WASHINGTON - Canada and Mexico have defeated the United States' meat-labelling rules at the World Trade Organization, winning a final appeal that could pave the way to retaliatory sanctions.
If the U.S. wants to avoid a broader trade war, Monday's decision means it might have to drop its insistence on special grocery-store labels that identify meat by its country of origin.
Failure to fix the meat-labelling requirement could lead to tariffs on a wide range of U.S. products, including wine, chocolate, cereal and frozen orange juice.
"Today is an incredibly important and historic day for Canada's cattle industry," Dave Solverson, president of the Canadian Cattlemen's Association, said after Monday's decision.
The body upheld previous rulings that the U.S. has violated international trade law with a requirement that meat be identified by where it was raised and slaughtered.
Proponents of those labels argued that customers have the right to know where their food comes from. Canada and Mexico countered, however, that it was actually a protectionist measure designed to keep foreign meat off the grocery shelves while offering no benefit for food safety.
Livestock producers also said the requirement created costly overhead, and logistical problems for an integrated industry where animals might cross the border multiple times.
The measure was blamed for a drastic decline in meat exports to the U.S. in recent years, and the other North American countries repeatedly threatened to retaliate if successful at the WTO.
That moment has arrived.
The U.S. is now left with two options according to the Canadian and Mexican governments: Fix the law, or suffer punitive tariffs on a range of goods.
The Canadian government said it will now prepare an application to the WTO for punitive measures. The process involves setting a dollar value on the retaliation, and identifying targeted goods for tariffs.
The federal government estimates the U.S. legislation costs the Canadian pork and beef industries about $1 billion annually. The retaliatory measures, if imposed, could set tariffs at a similar amount.
Canada has already announced possible targets for a 100 per cent surtax.
The choices were intended to single out states where lawmakers supported the meat-labelling requirements. The preliminary list released by Canada suggests a couple of main targets: California and Pennsylvania.
Wine, frozen orange juice, chocolate, ketchup, pasta, cereals — stats show Canadians import hundreds of millions of some of those products from the U.S. each year, and California or Pennsylvania are key producers of almost every single one.
Michigan, Minnesota and Illinois also produce some of the goods on the hit list.
"The United States has used and exhausted all possible means to avoid its international obligations," said a statement from Canada's agriculture and trade ministers.
"In light of the final ruling...Canada will be seeking authority from the WTO to use retaliatory measures on U.S. agricultural and non-agricultural products."
The U.S. government said it hopes to find a solution before such talk escalates. It says it's working with lawmakers in an attempt to find a legislative fix.
"We are considering all options going forward, and will continue to consult with members of Congress and interested members of the public regarding possible next steps," said Tim Reif, chief counsel of the U.S. Trade Representative.
He said the ruling confirmed the U.S. view that the labels weren't trade restrictive, but expressed disappointment that it upheld lower-level findings that current U.S. law discriminates against Canadian and Mexican livestock.
Follow @Alex_Panetta on Twitter