The Renegotiated “NAFTA”: What Is In It for Labor Rights?

On 1 October 2018, the draft text of the United States-Mexico-Canada Agreement (Draft USMCA), the North American Free Trade Agreement (NAFTA)’s successor, was published on the official website of the United States Trade Representative. The Agreement has still some way to go though, including extensive legal ‘scrubbing’ by national authorities and, most importantly, approval by the corresponding national legislatures, which is likely to give rise to intense controversies. Much of the debate surrounding the Agreement so far has revolved around its labor implications, with US Trade Representative Robert Lighthizer stating that the renegotiations’ objective was, among others, “to better serve the interests of our workers”.

Against this backdrop, this post takes a look at the Draft USMCA’s labor rights dimension. It analyzes the Draft USMCA’s Labor Chapter and also reviews certain other chapters that are relevant from a labor rights perspective. The main argument is that, while the Draft USMCA entails some interesting legal innovations, the opportunity to address the main structural problems of US trade agreements to date in terms oflabor rights has largely been missed.

What is new in Draft USMCA’s Labor Chapter?

When the NAFTA was adopted in 1993, one of its novelties was the accompanying labor side agreement, which is still in force. At its core, it required parties to enforce their own domestic labor law, set up a Commission for Labor Cooperation, and established a complaint mechanism for third parties. It also allowed, in certain cases, for state-to-state arbitral dispute settlement with possibilities to impose limited fines as a last resort measure. The fate of NAFTA’s labor side agreement, which the Draft USMCA, as it stands, does not refer to, remains unclear.

By contrast, the Draft USMCA addresses labor rights matters in a dedicated Labor Chapter. Rather than developing a wholly new approach, this Chapter relied on other recent US trade agreements as a template, in particular the stalemated Transpacific Partnership Agreement (TPP). Like the latter, the Draft USMCA obligates State Parties, in addition to enforcing their domestic labor laws, to comply with certain minimum standards, largely related to the ILO’s 1998 Declaration on Fundamental Principles and Rights at Work. It also contains a number of procedural and institutional provisions, including on cooperative activities, a third-party complaint mechanism, and arrangements on inter-party consultations. Finally, the Draft USMCA – again as the TPP and earlier US trade agreements – allows for the enforcement of the Labor Chapter through the general Dispute Settlement Chapter, which can, eventually, lead to trade sanctions (“suspension of benefits”).

While the overall approach of the Draft USMCA’s Labor Chapter is hence far from original, there are some noteworthy innovations. Apart from new language on “Violence against Workers”, migrant workers, and sex-based discrimination and harassment, the Draft USMCA requires State Parties to ban “the importation of goods [made] with forced or compulsory labor” (Article 23.6 Draft USMCA). In addition, some new wording contributes to removing ambiguities in the requirements for establishing a breach of the labor provisions. Notably, the Labor Chapter provides a definition of the often-used phrase “in a manner affecting trade and investment between the Parties” (Articles 23.3, 23.4, 23.5, and 23.7 Draft USMCA). This is particularly relevant given that a Panel had used a similar clause in a dispute between the United States and Guatemala to find that widespread and severe violations of Guatemalan labor law did not breach the labor provisions of the relevant trade agreement, CAFTA-DR. As has been argued elsewhere, the definition used in the Draft USMCA sets this threshold rather low, which could make it easier to activate the relevant provisions in the future.

Specific collective labor law requirements for Mexico

A further novelty of the Draft USMCA Labor Chapter is its Annex 23-A, which contains detailed requirements regarding workers’ freedom of association and collective bargaining that need to be incorporated into Mexican law. The Annex formulates an “expectation” that the relevant legislation will be adopted no later than at the end of December 2018 (Annex 23-A(8) Draft USMCA), which would be before the Agreement’s expected entry into force and, at this point, seems rather ambitious.

In the degree of specificity and by establishing concrete timelines, the Annex resembles the bilateral labor action plans that had been negotiated between the United States and Vietnam, Malaysia, and Brunei, respectively, under the TPP. That being said, not all the requirements contained in the Annex are entirely new for Mexican law. For example, Article 123-XX of the Mexican Constitution, as reformed in 2017, already provides for the creation of independent labor courts, among other prescriptions introduced in Draft USMCA’s Annex 23-A. However, this reform still requires secondary legislation for its implementation, which is currently stalled in the Mexican Congress. Here, Annex 23-A could have the effect of accelerating the adoption of relevant legislation as well as shielding this reform from changes through subsequent governments.

Addressing wage issues through country of origin rules

What is probably the most innovative labor-related arrangement is not to be found within Draft USMCA’s Labor Chapter, but rather in the Rules of Origins Chapter. Annex 4-B of this Chapter provides that passenger vehicles as well as light and heavy trucks produced in North America need to have a minimum percentage of “Labor Value Content” to qualify as “originating goods”, thus benefiting from duty-free treatment. Workers need to be payed a minimum rate of US$16/hour within the production stage that is selected to fulfill this minimum percentage of material, manufacturing and assembly expenditures in order to meet the Labor Value Content requirement (Article 4-B.7(3)(a) Draft USMCA). Furthermore, the minimum percentage of Labor Value Content that needs to be met for the production of these vehicles increases every year, until 2023 or three years after the date of entry into force of said Agreement. Producers’ (i.e. car manufacturers’) compliance with these requirements will need to be certified on a yearly basis (Article 4-B.7(5) Draft USMCA). The exact technical procedures for certification and verification are to be determined through Uniform Regulations to be issued in the future, in accordance with Articles 5.10 and 5.17 Draft USMCA. Furthermore, Article 4-B.8 Draft USMCA, dealing with “transitions”, allows companies to opt for an “alternative staging procedure” during the first five years of validity of the Agreement for a fraction of the vehicle production, in which a lower percentage of the Labor Value Content would be required. Consequently, it can be seen as a “cooling-off” scheme for gradually adapting the modifications to the production chain. 

The above arrangement is, to our knowledge, the first attempt to integrate mechanisms for guaranteeing a minimum wage floor directly into the technical rules of a trade agreement. While this could potentially lead to increased wages in parts of the Mexican automotive industry and reduce incentives for US companies to outsource production, much will depend on how these provisions will eventually be implemented. Furthermore, by statically fixing the minimum floor at $16/hour, the rule lacks flexibility to keep up with economic developments and it is debatable whether the envisioned six-year-review of the Agreement (see Article 34.7(2) Draft USMCA) could lead to a modification of some of its provisions. Finally, by strictly limiting the “Labor Value Content” requirements to the automotive sector, the new approach leaves out many economic sectors that also suffer from wage disparities in the North American region.

A lost opportunity to deal with key structural flaws of the Labor Chapter

Notwithstanding the Draft USMCA´s innovations, deeper flaws hampering the effectiveness of the Labor Chapters in US trade agreements remain untouched. A key deficiency in this regard consists in the Chapters’ reliance on the goodwill of State Parties to enforce the labor provisions against each other. While third parties can file complaints against a State Party with a designated Contact Point of another State Party, it is entirely for the State Party receiving the complaint to decide whether the matter will be taken to inter-state consultations or, ultimately, dispute settlement. This is problematic because the experience with labor provisions under earlier US trade agreements suggests that State Parties are reluctant to activate relevant dispute settlement mechanisms even where partner countries are unwilling to address severe labor rights problems. Indeed, from the about 40 complaints under NAFTA’s labor side agreement and the half a dozen complaints under other US trade agreements, only one – the aforesaid case concerning Guatemala – made it to the dispute settlement stage. This was so, despite the existence of a number of cases where the path towards dispute settlement was legally available and where the national contact points had identified labor rights problems which the State Party complained against had not resolved (for an overview see here).

As a result, the case has repeatedly been made by academics and civil society actors that the dispute settlement arrangements for labor provisions under trade agreements need to be reconsidered (see, e.g., here, and here). As Henner Gött has convincingly argued, a straightforward and feasible way to increase the effectiveness of labor provisions in trade agreements would be to grant complainants direct access to arbitral dispute settlement. Such an approach could, for example, draw on experiences with complaints mechanisms pertaining to regional human rights tribunals and would also send a strong signal that workers’ concerns are not less worthy of protection than investor concerns. Instead, the Draft USMCA simply copies the dispute settlement model of earlier US trade agreements, which renders it unlikely that the Labor Chapter will serve as an effective device to tackle labor rights matters in the countries concerned.

Missing labor concerns within the overall agreement

With regard to the Draft Agreement’s design as a whole, it is conspicuous that there is so far no discernible effort by the Negotiating Parties to systematically evaluate the labor rights impact of either NAFTA or the Draft USMCA. In the absence of such an exercise, it is unsurprising that theDraftUSMCA does not seem to include sufficient safeguards to prevent its economic provisions from negatively affecting labor rights. A case in point is the Agreement’s Draft Investment Chapter. While the Draft USMCA provides for the phase out of Investor-State Dispute Settlement (ISDS) between the United States and Canada and limits the use of ISDS between the United States and Mexico, a possibility remains that investors will rely on the relevant provisions to challenge extant labor laws or envisioned reforms (for an ongoing case under a BIT see here). In this regard, it is striking that the Draft Investment Chapter replicates the TPP’s problematic exception clause, under which measures taken to further regulatory objectives are permissible only to the extent that these measures are “otherwise consistent with this Chapter” (Article 14.16 Draft USMCA).

Similarly, concerns persist with regard to the Draft Good Regulatory Practices Chapter. Not having a counterpart in the 1994 NAFTA, this Chapter has been criticized, including by workers organizations, as opening avenues for business groups to complicate the adoption of socially progressive legislation. Labor legislation was – with the exception of “labor justice” matters in Mexico (Annex 28-A(1)(c) Draft USMCA) – not exempted from the scope of this Chapter. It is therefore unclear how this Chapter will affect labor rights issues in the future. Finally, no effort was undertaken to devise sufficiently specific safeguards for the Draft Chapter on Exceptions and General Provisions. Instead, Article 32.1 Draft USMCA mostly reproduces the content of Article XX GATT and Article XIV GATS, even though their precise reach with regard to labor legislation continues to be uncertain. Given that a specific exception clause has been inserted to safeguard indigenous peoples’ rights (Article 32.5 Draft USMCA), it is unclear why a similar provision could not be crafted concerning labor rights matters.

On the whole, as the Draft USMCA’s text stands now, it appears to be a rather half-hearted attempt to address the labor-related flaws of NAFTA and other US trade agreements. Although the published version of the Agreement does contain some innovative labor-related features, more than mere legal scrubbing will be required if the USMCA is meant to bring about substantial progress for labor rights in North America.