Mexico's beef with the tuna goes back almost a decade, when it asserted the US was unfairly targeting the country over its dolphin-free regulations, the complaint indicates.
The WTO said the rule change was not enough and Mexico was still being unfairly treated, giving rise to the award of trade sanctions.
The organization is also expected to re-examine the program this summer in order to determine if the USA needs to change the labeling program or face trade sanctions.
Mexico and the United States have fought for years over tuna.
A WTO arbitrator authorised Mexico to hit USA exports with $163 million (149 million euros) in annual tariffs in response.
The ruling will see trade sanctions worth £127 million ($163 million) actioned immediately, according to Mexico's economy minister.
The US insists that any Mexican tuna sold in the US must be "dolphin safe", meaning dolphins were not killed by tuna fisherman, which was once common.
However, the United States changed its rules again in 2016 by expanding the tougher rules to all countries. In 2013, the WTO said the change was not enough, and the U.S. was still discriminating against Mexico.
The Geneva-based WTO, which aims to ensure a level playing field in global trade, can not force countries to change their trade policies.
The U.S. Trade Representative's Office said it was "disappointed" by Tuesday's ruling.
That's because the USA had been penalizing Mexico over tuna claiming the product from Mexico wasn't "dolphin safe", which means no dolphins were killed by the fishermen.
"We will continue to monitor the situation and closely consult with Congress and stakeholders about next steps".
If the WTO decides the new changes no longer penalize Mexico's fishing industry, America's southern neighbor would have to end its retaliations against the USA, according to Reuters.
Tuesday's decision comes amid President Trump's plan to renegotiate the North American Free Trade Agreement (NAFTA) as part of his campaign pledge. It's the first loss of the Trump era.