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Companies Should Understand USMCA's Labor Obligations as They Are Significant and Likely to Be Enforced

January 28, 2020, Covington Alert

Because labor-related obligations in existing U.S. trade agreements are general and largely hortatory, few enforcement actions have been taken with regard to these obligations. The labor obligations in the Agreement between the United States of America, the United Mexican States and Canada (“USMCA” or “Agreement”), however, are specific and likely to be enforced. In fact, unprecedented support of the USMCA by U.S. labor unions suggests that they are likely to press this and future administrations to vigorously enforce USMCA labor obligations, especially with regard to Mexico. Companies doing business in Mexico or sourcing goods from Mexico should understand USMCA’s labor obligations and develop compliance plans in preparation for entry into force of the Agreement.

Background

President Trump is set to sign the implementing legislation this week, which finalizes the United States’ ratification of the Agreement. Based on the terms of the Agreement, the USMCA will enter into force three months after the last notification is received by the Parties indicating that each Party has “completed the internal procedures required for entry into force.” Although it is unclear precisely when the USMCA will enter into force because many of the implementation requirements are still being worked out by the Parties, we think that companies should be prepared for the Administration’s enforcement of the new labor provisions.

The USMCA contains significant new labor-related provisions, including the:

  1. Requirement for Mexico to pass legislation recognizing the right of workers to engage in collective bargaining.
  2. First of its kind “Facility-specific Enforcement Mechanism” that is a rapid response mechanism to allow complaints to be brought against facilities for violating the rights of freedom of association and collective bargaining.
  3. New enforcement and monitoring mechanisms that allow for the inspections of factories and facilities that are not living up to their labor obligations.
  4. New “labor value content” rules for the automotive sector.

Below is an overview of each of these new provisions.

Worker Representation and Collective Bargaining

The USMCA Labor Chapter contains obligations requiring all Parties to adopt and maintain in law the labor rights as recognized by the International Labor Organization (“ILO”) Declaration on Rights at Work, including core worker representation and collective bargaining rights. The Annex to the Labor Chapter also includes obligations that are specific to Mexico, such as requirements that Mexico pass legislation recognizing the right for workers to engage in collective bargaining.

Facility-specific Enforcement Mechanism, Verifications and Penalties

The USMCA includes the strongest labor rights monitoring and enforcement mechanisms in any U.S. free trade agreement concluded to date. These include the creation of a “Facility-specific, Rapid Response Labor Mechanism” established through the addition of a special Annex to the Dispute Settlement Chapter of the Agreement. Under this mechanism, a Party believing that labor rights are being denied at a particular facility in the territory of another Party may request the establishment of a panel to investigate the matter. The powers of the panel include conducting on-site verifications at the facility in question, subject to the responding Party’s consent.

Where the verification (or a lack of cooperation by the responding Party) leads to a determination that the facility in question is, in fact, failing to accord labor rights to workers, that facility may be subject to punitive measures by the foreign Party that initiated the complaint. Such measures include a suspension of preferential tariff treatment for goods manufactured at the facility, or the imposition of penalties on goods or services provided by the facility. Furthermore, where a facility found to have failed to accord labor rights is owned or controlled by the same person as other facilities producing similar goods or services with prior violations, penalties may be extended to the goods or services of all such facilities.

Labor Value Content Rule for Automobiles and Trucks

Under the Rules of Origin Chapter, in order to make preferential duty claims for imports of passenger vehicles and light and heavy trucks, the Agreement sets forth specific percentages of vehicle content that must be manufactured with a minimum hourly wage of US $16 per hour. The specific percentage required begins at 30 percent labor value content (“LVC”) and increases annually before reaching its final (fully phased-in) value of 40 percent three years after entry into force. The intent of this provision is to protect U.S. automobile manufacturing jobs and prevent the shift of manufacturing jobs to lower wage jurisdictions. The Parties are currently working on uniform regulations for the rules of origin impacting the LVC and also other origin requirements for aluminum and steel and regional value content requirements for the automotive industry.

Steps Companies Should Consider

In light of the increased scrutiny and focus on labor rights in Mexico, we recommend that companies consider taking the following actions:

  1. Develop a comprehensive understanding of their supply chain in Mexico and the labor policies and standards of their Mexican suppliers, manufacturers, and service providers.
  2. Develop a written code of conduct for suppliers and service providers in Mexico.
  3. Ensure supplier, manufacturing, and service contracts reflect USMCA labor rights obligations with risk allocated accordingly.
  4. Institute a robust internal control process to monitor compliance with the code of conduct in order to avoid loss of duty preference claims, imposition of penalties, and potential delayed or rejected shipments.
  5. The automotive sector should continue to review LVC as the Parties to the Agreement further define critical details for implementation of the LVC and create new uniform regulations.

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