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 whether beef and pork were born, raised and slaughtered in the U.S.
Failure to change the labelling requirement could lead to tariffs on a wide range of American products including wine, chocolate, cereal and frozen orange juice.
Some U.S. lawmakers have already signalled plans to move swiftly: they're proposing legislation to rescind the labelling rules that stem from a 13-year-old American law.
Business groups in both countries mostly celebrated the WTO decision.
"Today is an incredibly important and historic day for Canada's cattle industry," said Dave Solverson, president of the Canadian Cattlemen's Association.
The body upheld several 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 the label requirement argued that customers have the right to know where their food comes from.
But Canada and Mexico countered that it was completely irrelevant to food safety, and was simply a protectionist measure designed to keep foreign meat off the grocery shelves. Livestock producers said the requirement created costly overhead, and processing problems in an integrated industry where animals might cross the border multiple times.
The measure was blamed for a drastic decline in meat exports from other North American countries, who 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 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. They were designed to hit 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.
"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."
But U.S. policy-makers appear keen to find a solution, before such talk escalates. The Obama administration says it's working with lawmakers to find a legislative fix.
Also, the chair of a key legislative committee said he planned to introduce a bill this week to repeal mandatory labelling. He referred to mandatory labels as a failed marketing program, not a food-safety program.
"It is more important now than ever to act quickly to avoid a protracted trade war with our two largest trade partners," Michael Conoway, the Republican chair of the House agriculture committee, said in a letter published on the website for the congressional newspaper Roll Call.
"We must act quickly to prevent the irreparable damages of retaliation, both to our economy and the trade relationship with Canada and Mexico."
The WTO decision won plaudits in the U.S. from business groups concerned about trade sanctions.
"We flaunt our country's obligations under the rules-based trading system at our peril," John Murphy, a senior vice-president at the U.S. Chamber of Commerce, said in a release.
But one farming organization in the U.S. that supports the labels, the National Farmers Union, said there was still time to negotiate a solution with Canada and Mexico that would allow labelling throughout North America.
It said consumers deserve to be able to make informed choices and added: "The U.S. as a sovereign country can decide how and whether to implement the adverse ruling."
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