Clark Hill 2022 Automotive & Manufacturing Industry Outlook: USTR
Facility-Specific Rapid Response Mechanism
The United States Trade Representative (“USTR”) Katherine Tai has been clear that protecting labor rights is a priority for the Biden Administration. The United States-Mexico-Canada Agreement (“USMCA”) has become instrumental in putting this policy into effect. Unlike its predecessor, the North American Free Trade Agreement, the USMCA includes labor standards and enforcement provisions.
One of the novel features of the USMCA is the Facility-Specific Rapid Response Labor Mechanisms, set out in Annex 31-A and Annex 31-B. Annex 31-A applies to disputes between Mexico and the United States, while Annex 31-B applies between Mexico and Canada. Under those mechanisms, a Party can request to the other to review whether workers at a particular facility are able to exercise their right of free association and collective bargaining. The Mechanism can ultimately result in company-specific sanctions if a panel finds a violation of workers’ rights.
The potential impact of this mechanisms on facilities in Mexico is relevant to Mexican companies; U.S., European and Asian companies with affiliates in Mexico; and U.S. and Canadian companies that rely on Mexico as part of their supply chain.
So far, the USTR activated Annex 31-A in 2021 against two companies from the automotive sector in Mexico. Fortunately, in both cases the companies and the Mexican Government addressed the concerns, thus the complaints did not reach the panel stage.
USMCA Labor Commitments
Another related and broader USMCA labor component is Annex 23-A, which commits Mexico to adjusting its labor legal framework to ensure adequate recognition of the right of collective bargaining. The Government of Mexico passed significant legislation in 2019 to, among other things, implement Annex 23-A. Failure to comply with Annex 23-A, as implemented in Mexico’s legislation, can also trigger the Facility-Specific Rapid Response Labor Mechanism, resulting in trade sanctions for companies and ultimately affecting supply chains.
Background on USMCA Facility-Specific Rapid Response Labor Mechanism
The USMCA’s entry into force on July 1st, 2020, represents the beginning of a new era for trade and investment in North America. One of the new features found in the USMCA is the Facility-Specific Rapid Response Labor Mechanism. This is the first mechanism of its kind ever negotiated in a free trade agreement. It was designed to address an alleged violation of workers’ right to free association and collective bargaining in facilities across the region.
The mechanism grabbed public’s attention in 2021 when the United States requested Mexico to investigate allegations of denial of workers’ rights in an automotive parts factory and an auto manufacturing facility in Mexico (see here). Fortunately, in both cases, the companies, the Government of Mexico, and the United States agreed on a course to remediate the allegations. The USTR did not request the establishment of a panel. However, it is important to know the mechanism’s operation and its consequences on cross-border trade if a complaining Party imposes remedies to the facility under investigation.
If the allegations had not been resolved, the USTR could have requested the establishment of a panel to conduct verification and make a determination. Under Annex 31-A, if a panel confirms that a denial of rights has taken place in a covered facility, the USMCA allows the complaining party to impose remedies. Remedies may include (i) “suspension of preferential treatment for goods manufactured at the facility investigated” and (ii) “the imposition of penalties on goods manufactured at or services provided.”
Background on Worker Representation in Collective Bargaining in Mexico
Another new feature in the USMCA is Annex 23-A (Worker Representation in Collective Bargaining in Mexico). Although the Annex sets forth obligations that apply only to Mexico, it is relevant to the auto industry across North America., Thus, stakeholders must be aware of the Annex’s scope due to the integration of the auto industry in the region. Annex 23-A is also relevant because a non-compliance allegation may trigger the Rapid Response Labor Mechanism described previously. The two complaints the USTR filed in 2021 alleged denial of rights under Mexico’s labor legislation as amended to comply with Annex 23-A.
Annex 23-A provides specific legislative actions Mexico had to take to reform its labor law to recognize the right to collective bargaining effectively. For instance, Mexico’s labor law must:
- establish an independent entity for conciliation and registration of unions and collective bargaining agreements, and independent Labor Courts; and
- provide an effective system to verify that elections of union leaders are carried out through a personal, free, and secret vote of union members.
Notably, Annex 23-A provides that all existing collective bargaining agreements in Mexico must be revised at least once during the four years after the legislation goes into effect. Mexico amended its Labor Law on May 1st, 2019, and it provides that all collective bargaining agreements must be certified by no later than April 2023. The Mexican Government is currently amid a process nationwide to certify that collective bargaining agreements comply with the new labor regulations.
- Due to the integration of industries in Mexico and the United States, the lack of compliance with the USMCA Annex 23-A and Mexico’s Labor Law could negatively impact the supply chains between Mexican and U.S. companies if remedies are imposed as a result of the Facility-Specific Rapid Response Labor Mechanism.
- An investigation under USMCA Annex 31-A can be requested anytime, regardless of the four-year period provided in Mexico’s Labor Law to certify collective bargaining agreements no later than April 2023.
- U.S. companies are advised to confirm that their suppliers in Mexico comply with USMCA Annex 23-A to avoid disruptions in their supply chains due to penalties or sanctions imposed on suppliers as a result of a USMCA labor investigation under Annex 31-A.
- Mexican companies are advised to certify their collective bargaining agreements pursuant to Mexico’s Labor Law within the four-year period.
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