On July 1, 2020, the U.S.-Mexico-Canada Agreement (the “USMCA” or the “Agreement”) entered into force and replaced its predecessor, the North American Free Trade Agreement (“NAFTA”). The USMCA has attracted unprecedented bipartisan support, and U.S. Members of Congress are enthusiastic about the robust labor protections and enforcement regime agreed to by the parties. Historically, NAFTA included unenforceable provisions on labor protections that were limited and largely ineffective. The USMCA incorporates much more robust labor protections and a sophisticated dispute settlement regime with two distinct enforcement mechanisms for labor issues: (1) traditional state-to-state dispute settlement for all obligations and (2) the innovative “facility-specific rapid response labor mechanism” (the “Rapid Response Mechanism”) for specific labor violations.
The Rapid Response Mechanism presents a new enforcement tool that adds an additional layer of trade and labor regulation between the United States and Mexico. Enforcement efforts can result in additional tariffs or other import restrictions. As discussed below, the potential for investigations and restriction of imports from Mexico, based on allegations of labor violations, can expose firms operating in Mexico to significant business, legal, and political risks if not properly managed.
Mexico’s labor reforms are historic and, if successful, will permanently change the landscape of labor organization, collective bargaining, and workers’ rights. Some of the newly effective labor-related obligations affecting trade with Mexico include:
These reforms are meaningful for businesses operating across borders in North America, not only because they may require changes in collective bargaining representation and agreements, but also because they will allow the U.S. and Canadian governments to enforce Mexico’s commitment to these significant changes. The U.S. government, in particular, has voiced its intent to enforce aggressively the labor obligations that are at the heart of the new Agreement. As described in more detail below, Annex 31-A of the USMCA includes the novel Rapid Response Mechanism for certain types of labor violations. The mechanism is one of the keystones of the USMCA and is expected to generate substantial and highly politicized scrutiny of manufacturing operations in Mexico.
The Rapid Response Mechanism is a bilateral agreement between the United States and Mexico. Canada and Mexico have an identical agreement, but there is no agreement between the United States and Canada. Unlike the broader set of labor claims available through state-to-state dispute settlement under Chapter 31, the Rapid Response Mechanism focuses on the denial of specific labor rights, as defined in the agreement, and establishes strong remedies that quickly penalize (and even prohibit) certain imports. A specific violation in Mexico can be alleged by outside parties by petition to the U.S. Government. With respect to Mexico, claims can be brought only with regard to an alleged Denial of Rights for commitments identified in Annex 23-A of the Labor chapter, Worker Representation in Collective Bargaining in Mexico. In accordance with Annex 23-A, Mexico is required to enact legislation that covers various obligations, including:
Only certain sectors are covered by the Rapid Response Mechanism, but this coverage extends to a significant portion of cross-border trade. At the outset, the focus will be on certain priority sectors consisting primarily of automotive and aerospace, industrial food operations, electronics, call centers, and raw material mining and production sectors, e.g., steel and aluminum. The USMCA requires annual review of these priority sectors to determine whether additional subsectors should fall into the purview of the Rapid Response Mechanism.
In addition to being sector-specific, the mechanism is facility-specific, meaning that a Party alleges that a “Covered Facility” has denied the right of free association and collective bargaining. A Covered Facility is defined in the agreement as a facility that (1) produces a good or supplies a service traded between the United States and Mexico or (2) produces a good or supplies a service in the United States or Mexico that competes in the territory of either country with goods or services of the other country. As a result, in the United States, allegations are made with respect to violations of Mexico’s labor laws in a Covered Facility in Mexico. Denial of Rights claims by Mexico for a facility in the United States can be brought only if the facility is covered by a National Labor Relations Board order. In effect, this means that facilities in Mexico are much more likely to be subject to allegations of a Denial of Rights than U.S. facilities.
Section 716 of the United States-Mexico-Canada Agreement Implementation Act (the “Act”) requires the U.S. Administration to establish a process for public petitions alleging a Denial of Rights for resolution through the Rapid Response Mechanism.
The U.S. process begins when a party (e.g., public stakeholders such as U.S. labor unions) submits a Petition through the Department of Labor’s Bureau of International Labor Affairs to the newly created Interagency Labor Committee for Monitoring and Enforcement (the “Interagency Labor Committee” or the “Committee”). The Petition must meet all informational requirements set out in the implementing procedures. Once the Committee receives a Petition, the Committee must decide within 30 days of receipt whether there is sufficient, credible information to support a “good faith basis to believe” that a Denial of Rights to workers exists at a Covered Facility. Among other requirements, the Petition must state whether relief has been sought under the domestic laws or procedures of Mexico, and if so, the status of any proceedings. If the Committee’s determination is affirmative, the U.S. Trade Representative (“USTR”) is required to request that Mexico conduct a review at such facility. If Mexico chooses to conduct a review, it must report within 45 days of the request whether it has found a Denial of Rights. In the meantime, the United States can suspend liquidation of duties for imported goods from the facility at issue. If Mexico’s review finds a Denial of Rights, the United States and Mexico must consult on the actions necessary to be taken to remedy the labor violations within a certain period of time.
If Mexico (1) chooses not to conduct a review, (2) conducts a review and determines there was no Denial of Rights but the United States disagrees, or (3) conducts a review and determines there was a Denial of Rights but the parties cannot agree on a path towards remediation, the United States can request the formation of a Rapid Response Labor Panel (“Rapid Response Panel”). If USTR chooses not to request the formation of a Panel, the agency is required to certify its determination and provide information regarding any remediation plan to the committee on Ways and Means and the Senate Finance Committee. This accountability mechanism will likely push USTR to request the establishment of Panels where a resolution of allegations is not forthcoming.
As indicated above, a request to form a Rapid Response Panel can be in the form of a request for an opportunity to verify a Covered Facility’s compliance with a Party’s labor laws or for a determination of whether there has been a Denial of Rights. In forming the Rapid Response Panel, the USMCA requires that the three-person panel be comprised of (1) an individual from a list of panelists jointly created by the United States and Mexico, (2) an individual from a list created by the United States, and (3) an individual from a list created by Mexico. During the course of its determination, the Rapid Response Panel may conduct an on-site verification, in which U.S. and Mexican observers may participate. Upon receiving a request for verification, the respondent Party must reply to the request within seven (7) business days; otherwise, verification will be deemed to have been refused, which can be taken into account in the Panel’s determination. If the respondent Party agrees to verification, the Rapid Response Panel and accompanying observers must conduct the verification within 30 days after receipt of the request by the respondent Party. Within 30 days following verification or a respondent Party’s refusal of verification, both Parties will be provided an opportunity to be heard. The Rapid Response Panel must make its determination in writing and release its determination to the public.
The procedures outlined above, although rapid, provide many opportunities to negotiate with national governments and interested parties to arrive at an acceptable resolution. In fact, there may be strong political interest in Mexico and the United States supporting settlements that avoid confrontation with tariffs and showcase significant compliance efforts with the Agreement’s labor obligations. Accordingly, any dispute settlement strategy should include an advocacy effort with the U.S. and Mexican governments.
Remedies under the Rapid Response Mechanism, like the underlying allegations, are specific to a Covered Facility. In the event of a Denial of Rights determination, the complainant Party can suspend preferential treatment for goods manufactured at the specific Covered Facility or impose penalties on goods or services provided by the Covered Facility. For a second Denial of Rights determination, a complainant Party can also deny preferential treatment or impose penalties against the same or related goods or services provided by other Covered Facilities owned by the entity of the offending facility. On the third Denial of Rights determination, the complainant Party can completely prohibit entry of goods from the entity that owns the facility, including from Covered Facilities owned or controlled by the entity that have not been subject to allegations or dispute settlement under the Rapid Response Mechanism. Remedies will remain in place until the parties agree that the Denial of Rights has been remediated. If the Parties disagree on whether the Denial of Rights has been remediated, the responding Party can request an opportunity to demonstrate to the Rapid Response Panel that the problem has been remediated.
The impact of labor allegations at facilities in Mexico will likely be significant on Original Equipment Manufacturers (“OEMs”) and their suppliers. Companies will likely need to update their internal measures to closely align with the USMCA to ensure workers can exercise their right to freely associate, join a union, vote for union representatives by secret ballot, and collectively bargain. Companies in Mexico will need to adapt the requirements of Mexico’s recent labor reform legislation into their own internal measures.
Given the political attention to these issues, the industry should expect a number of Denial of Rights allegations early on. Because allegations can be made by public stakeholders, Petitions to address Denials of Rights under the Rapid Response Mechanism will likely occur more frequently than disputes under the slower-moving state-to-state dispute settlement process. The Interagency Labor Committee may initiate the process to review a Covered Facility on its own, but it is likely that this process will be driven by public stakeholders like unions and supported by their political allies.
Companies may want to consider various advocacy efforts with the United States and Mexican governments as well as strategic efforts to mitigate any potential disruptions from goods manufactured by targeted Covered Facilities. Such efforts will involve auditing efforts of internal labor practices, investigations of a competitor’s labor practices, negotiating with governmental and non-governmental actors, and supply chain considerations. In the event that a company’s facility or one of its supplier’s facilities is an enforcement target under the Rapid Response Mechanism, it is important to quickly get a sense of the allegation, the process, and the potential exposure to import tariffs and other penalties.
 On May 2, 2019, Mexico’s new labor reform legislation took effect and provides for a four-year implementation timeline.
 The Committee is co-chaired by the United States Trade Representative and the Secretary of Labor and will include representatives of the Department of State, the Department of Treasury, the Department of Agriculture, the Department of Commerce, the Department of Homeland Security, and the United States Agency for International Development.