Amendments to the USMCA Spotlight Labor Standards Compliance in Mexico
by Edward Lebow, Larry B. Pascal, Alberto de la Pena
Published: December, 2019
Submission: December, 2019
With the signing of a Protocol of Amendments (“PoA”) and the approval by the U.S. House of implementing legislation, the United States, Canada and Mexico are on track for final approval of the US-Canada-Mexico Agreement (the “USMCA”) by the middle of February 2020, which is the anticipated time frame for the vote by the U.S. Senate. If that proceeds as expected, the USMCA would take effect 90 days later, before the end of May. Certainly, a sigh of relief has been heard throughout the continent, as the new agreement has been reached without the original NAFTA having been discarded and avoiding the interruption of supply lines and cross-border trade. Instead, the parties have succeeded in modernizing much of NAFTA while still incorporating rules that may help achieve the Trump Administration’s stated goal of providing a boost to U.S. domestic manufacturing.
As noted in our earlier reports, the USMCA modernizes and expands NAFTA, covering several aspects of trade, a few of the more significant of which are:
National Treatment and Market Access for Goods
Automotive Vehicles and Component Parts
Critics of NAFTA, including President Trump, contend that it contributed to the decline in U.S. manufacturing, particularly in midwestern states, by making possible the flight of manufacturing industries to destinations south of the border. The most important Administration objective economically – and certainly politically – in the new USMCA has therefore been to stem that flow and provide incentives for the reinvigoration of manufacturing – including manufacturing employment – in the United States. That is why, even with the many elements of the USMCA that will stimulate and streamline trade, most interest has been focused on the new rules governing the production of automobiles and auto parts.
Automobiles are the quintessential manufactured product, and the related supply chain is crucial to maintaining a strong manufacturing base. As noted above, under the USMCA, to move their products across the U.S. border free of the passenger car tariff of 2.5 percent auto manufacturers will have to achieve higher North American content than under NAFTA (increasing over time from 62.5 percent to 75 percent), pay wages of at least $16 per hour on a share of approximately 40 percent of their production and use at least 70 percent aluminum and steel of North American origin. Moreover, within seven years that steel will have to be melted and poured, not just rolled from slabs, in North America.
Notwithstanding these provisions, after the USMCA was announced late in 2018, Democrats in the U.S. Congress expressed concern that, absent strict enforcement of Mexico’s promises to respect the ILO commitments made by Mexico and improve the rights and conditions of its workers, these increased regional content rules would not be sufficient to stem the flow of industry moving out of the United States to Mexico. After all, according to critics, if workers in Mexico can be paid so little that the savings to auto producers exceed the standard 2.5 percent tariff on completed cars, it might still make sense for a manufacturer to disregard the complex USMCA rules of origin and instead move production in its entirety to Mexico.
To make this less likely, Democrats in the U.S. Congress pressed the Administration and the government of Mexico to take steps to assure enforcement of the labor standards negotiated in the USMCA. Both the Trump Administration and Mexico agreed, and thus, the PoA contains a detailed “Rapid Response Labor Mechanism” that addresses these concerns.
The Rapid Response Labor Mechanism, which is structured as an Annex to USMCA Chapter 31 on Dispute Resolution, provides, upon an allegation that Mexican workers’ rights to free association or collective bargaining are being hindered, for consultations among the concerned parties, and if they cannot resolve the issue promptly, for “Labor Panelists” to be dispatched to investigate and file a report, all within specified tight time limits. Upon a finding of a violation, trade remedies can be imposed, including loss of USMCA duty-free status for goods produced at the facility, or in the event of multiple violations, being barred from entry into the United States.
The PoA requires that a Party have “a good faith basis to believe that a Denial of Rights is occurring at a Covered Facility” before invoking its rights to remediation. There is no direct private right of action under Chapter 31. Instead, the PoA contemplates that a Party will have established “a process for determining whether to invoke” the Rapid Response Labor Mechanism and “shall notify the other Party within five business days of initiating such process.” The United States notes in the PoA that it “intends to establish such a domestic process under which the United States government will strive to complete initial reviews of complaints received by the government about a “Covered Facility” in the other Party in 30 days.” Presumably regulations will be issued specifying how and on what basis a private U.S. party can file a complaint.
To help enforce these elements of the PoA, the U.S. implementing legislation provides for the assignment of five U.S. labor attachés to the U.S. diplomatic mission to Mexico. Mexican officials have voiced objection to the assignment of U.S. monitors on Mexican soil as a breach of its sovereignty and as being outside of their amended agreement with the United States. They note that the agreement provides for three-person panels to resolve labor and other disputes. These panels would comprise a person chosen by the United States, one by Mexico and a third-country person agreed upon by both countries.
For companies with operations in Mexico, be they Mexican or U.S. owned, the labor enforcement mechanisms and potential penalties set forth in the PoA make it clear that to avoid being caught up in any disputes it will be crucial for labor and human resources policies to meet the standards negotiated in the USMCA. Haynes and Boone, with its significant presence and experience in Mexico, has already been working with clients in the implementation of the new labor reforms regarding collective bargaining agreements in Mexico. We will continue to monitor developing standards, practices and issues in this and other areas of USMCA implementation and enforcement.
Overall, although there are some concepts that are more restrictive than under the original NAFTA, the ratification of the USMCA represents a step forward for the cross-border trade among the three countries and eliminates a possible drag on future growth for Mexico by mitigating investor uncertainty. It also helps achieve some much desired societal consensus in the United States on the importance of trade with our North American trading partners (particularly Mexico), while placing more emphasis on worker rights. However, it is clear that foreign investors in Mexico will likely have to devote more effort and planning on human relations and labor issues going forward as Mexico implements new labor rules.
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