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Application P292 – Country of Origin Labelling – A Discussion Paper to Inform the Development of a Food Standard (12 August 2005) AND COOL Revisited: Benefit Cost Analysis of Country of Origin Labelling: Discussion Draft for Food Standards Australia New Zealand (30 August 2005)

2 September 2005

Dear Sir/Madam

Thank you for the opportunity to comment on this application/proposal. The New Zealand Food Safety Authority (NZFSA) has the following comments to make.

Introduction

FSANZ has invited comments on its discussion paper of 12 August 2005, concerning a proposed standard for country of origin labelling (CoOL). The following sets out the views of the New Zealand Food Safety Authority (NZFSA) on the proposed standard. The submission also represents the views of the New Zealand Ministries of Foreign Affairs and Trade, Consumer Affairs and Economic Development.

FSANZ has also invited comments on its revised Benefit Cost Analysis of CoOL discussion draft published on 30 August 2005. This submission represents the views of only NZFSA on this analysis as the two working days for comment has precluded broader consultation.

In relation to the discussion of a proposed standard, we remain concerned over proposals to mandate CoOL. Our reasons have already been expressed in previous submissions to FSANZ on its Proposal P292 and Draft Assessment Report of May 2005. We are also concerned that a number of the issues which we raised for consideration in the last round of consultation on proposed options for standards appear to have been exacerbated by the latest proposals. In particular, the third country trade impacts. While we are pleased to see the Benefit Cost Analysis revised and that here, concerns such as trade impacts, have been acknowledged and factored into the analysis, there is a disjoint between the discussion paper on a possible standard and the benefit cost analysis. The discussion paper presents only one option for a possible standard (a joint standard applying in both New Zealand and Australia) yet the benefit cost analysis presents two options.

We also note at the outset that, while FSANZ commissioned further cost benefit analysis on its latest proposal, this was not made publicly available in time for stakeholders generally to factor the analysis into their submissions. We believe that this undermines the robustness of the public consultative process and may impact negatively on the quality of decision-making around this proposal.

In summary:

• internationally, New Zealand has consistently opposed the imposition of mandatory CoOL, on the grounds that it is potentially trade restrictive and is not relevant to the issue of food safety;

• FSANZ’s latest proposal is not consistent with the Higher Order Principles in the 2003 Ministerial Council issued Policy Guidelines on CoOL relating to international obligations, national policies, consumer information and competition;

• the proposal has not demonstrated tangible consumer benefits, and the discussion paper on the proposed standard has failed to acknowledge both the extent of change proposed for the New Zealand regulatory environment and the significance of costs associated with such a change;

• the proposed measure is inconsistent with New Zealand’s (and Australia’s) international obligations, in particular, the WTO TBT Agreement. It also has implications for the wider objectives of third country trade generally and trans-Tasman trade specifically; and

• features of the current proposal run counter to the general principles of the Food Standards Code and set concerning precedents (e.g. size of lettering for some provisions, placement of provisions on products).

These matters are discussed in more detail below.

Costs and Benefits

As stated in our May 2005 submission on FSANZ’s Proposal P292 Draft Assessment Report, mandatory CoOL is potentially trade restrictive and is not relevant to the issue of food safety.

We acknowledge that FSANZ’s proposals, as set out in its latest discussion paper, are not predicated on meeting food safety objectives. Instead, mandatory CoOL is proposed in response to consumers’ “right to know”. It is unclear what “rights” are being addressed and the impact of such “rights” on the food supply both at the outset and ongoing. It is also unclear what problem is being addressed by this measure, or what tangible (“real”) benefit will be obtained by consumers. The discussion paper simply asserts that consumers will benefit: no analysis or information is provided in support of this assertion.

In practice, mandatory CoOL does not appear to offer consumers any benefit that is not already, and more effectively, provided by other means. Mandatory CoOL is not required in order to protect consumers from misleading or deceptive marketing. This is already addressed by consumer law (New Zealand’s Fair Trading Act 1986). Nor does mandatory CoOL guarantee consumer choice or quality. Choice and quality are best delivered by means of open, competitive markets. CoOL is primarily a marketing tool, not a consumer protection measure, and at the national level is most commonly associated with promoting national loyalty programmes. As such, it is best employed voluntarily by companies in response to customer demand. As stated in our previous submission, mandatory CoOL may be anticompetitive, if consumers’ decisions are distorted by regulatory measures, rather than being taken in response to the actual merits of the good/s concerned.

While the benefits to consumers are intangible and non-quantifiable, the costs of FSANZ’s proposals are both real and potentially significant for New Zealand. As well as the direct costs imposed on industry itself, there are greater potential impacts on New Zealand’s international interests, which are not acknowledged in the discussion paper.

The discussion paper fails to acknowledge the extent of change which the proposals would impose upon New Zealand and, accordingly, minimises the associated impact. The paper makes various references to “existing” or “current” requirements, without making it clear in the body of the text itself that the “existing” requirements (with the exception of wine) apply only to Australia. This tends to create the impression that there will be little substantive impact on New Zealand, when this is not the case.

As set out in the Introduction to this submission, while FSANZ commissioned further cost benefit analysis on its latest proposal, this was not made publicly available in time for stakeholders generally to factor the analysis into their submissions. NZFSA has the following observations to make in the time available:

• we question the robustness of the results of the analysis given the range of assumptions made and the limited data available. The New Zealand Institute of Economic Research (NZIER) itself acknowledges that there are large uncertainties around the inputs and results of its analysis;

• the NZIER analysis has been prepared in a very short time frame, and to our knowledge there is limited substantive data available (for example, on the number of products which might currently be labelled consistent with either the current transitional standard, or the proposed new standard). This means that the estimates of cost impacts (presented in the form of three sets of assumptions) must rely on very imperfect data or "guesstimates" which must call into question the value of the analysis of cost impacts;

• while the assessment of costs would seem to be limited, as a result of limited substantive data, there is no corresponding quantification of "real" benefit. NZIER acknowledges that quantification of the consumer added value for CoOL is not possible nor is consumers’ “right to know”. The benefit is simply asserted by NZIER; and

• wider trade policy implications are acknowledged in the analysis but are categorised as "intangible" and "unquantifiable" without further analysis. While we recognise that it may not be possible to quantify such impacts, we consider that NZIER has not acknowledged that the magnitude of such trade impacts, taking into account New Zealand’s and Australia's reliance on global trade and trade rules, may be very significant. The costs of the proposal are therefore presented as generally limited to the immediate business costs of relabelling. As noted in this submission, this narrow view does not capture the full potential impact of a mandatory CoOL standard.

Ministerial Policy Guidelines: High Order Principles

In our previous submission on FSANZ’s Draft Assessment Report, we noted inconsistency with a number of the High Order Principles developed by the Ministerial Council. We consider that the current proposal remains inconsistent with these Principles. We acknowledge that it is not mandatory for FSANZ to meet the Guidelines but it is significant that the mismatch occurs in the more significant high order principles.

We refer FSANZ to our previous submission, but summarise key points below.

On the High Order Principle Be consistent with, and complement, Australia and New Zealand national policies and legislation including those related to fair-trading and industry competitiveness, we note again that the proposal to introduce mandatory CoOL is inconsistent with New Zealand’s long-standing policy of opposition to mandatory CoOL but support for voluntary CoOL. The imposition of a mandatory standard cannot be consistent with New Zealand’s national policy. Nor, as already discussed above, can a mandatory system be consistent with industry competitiveness.

We have commented above on the objective of ensuring that consumers have access to accurate information regarding the contents and production of food products. We note further that the purpose of CoOL is to identify origin. It does not of itself provide consumers with meaningful information on other matters, such as contents or production of food products. The effect of a standard that simply distinguishes “Australian” from “imported” product provides little in the way of useful or meaningful information to consumers. However, to now require specific source countries to be identified significantly increases the costs of implementation and compliance.

The inconsistency with the last High Order Principle Be cost-effective overall, and comply with Australia and New Zealand’s obligations under international trade agreements, while not being more trade restrictive than necessary, was discussed in detail in our previous submission. In light of the issues raised in our previous submission on the potential impacts of mandatory CoOL on New Zealand’s (and Australia’s) international trade interests and the further more prescriptive provisions now proposed, we are concerned that FSANZ’s current discussion paper once again fails to adequately address the issues of cost effectiveness and compliance with international obligations. We therefore restate our views in the section below.

International Obligations

New Zealand has consistently opposed mandatory CoOL in international fora and in bilateral trade relations, as being a potential barrier to trade. Trade implications have been a key concern for both New Zealand and Australia where other countries have sought to impose mandatory CoOL requirements.

The imposition of mandatory CoOL would therefore run counter to New Zealand’s long-standing international position. To adopt in our domestic law a regulatory measure which we have consistently identified as a potential barrier to trade, would have a serious impact on New Zealand’s credibility in international trade fora and in bilateral trading relationships, and on our ability to sustain future arguments against potentially trade-distorting measures of this type.

We continue to believe that a strong case could be made that mandatory CoOL requirements are not consistent with WTO obligations (specifically the WTO Agreement on Technical Barriers to Trade (TBT)).

There are two issues. Firstly, the non-exhaustive list of legitimate objectives outlined in the TBT Agreement does not explicitly provide grounds for mandatory regulations, which are justified on the basis of, for example, protecting a consumer’s “right to know”. While TBT Article 2.2 does include “the prevention of deceptive practices” as a legitimate objective for mandatory regulations, this does not necessarily require mandatory CoOL. As we have already noted above, the objective of preventing deceptive practices can be achieved through other more effective, and least trade restricting, mechanisms, e.g. the New Zealand Fair Trading Act 1986 and the Australian Trade Practices Act 1974.

Secondly, mandatory CoOL could be deemed more trade restrictive than necessary to fulfil this objective. Article 2.2 of the TBT Agreement specifically states, “Members shall ensure that technical regulations [i.e. mandatory standards] are not prepared, adopted, or applied with a view to or with the effect of creating unnecessary obstacles to international trade”. Mandatory CoOL would not, in our view, help mitigate the risk of deceptive practices and could therefore be challenged as being unnecessary and overly restrictive in light of the potential costs to the food industry. In other words, mandatory CoOL could constitute an unnecessary barrier to trade by increasing the costs to industry, thereby limiting market access.

We believe that there is the potential for mandatory CoOL to have a negative impact on trade, given the very real costs to industry involved in a mandatory labelling scheme. Failure to comply with WTO obligations could result in other WTO members challenging the measure in WTO dispute settlement proceedings. We believe that the revised measure will have to be notified to the WTO TBT Committee.

As a major food exporter, New Zealand, along with other Cairns Group members, has strongly opposed mandatory CoOL internationally for many years, most recently at the Codex Alimentarius Commission in July 2005, where CoOL was taken off the agenda because of a lack of consensus. New Zealand has also opposed United States and Canadian proposals for mandatory CoOL for meat. It would be difficult to reconcile one position internationally and another domestically. New Zealand's standing internationally as a principled trader, committed to upholding the SPS and TBT Agreements would potentially be damaged considerably.

TTMRA Issues

In our previous submission we commented on implications for trans-Tasman trade, should New Zealand not support the proposed mandatory CoOL standard, due to the operation of the TTMRA. We noted that the impact on New Zealand products would depend on how Australia implemented mandatory CoOL.

If Australia continues to impose mandatory CoOL at the point of sale, New Zealand products could still enter the market under the TTMRA without complying with the Australian CoOL standard. This reflects the provisions of the TTMRA, namely that:

• Under Article 4.1.1, a good that may legally be sold in New Zealand may be legally sold in Australia. This mutual recognition regime is intended to affect laws in the two countries relating to the sale of goods, including requirements that goods satisfy certain standards relating to presentation, including labelling. New Zealand food products without CoOL could accordingly continue to be sold in Australia; and

• Article 7 of the Agreement on Joint Food Standards confirms that the provisions of the TTMRA are to apply to food (subject to exemptions provided for under the TTMRA).

Impacts on Industry

The discussion paper suggests that the overall cost impact of FSANZ’s proposals on industry is expected to be small and that such costs will be one-off in nature. The revised Benefit Cost Analysis states otherwise and identifies both one-off and on-going costs, should mandatory CoOL be applied in New Zealand.

The magnitude of these costs is obviously dependent on the level of voluntary labelling in New Zealand. There does not, however, appear to be a consensus view on this. NZIER has proposed, in its Benefit Cost Analysis, a range for costs depending on the level of compliance of current labelling. This range is from 10% compliance to 90% compliance. We suspect the range to be unrealistic even towards the low end given the further prescriptive requirements of the current proposal.

We believe that consideration should also be given to the cumulative nature of such costs (in an environment of increasing regulation in the area of border security, for example) and the distributional impacts on small businesses.

Mandatory CoOL requirements will present on-going compliance costs for some companies. These costs will arise in two key ways:

• where there are changes to source countries of imported food products, due to factors such as seasonality, changes in market conditions and quality, and competitive pressures between source countries; and

• where there are specific and differing requirements for exported product, thereby limiting the flexibility to place food either on the domestic market or in export markets.

With the reduced scope for diversification in New Zealand’s agriculture sector (given the more temperate climate and relatively smaller size) and the fact that many raw materials are imported into New Zealand, we would expect such changes to be more prevalent here than in Australia. In other words, the likelihood of a New Zealand food manufacturer having to source products from off-shore during an off- or poor season, is likely to be higher than for its Australian counterpart.

As such, changes to labelling could be required relatively frequently on an on-going basis, as input foods (which would comprise a packaged food, e.g. canned peaches, as opposed to an individual ingredient, which, we note, is now outside the ambit of this proposal) are sourced from different countries. We would expect such costs to comprise both the cost of physically amending the labelling on the finished food product, as well as the cost of managing the necessary systems to monitor and determine what should be on the label itself. While we acknowledge that again there is little quantitative data on the magnitude of these costs, we would expect them to be more than minor in New Zealand given current voluntary arrangements.

Print Size

We note that FSANZ proposes to regulate print size for signage concerning CoOL placed adjacent to specified unpackaged foods. We consider that this is not only unwarranted, but also highly undesirable, as it potentially undermines current food safety measures. The regulation of print size is currently reserved for only the most significant of food safety concerns, such as mandatory warning statements. To set mandatory requirements for print size for CoOL would set an undesirable precedent for other food labelling, and would undermine the value of print size as a means of highlighting significant issues to consumers. We note further that international trends are to move away from size of font and position of information.

Wine Labelling

In our previous submission we noted that New Zealand was unable to comment on the issue of wine labelling, as New Zealand was undertaking a review of many aspects of wine production and sale, including CoOL as part of the implementation of the Wine Act 2003. This work is still in progress and policy decisions have yet to be taken. Accordingly we are unable to comment on the implications of FSANZ’s current proposal for wine at this time, except to say that continued placement in a transitional standard is appropriate until policy decisions have been taken by New Zealand.

Conclusion

In conclusion, we consider that the mandatory standard involves costs and potentially significant trade risks, for which no substantive consumer benefit has been identified. The discussion paper did not take account of the costs and risks inherent in the proposed mandatory standard, and, in particular, its inconsistency with New Zealand’s and Australia’s international trade obligations, and the NZIER report, though improved, remains limited in terms of source data and assumptions.

Yours sincerely