On July 1, 2020, the United-States-Mexico-Canada Agreement (USMCA) entered into force, replacing the 26-year-old North American Free Trade Agreement (NAFTA). The U.S. government has taken several steps toward implementation via executive order and proposed regulations, but the legal framework remains a work in progress.
One of the most closely watched provisions is the Facility-Specific Rapid Response Labor Mechanism (“Rapid Response Mechanism”) that will allow both the United States, Mexico and Canada to take action against facilities with certain labor standards failures. Unlike NAFTA, the USMCA includes labor standards in the core text of the agreement (Chapter 23, Labor), with new features adding to enforceability. The Rapid Response Mechanism will apply between the United States and Mexico (Annex 31-A) and between Canada and Mexico (Annex 31-B), but does not apply between the U.S. and Canada.
The potential impact on covered facilities in Mexico will be relevant both 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.
Scope of the Rapid Response Mechanism
The Rapid Response Mechanism applies when the United States or Mexican governments believe on a good faith basis that workers at a “Covered Facility” are being denied the right of free association and collective bargaining (“denial of rights”). A “Covered facility” is defined in the USMCA for purposes of the United States and Mexico as a facility that:
- (1) produces a good or supplies a service traded between the countries; or
- (2) produces a good or supplies a service that competes in the territory of a Party with a good or a service of the other Party.
In addition, the Covered Facility must be in a “priority sector.” Priority sectors are those sectors that manufacture goods, supply services, or involve mining (agriculture is not included). Manufactured goods include, but are not limited to, “aerospace products and components, autos and auto parts, cosmetic products, industrial baked goods, steel and aluminum, glass, pottery, plastics, forgings, and cement.”
The Rapid Response Mechanism has limitations for use in the United States that do not apply for Mexico. Specifically, a claim can only be brought against a U.S. facility where it is covered by a U.S. National Labor Relations Board (NLRB) order.
Triggering the Rapid Response Mechanism in the United States
The Rapid Response Mechanism is distinguished by its accessibility to stakeholders within the U.S. and Mexican economies, as well as by its fast-moving process.
First: Any member of the public in the United States may submit a petition alleging denial of rights at a covered facility in Mexico. The petition is submitted to an “Interagency Labor Committee for Monitoring and Enforcement” (“Interagency Labor Committee”), which will be co-chaired by the U.S. Trade Representative (USTR) and Secretary of Labor.
Second: Within 30 days of receiving a petition, the Interagency Labor Committee will review the petition and determine whether there is “sufficient, credible evidence of a denial of rights.”
Third: If the Interagency Labor Committee finds that there has been a “denial of rights,” it must request that Mexico conduct its own review and determine whether there is a denial of rights. If Mexico agrees to conduct a review of the complaint, it has 45 days to make a determination.
If Mexico does not agree to conduct a review of the complaint, the United States can request a panel to conduct a separate verification and determination under the USMCA. If Mexico does conduct a review and determines that there was no denial of rights, the United States can disagree and immediately request a panel verification and determination. However, if Mexico determines that there is a denial of rights, both countries will engage in a 10-day consultation period aimed at agreeing upon a course of remediation. If consultations fail, the United States then can request a panel verification and determination.
The USMCA implementing legislation authorizes the U.S. government to suspend liquidation for imports from a covered facility that is the subject of the complaint until:
- A labor panel under the Rapid Response Mechanism determines that there is no denial of rights;
- A course of remediation for a denial of rights has been agreed to and completed within the agreed-upon timeframe; or
- The denial of rights has been otherwise remedied.
If a panel determines pursuant to the Rapid Response Mechanism that there has been a denial of rights at a Mexican covered facility, the United States may impose remedies including (a) suspension of preferential treatment for goods manufactured at the covered facility; (b) imposition of “penalties” on covered facility; and (c) denial of entry for such goods, which can be invoked if a covered facility has received at least two prior denial of rights determinations.
Interim Procedural Guidelines for Submission of Petitions Alleging Denial of Rights
On June 30, 2020, the Interagency Labor Committee released interim procedural guidelines for the submission of petitions pursuant to the Rapid Response Mechanism and invited public comments on the procedures outlined in the notice.
According to the notice, petitions should provide information that addresses, among other things:
- Whether the petitioner has been harmed;
- For claims alleging failure to effectively enforce labor laws, “whether there has been a sustained or recurring course of action or inaction of non-enforcement of labor law”; and
- Whether “the matter referenced in the petition occurred in a manner affecting trade or investment.”
It will be worth monitoring the type of information the Committee deems to meet the criteria that a matter occur in a “manner affecting trade or investment”. Under the USMCA, the burden of proof to meet this standard was shifted from the petitioner to the respondent covered facility.
Comments on these guidelines and procedures may be submitted to the Committee on or before August 15, 2020.
Takeaway 1 – Potential for Early Interest and Invocation
U.S. stakeholders reportedly are interested in early use of the Rapid Response Mechanism. This includes labor organization, corporate competitors, and other parties. Thus, the early use of the Rapid Response Mechanism will be closely watched by Mexican manufacturers, affiliates of international companies in Mexico, and all companies that could be impacted by disruption to their Mexican supply chain. It will be important for these parties to understand the triggering and application of the Rapid Response Mechanism and how best to respond.
Takeaway 2 – Facilities in the automobile, aerospace, steel and aluminum and mining sectors are among the first that may be tested under the Rapid Response Mechanism.
Although there are some differences in “priority sectors” outlined in U.S. implementing legislation and in the USMCA, there is important overlap between the two. Specifically, these sectors include automobile, aerospace, steel and aluminum, mining and industrial bakeries. These sectors may be among the first tested under the Rapid Response Mechanism.
Takeaway 3 – Differing criteria for denial of rights claims applying to the United States and Mexico likely will mean more claims against Mexican covered facilities than U.S. facilities.
As noted above, in the United States, a claim only can be brought if the facility is covered by an NLRB enforced order. Since 2016, approximately 164 facilities in the United States have been subject to an NLRB enforced order. From those 164 facilities, approximately five would fall under the purview/scope of the “priority sectors.” Given the small number of cases involving companies in a “priority sector” covered by a NLRB enforced order, there are fewer opportunities for denial of rights claims in the United States under the Rapid Response Mechanism.
There is no prerequisite to bring a claim for denial of rights in Mexico. Without threshold limitations relating to existing labor orders, and with the broad ability of the U.S. public to petition for use of the Rapid Response Mechanism, claims against Mexican covered facilities are expected to be more expansive in nature and number.