Four Years of the USMCA Rapid-Response Labor Mechanism

Four Years of the USMCA Rapid-Response Labor Mechanism

May 9, 2024, Covington Alert

Four Years of the RRM

Since the U.S.-Mexico-Canada Agreement (“USMCA”) entered into force in July 2020, the special labor-related enforcement mechanism known as the facility-specific Rapid-Response Labor Mechanism (“RRM”) has been invoked 23 times regarding Mexico’s compliance with labor-related obligations under the USMCA. As outlined in our prior alerts, the RRM is the first of its kind in any free trade agreement, and provides a means to enforce, at the facility level, labor-related obligations set forth in the USMCA that guarantee worker rights to free association and collective bargaining. To date, the RRM has been used almost exclusively by the United States. Complaints considered by the Office of the U.S. Trade Representative (“USTR”) regarding alleged instances of denial of workers’ rights at specific facilities in Mexico account for 22 of the 23 times the mechanism has been invoked. Canada invoked the RRM once in March 2023 in regard to alleged violations of labor-related rights at a facility in Mexico.

Recently, use of the RRM has expanded both in frequency and with respect to the sectors it has been applied to. For instance, there were only two RRM cases in 2021 and four in 2022, but the number jumped to 13 in 2023. As of April 2024, the United States has invoked the RRM four times this year.

In addition, while the RRM applies to a list of certain “priority” sectors that broadly covers the production of manufactured goods, supply of services, and mining, the majority of facilities in Mexico initially targeted under the RRM (16 of the 23 facilities) operated in the automotive sector. All facilities targeted by the United States and Canada under the RRM prior to June 2023 were limited to that sector. Since June 2023, however, USTR has broadened its use of the RRM to target facilities operating in other manufacturing sectors, as well as facilities involved in mining, and the supply of services. The four requests that were submitted in 2024 have similarly expanded use of the mechanism to facilities operating in telecommunications, food production, steel manufacturing, and mining.

The U.S. government has considered that 17 out of the 22 cases it has referred to Mexico have been successfully resolved. In several instances, the resolution has consisted of an agreement by the U.S. and Mexican governments on remediation plans. These plans include specific remediation measures that Mexico must adopt. They often also identify actions the facility must take or sometimes refer to separate agreements concluded in parallel with representatives of the affected facility, though this is not always the case. In at least one instance, following the announcement of a remediation plan agreed to by the two governments regarding an automotive plant in Mexico, the company closed the facility and ended operations in Mexico.

If the governments cannot reach an agreement, the complaining government can escalate the dispute to a Rapid-Response Labor Mechanism Dispute Settlement Panel (“RRLP”) to decide whether a violation of USMCA labor-related obligations has occurred. To date, the United States has requested such a panel on only two occasions. The first one relates to allegations of labor rights violations at a mining facility. In April 2024, Mexico announced the panel had ruled in its favor, finding that it had no jurisdiction over alleged denials of workers’ rights that predated entry into force of the USMCA. The second panel was requested by USTR in April 2024 to address a dispute involving labor rights violations at a telecommunications facility in Mexico.

Challenges for Companies

• Most RRM complaints have targeted Mexican subsidiaries of U.S.-headquartered firms, but companies headquartered in Europe, Japan, Korea, China, and Mexico have also been targets of complaints. Since the mechanism is facility specific, it is possible that corporate offices and headquarters may not be aware of the alleged denial of workers’ rights until news of the allegations is reported in the press or the U.S. government formally requests Mexico investigate the issue.
• The timeframe for companies to react to allegations of denial of workers’ rights is very short. USTR may initiate a request that Mexico investigate allegations of its own accord or at the request of individuals or entities. Once it receives a petition, USTR has 30 days to review the allegations and decide whether there is sufficient, credible evidence of a denial of rights at the facility. If it finds that there is, it will submit a formal request to the Mexican government to review. Mexico will then have ten days to decide whether to conduct a review and 45 days to investigate the allegations.
• At the same time USTR submits a formal request to Mexico to review an alleged denial of workers’ rights at a particular facility, USTR also instructs the Treasury Department to suspend liquidation of tariffs on goods from the facility. This delays the final computation of duties owed on those imports, which may be subject to punitive tariffs.
• There may be little transparency on the content of complaints of denial of workers’ rights. USTR may not make petitions available to the implicated facility or the public. In the past, USTR has even withheld the petitions from Mexico. In addition, there is little clarity on the channels for companies to submit their counter-arguments to the U.S. and Mexican governments. In many instances, the initial reviews of the allegations may be completed using only the information provided by the person or group that filed the complaint. Relatedly, facility representatives have sometimes been excluded from panel proceedings, and their counsel has been denied participation in the on-site facility verifications conducted by the panels.
• For large, publicly traded companies, the announcement of an RRM complaint or review may have immediate repercussions for stock prices and business relationships, even if a complaint is ultimately not accepted by the United States or reviewed by Mexico. Smaller companies may also suffer reputational harm and financial distress in the immediate aftermath of such a complaint.
• In several cases, U.S. and international workers’ rights associations with political affiliations in the United States or Canada are advising and, in some cases, joining Mexican unions in filing the complaints with USTR. In some circumstances, these labor associations are actively working in Mexico and providing legal and public relations advice to unions regarding the complaints.

What Can Companies Do?

• Companies should be vigilant and build a strong relationship between headquarters and facility managers in Mexico. It may be advisable for plant managers to have a direct point of contact at headquarters to communicate any concerns regarding workers’ rights raised by unions, as well as any issues arising regarding the collective bargaining agreement or the creation of new unions within the facility.
• Facility managers and human resources staff should have a strong working knowledge of labor rights and neutrality standards required under Mexican law. It is advisable that companies have a list of best practices to follow when carrying out votes on collective bargaining agreements and documenting such processes.
• Local staff should have adequate resources to ensure they are ready to receive visits by U.S. Embassy staff or Mexican authorities to facilities in Mexico, even on short notice, and provide any information requested.
• Companies can act proactively by providing training on labor rights and collective bargaining to employees, as well as documenting the training process. When possible, training should be done in coordination with Mexican labor authorities.
• A close working relationship with Mexican state labor officials is also advisable.

What to Expect

• The RRM is a trade enforcement tool that has garnered unique bipartisan support in the United States. As a result, USTR will likely continue to utilize the RRM aggressively to enforce compliance by Mexico with labor-related obligations under the USMCA.
• While the majority of cases have been resolved amicably through agreement, the RRM has revealed some tensions between the U.S. and Mexican governments on the use of the mechanism. Though the United States views enforcement of USMCA labor obligations as a priority, labor authorities in Mexico lack the resources to adequately respond to the increasing number of RRM complaints submitted by the U.S. government.
• Additionally, Mexico has stated that the RRM should not be used to undermine Mexico’s sovereignty by going beyond what USMCA requires and replacing or interfering with its domestic enforcement labor laws, including in cases that are being reviewed by local courts. Having expressed concern with the aggressive use of the RRM by the United States, Mexico may reject more requests to investigate such complaints in the future. Mexico has also expressed a desire to renegotiate the RRM to make it more symmetrical. Currently, the USMCA restricts the application of the RRM to only a limited number of U.S. and Canadian facilities by permitting Mexico to invoke the mechanism only with respect to facilities already subject to an order issued by specified domestic enforcement agencies in the United States and Canada.
• The recent U.S. request to establish a panel on the alleged denial of workers’ rights in the service sector suggests that USTR may be planning to expand its enforcement to that sector. Should the United States prevail in this dispute, this would send an important signal to companies operating in the services sector in Mexico.
• Under the terms of the USMCA, the United States, Mexico, and Canada are required to conduct a joint review of the agreement in 2026. It is expected that the RRM will be a contentious element of this review. Both U.S. and Mexican stakeholders could use the review as an opportunity to propose adjustments to the operation of the mechanism.

If you have any questions concerning the material discussed in this client alert, please contact the members of the Covington team.