left untouched, except for the few that import young animals to grow for later sale. Many small processors, packers and other handlers would be de facto exempt because they do not engage in the trade of imported foods.

Second, the problem of lack of jurisdiction over U.S. producers is eliminated because this regime does not rely upon the producer as the trigger point to input the first information as to country of origin that follows the product to the consumer. Rather, the trigger point relied upon is the passage of covered commodity over the border, through customs. The USDA acknowledged in the Voluntary Guidelines that several current federal laws require most imports, including food items, to bear labels or other information designating the country of origin.

Third, the Presumption of U.S. Origin Rule complies with international trade rules. The relevant rule arises from the membership of the United States in the World Trade Organization (WTO). Though some have argued that a Presumption of U.S. Origin Rule would violate the general proposition that a WTO member must afford the same treatment to foreign goods that it does to domestic product, Article IX of the General Agreement on Tariffs and Trade (GATT) allows member nations to require marks of origin on goods imported from any other WTO Member.

Specifically, Article IX: 3 of GATT provides that “[w]henever it is administratively practicable to do so, contracting parties should permit required marks of origin to be affixed at the time of importation.” This is currently the practice in the U.S. Further, the laws and regulations relating to “the marking of imported products shall be such as to permit compliance without seriously damaging the products, or materially reducing their value, or unreasonably increasing their cost.”(GATT Article IX: 4). Thus, the U.S. can require any “reasonable” means to mark the imported products as to their origin. However, the U.S. cannot go beyond requiring a mark of country of origin to further specify the producer or sub-national region of origin.

The U.S. currently requires imported products of nearly all types (many beyond the scope of covered commodities under the Labeling Legislation) to bear a mark of origin upon entry to the United States. These rules are administered through the U.S. Customs Service under the ultimate authority of the Secretary of the Treasury. The Treasury Secretary has the discretionary authority to exempt certain merchandise from the marking requirement. (This list of exempted products is called the “J-list”.) U.S. trade laws provide that if the “ultimate purchaser” knows the country of origin of the imported article, then the article need not be marked.

Thus, cattle, swine and sheep imported for immediate slaughter need not bear such a mark for COOL purposes because the packer that is importing the animals knows the country of origin as a result of engaging in the import transaction. Thus, the “ultimate purchaser” of livestock is the packer/slaughterer. Since the packer knows the country of origin of imported livestock, it can then convey that information downstream to subsequent purchasers of meat.

The ultimate purchaser, for import purchases, of covered commodities such as meat, fruits, vegetables, nuts, etc. also knows the origin of those commodities. Those ultimate purchasers are regulated entities under the Labeling Legislation that have a duty to pass that information to downstream purchasers.

While live animals are on the “J-list” and do not bear a mark of origin for customs purposes, they can be identified in other ways. Live animals imported for slaughter must be accompanied by papers that include information such as the country of origin. That information can be used by the packer who imports the animals and who can then transmit the information to downstream buyers, including retailers. The case of live animals imported for further feeding and other purposes, such as dairy cattle, breeding cattle, feeder cattle and feeder pigs, is more complicated.

As a general proposition, the USDA can work with the U.S. Treasury to remove livestock from the J-list in order to facilitate proper identification for labeling purposes. A tag, brand or tattoo could be used to convey the origin information to the packer. Many imported live animals are currently marked for health purposes under USDA rules. Those marks can be used to identify the origin of the animals by the packer that purchases them.

Additionally, USDA currently has the authority to regulate the importation of animals, including requirements that the animals bear documentation or markings denoting their origin. The USDA requirements take precedence over the Customs Service’s J-list; USDA can require such markings despite the fact that live animals are on the J-list. USDA’s Animal and Plant Health Inspection Service (APHIS) carries out these functions. With this authority, USDA could choose to modify the appropriate health rules so that the animals imported can be identifiable for labeling purposes. Recall that the prohibition of mandatory identification systems in the Labeling Legislation serves to prevent trace-back to the farm of origin but does not affect attempts to designate the country of origin.

As a practical matter, there are relatively few animals that must be identified by means other than those means which exist now. As to cattle in 2002, 1.41 million head of cattle were imported for feeding or other purposes, not for direct slaughter. Of those feeder and other cattle, 816,000 were Mexican cattle. All Mexican cattle coming into the U.S. for further feeding must be marked with a permanent “M” brand for steers and an “Mx” brand for heifers. These marks are highly visible. Packers can readily identify these cattle when they are sorted at the packing plant for slaughter. Therefore, only 593,130 head of cattle entered the United States in 2002, almost all them from Canada, without either existing marks of origin or without the need for marks of origin because the cattle’s origins were known to the persons importing the cattle for direct slaughter.

The Foreign Ag Service FAS agricultural trade data similarly show that the number of swine and sheep that must be tracked under this system are minimal. For example, virtually all swine imported for immediate slaughter came from Canada in the amount of 1.81 million head. Because packers engaged in the import transaction know the origin of the swine, no mark of origin is needed. Additionally, approximately 3.93 million head of feeder pigs and 139,000 head of sheep were imported into the United States. The National Center for Import and Export, a subdivision of USDA-APHIS Veterinary Services, says that all swine imported from Canada must have a health certificate which contains information that can identify the specific animals. That identification system includes any permanent mark such as an ear tag or tattoo with a unique number. Thus, feeder swine are already identified with a permanent mark that packers can use to identify their origin upon later slaughter. Imported sheep, however, may need to have an additional mark for a packer to identify them after being further grown for slaughter.

Thus, the number of animals that are not currently subject to identification for labeling purposes is very small. Only 0.6 percent of the U.S. inventory of cattle and calves need be identified for COOL purposes in 2002. Only 1.7 percent of sheep and lambs are not of known origin and need be identified. USDA needs only to create a system of foreign markings on 139,000 head of imported sheep in order to effectively implement the Labeling Legislation. Lastly, it appears that no additional means need be implemented to identify swine under the Presumption of U.S. Origin Rule because all feeder swine already bear a permanent mark for health purposes upon entry to the U.S.

In sum, under the Presumption of U.S. Origin Rule, all that is necessary is the recommended minor modifications of current regulations to identify, with marks of origin, the few imported livestock for which the origin is not presently determinable by marks or otherwise. These livestock constitute merely five-tenths of one percent of the total livestock inventory of the United States.

Summary

The details of COOL enforcement are currently under development by the USDA. Three possible mandatory reporting rules are under consideration. First, a new system of third-party verification is possible, but this alternative is the most costly and is at variance with analogous USDA rules. Second, self verification, which operates like the procedures used for paying income taxes, is a much less costly alternative. How-ever, self verification may violate the intent of Congress when it passed the COOL legislation, because agricultural producers were not specifically cited in the language of the law as is customary. Third, the USDA may adopt a rule that presumes that regulated commodities are of U.S. origin. Under this scheme, more than 99% of the current U.S. stock of meat animals would require no additional effort to identify as being of foreign origin. Based on 2002 data, only about 732,000 cattle and sheep would require marks of foreign origin and additional documentation for processors and distributors. Imported feeder pigs would require no additional labeling effort.

 —————————————————–

Note: This article summarizes part of “Country of Origin Labeling: A Legal and Economic Analysis” by professors John Van Sickle (University of Florida), Roger McEowen

(Kansas State University), C. Robert Taylor (Auburn University), Neil E. Harl (Iowa State University), and John M. Connor (Purdue University). It can be read in its entirety on the Worldwide Web at: http://www.iatpc. fred.ifas.ufl.edu/docs/policy_brief/PBTC_03-5.pdf .

A second PAER article on the benefits and costs of COOL is planned for the fall of 2003.

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