Consequences for Labor Violations in Mexican Factories Under USMCA Comes Into Focus

If a panel of labor experts determines that a Mexican factory is violating its workers' rights to collective bargaining, the U.S. may deny the goods from that factory the tariff benefits of the U.S.-Mexico-Canada Agreement -- but that denial of tariff benefits is not automatic.

The same is true for a second violation -- which is judged by not just violations at that individual factory, but at any factory under that ownership. If there were to be a third violation confirmed by such a panel, the U.S. could block entry of goods from the factory.

These panelists will have expertise in labor law, be independent of all parties to the complaint, and cannot be either U.S. or Mexican nationals. That latter rule was important for Mexican political sensitivities. There is also no way for countries to block formation of a panel by refusing to name panelists, or to pay for their time.

Trade lawyer Dan Ujczo, of Dickinson Wright, called the rapid-response panel section “brilliant negotiation. I like the tiered approach to penalties.”

During the process of determining if there was a violation -- or if there was, a short time to remedy it -- the goods can come into the U.S. duty free, but CBP “may delay final settlement of customs accounts” from the factory in question. Settlement must resume immediately if it's determined there was no violation, or that the violation is remedied.

“Products can flow across the border but customs will not liquidate the final entry until the dispute is resolved (so duties could go up),” Ujczo said. However, if there ever were a third violation, it appears goods could only be blocked after the panel rules.

Like the state-to-state dispute settlement system, there is consultation before adjudication. But again and again, the text of the USMCA limits how long a complainant must wait for a decision. The U.S. pledges to try to decide whether to pursue a complaint within 30 days. Then, Mexico has 45 days to review whether it thinks workers' rights are being violated at the factory. If it decides there is a violation, there are 45 days for the company to fix the problem.

Also, Mexico and the U.S. will endeavor to agree on the remediation without interrupting trade, but that's limited to 10 days.

If Mexico says there isn't a violation, but the U.S. disagrees, a panel is formed, and the panel has the authority to travel to the factory to verify the conditions. If the factory doesn't allow access, that is taken into account in the panel's report. The report is due either 30 days after the trip, or 30 days after formation if the panel is blocked from company property.

Also, if Mexico chooses not to do a review, the panel comes into play instead.

“The panel shall also provide its views on the severity of any denial of rights and, to the extent possible, identify the person or persons responsible for the Denial of Rights,” the section's text says. “The panel’s determination shall be in writing and shall be made public.”

At that point, it would be up to the U.S. to decide whether tariff benefits should be denied, or whether another penalty is more proportional to the harm, taking into account the panel's recommendations.

The two sides would continue to consult to find out when the problem has been fixed. Once it's fixed, the remedies are removed immediately. If the two countries don't agree that the violation has been remedied, the accused can ask for an opportunity to demonstrate to the panel that it has fixed it, and the panel will rule within 30 days. If it disagrees, the respondent can't ask for relief for 180 days.

The slower state-to-state dispute settlement system is still a backstop to this process. The text says: “If one Party considers that the other has not acted in good faith in its use of this Mechanism, either with regard to an invocation of the Mechanism itself or an imposition of remedies that are excessive in light of the severity of the Denial of Rights found by the panel,” it can open a state-to-state dispute.

When asked by International Trade Today how significant the labor panels could be for supply chains between Mexico and the U.S., Ujczo said, “I do believe that there will be an initial period where the rapid response mechanism will be used to make an example of a company or several to demonstrate the effectiveness of the vehicle. Combined with the domestic labor reform process in Mexico, it will be imperative for all companies doing in business in Mexico to review their employment practices and potentially perform internal [human resources] audits.”