The U.S.-Mexico-Canada Agreement (“USMCA”) is a pending free trade agreement that will replace the North American Free Trade Agreement (“NAFTA”). The USMCA was signed in December 2019 and was ratified by all three countries in March 2020. Currently, the USMCA is being implemented and the agreement will enter into force on July 1, 2020.
The implementation of the USMCA’s labor chapter had been under particular scrutiny because of concerns about whether the required reforms will be effective in Mexico. However, in recent weeks, there have been significant assurances that the labor provisions will be effectively enforced. For example, when U.S. Trade Representative Robert Lighthizer testified before the U.S. House Ways & Means Committee on June 17, he said that the USTR will take labor enforcement action “early and often when there are problems.” U.S. businesses should ensure that their supply chains are compliant with changing labor laws and procedures in Mexico and monitor how Mexican supply chain partners participate in the reforms.
NAFTA, the USMCA’s predecessor, did not include a labor chapter. However, NAFTA was accompanied by a side agreement that focused on labor. This side agreement listed guiding principles pertaining to workers’ rights. Although full dispute resolution procedures were available, they could only be utilized if a high standard was met – that a signatory country exhibited a “persistent pattern of failure” to effectively enforce labor standards. Furthermore, the NAFTA labor side agreement only permitted issues of collective bargaining to be addressed via formal ministerial consultations rather than through more straightforward arbitration procedures. In recent years, efforts at domestic labor reforms in Mexico have largely failed to effectively empower Mexican workers to engage in collective bargaining. A system of protection unions exists in which collective bargaining agreements are pre-set and lack explicit worker consent. It is envisioned that USMCA-based labor reforms will result in meaningful improvements in the ability of Mexican workers to collectively bargain on their own accord.
The USMCA comprises labor provisions that are significantly stronger than the NAFTA side agreement. Among other requirements, the USMCA requires Mexico to:
- Adopt worker rights laws related to the International Labor Organization’s 1998 Declaration on Fundamental Principles and the Rights at Work
- Prohibit imports of goods made by forced labor
- Regularly have facilities in Mexico inspected or otherwise monitored both by Mexican authorities and labor attachés from the U.S.
- Establish a Rapid Response Mechanism to address concerns at specific facilities
Additionally, the USMCA mandates Labor Value Content (“LVC”) requirements, which require that 30% of work performed on automobiles manufactured in North America should be performed by workers earning at least $16 per hour in order to qualify for duty-free treatment. The U.S. Customs and Border Protection’s implementing instructions provide information on LVCs, with specifications related to the U.S. Department of Labor’s treatment of these components available in Annexes A and B. Additionally, the U.S. Department of Labor will issue regulations related to high-wage components of the LVC requirements.
The Rapid Response Mechanism (“RRM”) is a novel and powerful tool that has never before been included in a U.S. free trade agreement. It addresses the ability to monitor and quickly resolve collective bargaining right infringement concerns at specific covered facilities in both Mexico and the U.S. Under the RRM, an independent, three-person panel of U.S., Mexican, and third country nationality can investigate alleged violations. If a violation is found but not remedied, the U.S. or Mexico can revoke preferential tariff treatment. The RRM is expected to be a particularly effective tool because it can be exercised quickly (as the name suggests), the panelists are few in number, and its scope of authority is limited to only issues of collective bargaining and free association.
The U.S. implementing legislation for the USMCA also requires the establishment of a 12-member independent labor-expert board, tasked with monitoring and evaluating the implementing of Mexico’s labor reform and compliance with its labor obligations. The board was established by Executive Order on April 28, 2020. The board members are selected by the U.S. Trade Representative’s Labor Advisory Committee (which get to select four members) and House Speaker Nancy Pelosi, House Minority Leader Kevin McCarthy, Senate Majority Leader Mitch McConnell, and Senate Minority Leader Chuck Schumer (each of who select two members). As of June 18, Speaker Pelosi has appointed two board members, and the remaining ten members are expected to be appointed by the July 1 enforcement date.
Although the array of labor reforms associated with the USMCA seem promising, there is both concern about the implementation of these reforms and uncertainty about how it will affect North American supply chains. It’s unclear whether there will be political pushback in Mexico to these changes and how transparent Mexican agencies will be about enforcement. In early June 2020, a well-known Mexico labor attorney, Susana Prieto, was arrested on a charge of threatening public officials. Prieto continues to be under arrest, with calls by civil society organizations for her release. Prieto had led protests at factories that she accused of not taking effective measures to protect workers from the coronavirus. Prieto’s arrest has been a cause for concern about how effective labor reforms will be in Mexico. These concerns are further exacerbated by the ongoing COVID-19 pandemic.
U.S. companies should work to ensure that their supply chains are compliant with new laws. For the latest information on USMCA implementation, be sure to visit the U.S. Customs & Border Protection’s recently launched USMCA Center and contact email@example.com.