As outlined in the documentation (no guidelines, weirdly, this is [in the Label / Country docs|musicbrainz.org/doc/Label/Country]), label country explicitly states "This field describes in which country a label was created."

Like we do with track capitalisation (MBS-13711), we could display a warning message when editors select something other than country.

Perhaps with this text:

{{}}Did you know: The label area field describes in which country a label was created, not smaller areas like cities or towns. [Click here to read the documentation.|musicbrainz.org/doc/Label/Country]