The World Trade Organization has ruled that the United States' country-of-origin labelling (COOL) rules discriminate beef and pork imports from Canada and Mexico.
The WTO compliance panel said COOL breaks trade rules because it treats Canadian and Mexican livestock less favourably than US livestock.
The rules, which went into effect in 2008 and were updated last year, are blamed by the Canadian meat industry for reducing exports to the US by half.
The panel said changes the US made to the rules last year made the policy even more detrimental to livestock exporters.
"The compliance panel concluded that the amended COOL measure increases the original COOL measure's detrimental impact on the competitive opportunities of imported livestock in the US market," the panel said.
"It necessitates increased segregation of meat and livestock in the U.S. market, entails a higher record-keeping burden and increases the original COOL measure's incentive to choose domestic over imported livestock."
Canada hailed the ruling Monday and called on the United States to comply with the WTO decision.
"Today's WTO compliance panel's report reaffirms Canada's long-standing view that the revised US COOL measure is blatantly protectionist and fails to comply with the WTO's original ruling against it," Canada's Agriculture Minister Gerry Ritz said in a statement.
"The WTO's clear and consistent findings in support of Canada's position effectively supply a clear message to the US - end this protectionist policy that creates economic harm on both sides of the border and comply with your international trade obligations."
Ritz said he expected the US to appeal the ruling before the trade battle was finally resolved.
COOL rules require all packaged meat to identify where the animal was born, raised and slaughtered.
Supporters of the law say it better informs US consumers, while opponents argue that segregating animals and tracking them adds costs and violates free-trade agreements.
Canada's International Trade Minister Ed Fast has said the legislation undermines North American supply chains and costs the Canadian pork and beef industries about $1 billion a year.
Some US. companies have said they can't afford to sort, label and store meat from Canada differently than meat from domestic animals.
Ritz has said the federal government would consider imposing retaliatory tariffs measures on some US goods as early as next year if Washington doesn't comply with WTO COOL rulings.