Products exempt from the mandatory COOL regulation include ingredients in a processed food item and food sold in restaurants or through the food service channel. AMS defines an ingredient in a processed food item as either “a combination of ingredients that result in a product with an identity that is different from that of the covered commodity” or “a commodity that is materially changed to the point that its character is substantially different from that of the covered commodity” . Examples of the former definition could be peanuts in a candy bar or salmon in sushi. Under this definition, a bag of frozen mixed vegetables would remain a covered commodity because it maintains its identity, but the peanuts and salmon in the earlier example would not. Examples of the latter definition include anything cooked, cured, or dried like corned beef briskets or bacon. These are to be considered functionally different products than the meat the processor began with, whereas vacuum-packed steaks or roasts retain their identity after processing and thus require mandatory labeling under COOL. COOL regulations do not affect restaurants,10 litre plant pots but have implications for nearly everyone else within the unprocessed food chain.
The law states that “the Secretary may require that any person that…distributes a covered commodity for retail sale maintain a verifiable record keeping audit trail…to verify compliance” for a period of up to two years . This includes foreign and domestic farmers and ranchers, distributors and processors, and retailers. We discuss the ramifications of this audit trail requirement for the cost of compliance below.The cost of COOL implementation can only be estimated at this time. The major direct costs of the program include the costs of segregating and tracking product origins, the physical cost of labels, and enforcement costs. AMS itself projects that domestic producers, food-handlers, and retailers will spend $2 billion and 60 million labor hours on COOL in the first year, though these figures were questioned by the GAO in a 2003 report. The GAO reports that the Food and Drug Administration has estimated that the cost of monitoring COOL for producers will be about $56 million annually. The costs of implementation for produce will likely be lower than the costs of implementation for meats as some fruits and vegetables are already labeled by country of origin. From a policy perspective, whether these uncertain costs outweigh the benefits to society of the program, and the extent to which retailers, producers and consumers will share these costs, are of equal importance. The extent to which COOL may benefit domestic producers depends on two considerations, whether country-of-origin information will induce and/or allow consumers to demand more domestic products relative to their foreign counterparts , and whether the costs of COOL implementation will be differentially higher for foreign suppliers than domestic suppliers.
If COOL costs foreign suppliers more to comply than domestic suppliers, the transaction costs imposed by COOL will be lower for domestic suppliers than for foreign suppliers. Even if the price elasticity of demand for foreign and domestic goods is the same, demand for foreign products will fall more than demand for domestic products, and some consumers who previously bought foreign goods will switch to buying domestic ones. This effect will be exacerbated to the extent that labels themselves affect consumers’ preferences or allow them to act upon preferences that were unsatisfied before mandatory labeling. If consumers truly prefer domestic products relative to foreign ones, all other characteristics being equal, COOL will be accompanied by increased demand for domestic goods. If this effect and the differentially higher compliance costs for foreign goods are large enough, this could theoretically offset the reduced demand for labeled goods occasioned by the transactions costs imposed by COOL. Gains to domestic producers are limited by the size of the market share claimed by foreign producers prior to the introduction of COOL, but in this case domestic producers would benefit from the regulation. Consumers could be net beneficiaries as well if mandatory labeling satisfied a preference that the market previously failed to serve. Economic theory and empirical evidence both suggest that the benefits of COOL are unlikely to outweigh the costs of compliance. Both consumers and suppliers are likely to be worse off as a result of this regulation.
The major support for this conclusion comes from the concept of “revealed preference.” In the absence of market failures, the fact that producers have not found it profitable to provide COOL to customers voluntarily is strong evidence that willingness to pay for this information does not outweigh the cost of providing it. If the benefits outweighed the costs, profit maximizing firms would have already exploited this opportunity. Of course, this argument depends on whether the market for agricultural products functions well and would be responsive to consumer demands for COOL if it existed. In this section, we argue that this is indeed the case, and provide empirical support for the theoretical argument that the costs of COOL exceed its benefits. These findings are consistent with the conclusion of the U.S. Food Safety and Inspection Service , that there is no evidence that “a price premium engendered by country of origin labeling will occur, and, if it does, [that it] will be large or persist over the long term.” There is little evidence that imperfections in the food market prevent producers from providing country-of-origin-labeling. Asymmetric information, where one party in a potential transaction has better information than the other, can indeed lead to inefficient outcomes. However, in standard economic theory this result arises either because a seller would like to signal that his product is of high quality but is unable to do so convincingly, or because a seller that has a low-quality product can pretend that it is high quality.But this situation does not plausibly apply in the case of COOL in agriculture. There is nothing now that inhibits producers from “signaling” the national origin of their products. Whatever their revealed preference, do consumers have a stated preference for country-of-origin labeling? The GAO summarizes survey evidence as indicating that American consumers claim they would prefer to buy U.S. food products if all other factors were equal,40 litre plant pots and that consumers believe American food products are safer than foreign ones. However, surveys also suggest that labeling information about freshness, nutrition, storage, and preparation tips is more important to consumers than country of origin . Revealed preference arguments in their simplest form suggest that if consumers truly preferred domestic food products, it would only take one grocer to limit store items to domestic-only products before other stores saw this grocer’s success and followed suit.Producers of organic products have voluntarily labeled their products to attempt to capture a premium, as have producers of “dolphin-safe tuna.” If demand for information exists, agricultural producers have generally been adept at seizing this opportunity. Similarly, many lamb imports from Australia and New Zealand already bear obvious country-of-origin labels going beyond legal requirements because consumers prefer this product to domestic lamb and lamb from the rest of the world . Thus, Australian and New Zealand suppliers have an incentive to label their lamb products because they infer a positive net benefit to doing so, while producers and retailers who abstain from the practice must know that sales will not increase enough from offset labeling costs. There are other non-economic arguments used to support mandatory COOL that relate to food safety. It is possible that COOL would make tracing disease outbreaks easier, thus reducing the health costs of food-related diseases. This is less likely than might initially seem to be the case, because of the long delay between disease outbreaks and the shipment of contaminated products .
If domestic products are systematically safer than foreign products, substitution towards domestic goods could also increase the average safety level of food consumed. However, there is little evidence that foreign food products are systematically less safe than domestic products.Foreign fruits and vegetables do not systemically carry more pesticide residue than their domestic counterparts . There is insufficient evidence to determine if bacteria levels differ between foreign and domestic produce . 8Not surprisingly, in light of revealed preference arguments, many retailers have argued that the cost of COOL implementation will be excessive and burdensome. As noted above, AMS has forecast an annual cost of $2 billion to implement the regulation. These costs will be borne by the private sector as the Farm Bill provides no funds to alleviate industry costs for developing and maintaining the necessary record-keeping systems . In addition, the statute prohibits the development of a mandatory identification system for certification purposes. Instead, USDA must “use as a model certification programs in existence on the date of this Act” . As discussed earlier, USDA is also allowed to require a verifiable record keeping audit trail from retailers to verify compliance.” These seemingly contradictory directions to the USDA—no mandatory identification system is allowed, but an audit trail from retailers may be required—could limit the AMS’s ability to implement the COOL legislation, but is likely intended to act as a prohibition against any efforts to mandate full-scale “trace back” requirements that would track products from the farm gate to the grocery store . Such a formal trace back requirement would impose costs with legal incidence on producers in the field unlike a certification program, where the legal incidence of the costs of regulation falls mostly on retailers and processors. Of course, the economic incidence of the costs of this regulation will be determined by the price elasticity of demand for products, as explained in the discussion that conceptualized COOL as a transaction cost. While retailers’ organizations, like the Food Marketing Institute, have generally been against mandatory COOL, perhaps the loudest complaints about the cost of COOL have come from the meat packing and processing industry. In particular, the costs of tracking and labeling the origin of ground meat products are expected to be relatively high. For example, the president of the American Meat Institute, a trade group representing meat packers and processors has claimed that COOL regulation will be costly and complicated and that it will “force companies to source their meat not based on quality or price, but based on what will simplify their labeling requirements” . The National Pork Producer’s Council also opposed COOL legislation , and has since funded a study that estimates that the cost of COOL implementation will translate into a $0.08 per pound increase in the average retail cost of pork . A key element of this study is an argument that, whatever the intention of the authors of the COOL legislation, implementation will in practice require complete “trace back” capability from the farm to the retail level. With the 2003 discovery of BSE in the U.S., a comprehensive trace back system for livestock may receive greater political support. Agricultural ranchers and growers have largely welcomed the COOL legislation. The California Farm Bureau , the Rocky Mountain Farmers Union , and the Western Growers Association , among other such organizations, have endorsed this regulation. These organizations generally argue that consumers “want” labeling, , consumers have a “right” to country-of-origin information , and that the legislation is a valuable “marketing tool” . The first of these arguments is weakened by the logic of revealed preference. In the case of meat products, the comments of the president of the American Meat Institute above explain the logic of the third justification; packers may demand more domestic inputs if this lowers the cost of COOL compliance. There is also some suggestion that the alleged market power exercised by the relatively concentrated meat-packing industry has created rents that COOL will dissipate . That is, the bargaining position of producers relative to packers will be improved as a result of these rules. This is at least in part because legal liability for failure to comply with COOL will rest with retailers, not with suppliers closer to the farm gate.COOL has been justified as an attempt to favor domestic products in the U.S. market, and early indications suggest that foreign suppliers believe it will do so. Canadian cattle groups have suggested that beef be given a “North American” label if it comes from any country in NAFTA .