EXECUTIVE SUMMARY

Since entry into force of the U.S.-Mexico-Canada Agreement (“USMCA”) in July 2020, the United States has brought two known complaints against Mexico under the Agreement’s Facility-Specific Rapid Response Labor Mechanism (“RRM”), concerning allegations that workers at two different factories in Mexico were being denied their fundamental right to organize.

The Office of the U.S. Trade Representative (“USTR”) submitted these complaints to Mexico in May and June 2021, respectively, and requested that Mexico review the allegations to evaluate their legitimacy. This process entailed significant interaction among U.S. and Mexican government officials as well as the companies that were the subject of the complaints.

Ultimately, both complaints were resolved through negotiation. The United States did not resort to a USMCA panel or impose punitive measures against the factories in question, both of which are potential options under the USMCA when a complaint under the RRM cannot be resolved between USMCA Parties.

Because both complaints were successfully resolved in the early stages, neither case materially tested the mechanism, though additional complaints are likely to materialize in the future as Mexico continues to implement the labor reforms required under the Agreement.  Future cases may provide greater insight into the functioning of mechanism with respect to the establishment of panels or the imposition of penalties on individual facilities.

As outlined in our prior alert, the USMCA contains labor-related obligations and enforcement mechanisms never before seen in a free trade agreement (“FTA”). For instance, the USMCA requires Mexico to pass legislation recognizing the right of workers to organize and engage in collective bargaining, and through the RRM allows one USMCA Party to petition another to investigate complaints that specific facilities are violating labor rights.

The RRM applies to a list of certain “priority” sectors that is reviewed annually. The list of priority sectors currently focuses primarily on automotive and aerospace manufacturing, industrial food operations, electronics, call centers, and raw material mining and production. Under this government-to-government enforcement mechanism, a complaining USMCA Party may request that the responding USMCA Party review allegations that labor rights are being denied at a particular facility in the responding Party’s territory. Where the responding Party declines to conduct a review, or where the Parties disagree on the result of a review or on a course of remediation, the complaining Party may request the establishment of a panel to investigate the matter. If the responding party agrees, that panel may conduct on-site inspections of factories and facilities subject to the complaint. If a verification visit is not allowed, the panel may take that fact into consideration in determining whether worker rights at that facility are being denied. Where the panel makes a determination that the facility in question is failing to respect labor rights, that facility may be subject to punitive measures by the complaining Party, including the denial of preferential tariff rates and other penalties on goods or services provided by the facility. In some cases, other facilities owned controlled by the same person or entity that owns the facility where a violation has been found may also be subject to penalties.

While complaints under the RRM can be initiated only by governments, the United States has established a petition mechanism through which private parties can ask the U.S. government to initiate a complaint under the RRM. In addition, the United States has also set up a confidential hotline for private parties to provide information relevant to the initiation of such complaints. Of the two complaints initiated thus far under the RRM by the United States, the first stemmed from information provided via the confidential hotline, while the second was the result of a petition filed by the AFL-CIO and others.

In addition to establishing the RRM, the USMCA required Mexico to implement labor-related reforms in its domestic law, including new measures to (1) allow workers to organize and engage in collective bargaining; (2) prohibit employer interference in union activities; (3) provide for personal, free, and secret votes by workers for union elections and agreements; and (4) establish impartial bodies to register union elections and resolve disputes over collective bargaining agreements. To implement these obligations, Mexico passed a labor reform bill in 2019. This law aimed at enhancing Mexican worker rights by ensuring that workers can vote for union representatives by secret ballot, establishing the right to join unions of choice, and creating the Federal Center for Labor Conciliation and Registration, an entity that is responsible for providing conciliation services in labor conflicts, verification of democratic union governance, and registration of Collective Bargaining Agreements (“CBAs”). These reforms also replaced the prior domestic system for the resolution of labor disputes, which going forward will be handled in new Federal and State level labor courts.

WHAT TO WATCH

  • Through the Coordination Council for the Implementation of the Labor Justice System Reform, Mexico imposed staggered deadlines for each of its 32 states to comply with the new labor law. These deadlines are set out in three phases. As of today, 21 states have implemented the labor reform with the remaining 11—which belong to the third implementation phase—expected to complete implementation by 2022. Of the 11 states that have yet to implement the labor law and create new labor courts, five are border states that include important manufacturing hubs for American companies.
  • With its 2022 budget, the Mexican government is sending mixed signals on labor reform implementation. The budget reduces funding of the judicial system, the key institution in charge of creating the new labor courts. The budget was approved by Congress and could have a negative impact on the implementation of the labor reform in the 11 states where implementation is still pending and new labor courts need to be created and staffed.
  • Ratifications of CBAs are proceeding slowly. As required by the new law, all CBAs need to be legitimized through personal, free, direct, and secret-ballot voting by May 2023. At present, 3,585[1] have gone through the ratification process, however, since there is no official number of existing CBA’s in Mexico, it is expected that an important number contracts will not go through the process and therefore be canceled.
  • Under the new law, employers in Mexico must ensure the protection of workers’ rights, including the right to freedom of association and the right to collective bargaining. While employers cannot interfere in unions’ operations, they can report any irregularity to the labor authorities in order to minimize the risk that the employer’s facility could be subject to punitive measures.
  • Employers also should maintain a close relationship with their unions and workers to better understand areas for potential improvement, as well as opportunities for collaboration in complying with the new provisions of the labor law.
  • In early 2022, two important labor union votes tested Mexico’s new union voting system:
  • For the first time in more than 80 years, over 75,000 workers from the Mexican state oil company PEMEX were able to vote for a union leader under a free and secret voting system. With more than 45,000 votes cast, Pemex employees elected as their new Union Secretary General a powerful union veteran who had served as treasurer of the union for 25 years. Despite the chance to elect new leaders, PEMEX employees opted for continuity, notwithstanding the criticisms that union leadership has received over the years.
  • Eight months after the initiation of the first RRM complaint under USMCA, and after a previous election needed to be re-run due to irregularities, a recently created union overwhelmingly won a majority of votes in an automotive manufacturing facility in central Mexico. The vote was supervised by the Mexican authorities, the International Labor Organization, and other international observers.

Both election processes went smoothly, and employees were able to cast their votes freely for the first time. However, companies should take care to ensure that any unions claiming to be new and independent are, in fact, as advertised. Some reports indicate that old-school union bosses are attempting to recast their influence via new unions in a new, more favorable light.

WHAT TO EXPECT

  • Labor disputes initiated under Mexico’s prior system (i.e., before implementation of the new law) are expected to remain under the old system until they are completed. As a result, the old local boards in each state will likely continue to function after the reform is implemented, as only new disputes will go to the new labor courts.
  • The slow pace of CBA legitimization could provide a basis for disputes and related enforcement actions under the RRM.
  • The strong focus placed by the Biden Administration on the enforcement of labor-related provisions in trade agreements may encourage private groups or unions in the United States to make use of the RRM petition process.
  • In Mexico’s labor reform process, 2022 is likely to be a critical year: the remaining 11 states will move toward implementation of labor reforms; pressure will mount to legitimize all CBAs in advance of the May 2023 deadline; and in the run-up to the November 2022 mid-term elections, the United States will likely continue its strong enforcement posture as part of the Biden administration’s “worker-centric trade policy.”
  • Companies in Mexico that have yet to undertake their CBA legitimization process should anticipate that the process may generate increased competition among unions, particularly as unions that portray themselves as “independent” attempt to unseat more traditional incumbent unions.

[1] https://reformalaboral.stps.gob.mx/#container2

Photo of Kimberly Breier Kimberly Breier

Kimberly Breier has more than 20 years of experience in foreign policy, primarily focused on Western Hemisphere affairs. Prior to joining the firm, Ms. Breier, a non-lawyer, was Assistant Secretary in the Bureau of Western Hemisphere Affairs at the U.S. Department of State.

Kimberly Breier has more than 20 years of experience in foreign policy, primarily focused on Western Hemisphere affairs. Prior to joining the firm, Ms. Breier, a non-lawyer, was Assistant Secretary in the Bureau of Western Hemisphere Affairs at the U.S. Department of State. She also served as the Western Hemisphere Member of the Policy Planning Staff.

Ms. Breier was previously the founder and Director of the U.S.-Mexico Futures Initiative, and the Deputy Director of the Americas Program at the Center for Strategic and International Studies (CSIS). She also was Vice President of a consulting firm, leading country risk assessment teams for private clients in Mexico, Argentina, and Chile.

In addition to her private sector and think tank experience, Ms. Breier served for more than a decade in the U.S. intelligence community as a political analyst and manager, primarily focused on Latin America.

From January 2005 to June 2006, Ms. Breier served at the White House in the National Security Council’s Office of Western Hemisphere Affairs, first as Director for Brazil and the Southern Cone, then as Director for Mexico and Canada, and also as an interim Director for the Andean region.

Prior to her government service, Ms. Breier was a senior fellow and director of the National Policy Association’s North American Committee—a trilateral business and labor committee with members from the United States, Canada, and Mexico.

Photo of Gerónimo Gutiérrez Fernández Gerónimo Gutiérrez Fernández

Gerónimo Gutiérrez Fernández, is a senior advisor at the firm. He provides strategic advice to businesses and governments on political risk, public affairs, communications, and business development. Gerónimo, a non-lawyer, has over 20 years of experience in senior government positions under five Mexican…

Gerónimo Gutiérrez Fernández, is a senior advisor at the firm. He provides strategic advice to businesses and governments on political risk, public affairs, communications, and business development. Gerónimo, a non-lawyer, has over 20 years of experience in senior government positions under five Mexican presidents in the areas of finance, trade, national security and diplomacy. Most recently, he served as Mexico’s Ambassador to the United States. In that position, he played a prominent role in the negotiation of the United States, Mexico and Canada Agreement (USMCA).

He previously served as Managing Director of the North American Development Bank (NADB), Deputy Secretary for Governance and Homeland Security, member of the National Security Council’s Executive Committee and, in the Foreign Ministry, as Under Secretary for Latin America and the Caribbean and Under Secretary for North America. In the latter capacity, he coordinated day-to-day trilateral and bilateral affairs with the United States and Canada. He also led negotiations for the creation of the Security and Prosperity Partnership for North America (SPP) – prelude to the present day North American Leaders Summit.

Gerónimo has also held other Mexican federal government positions in the Ministries of Economy and Treasury, the Office of the President, and Banobras.

Photo of Jay Smith Jay Smith

Jay Smith is of counsel in the Washington office. He joined the firm after several years as a professor of political science and international affairs, during which he specialized in international trade policy and international dispute settlement. His practice in the International and…

Jay Smith is of counsel in the Washington office. He joined the firm after several years as a professor of political science and international affairs, during which he specialized in international trade policy and international dispute settlement. His practice in the International and Litigation groups draws on this academic and policy experience.

He is currently helping clients develop and implement strategies with regard to the Trump Administration’s recent trade actions, including pursuing country exemptions and product exclusions to the recent steel and aluminum tariffs imposed under Section 232, and product exclusions to the proposed Section 301 tariffs.

Photo of Kate McNulty Kate McNulty

Kate McNulty is an associate in the Washington office who helps clients navigate complex international arbitrations and international trade matters. She has represented corporate clients in both commercial and investment treaty arbitrations, including under ICSID, ICC, UNCITRAL, and ICDR rules. She also provides…

Kate McNulty is an associate in the Washington office who helps clients navigate complex international arbitrations and international trade matters. She has represented corporate clients in both commercial and investment treaty arbitrations, including under ICSID, ICC, UNCITRAL, and ICDR rules. She also provides legal and strategic advice to clients on global policy and international trade issues relating to the negotiation, implementation and enforcement of bilateral and multilateral trade agreements, including in the areas of intellectual property, market access, regulatory trade barriers, government procurement, and investment.

Kate joined the firm after serving as a Foreign Affairs Officer in the Office of Multilateral Trade Affairs at the U.S. Department of State, where she managed trade enforcement and trade policy issues, and participated in the negotiation of international trade agreements on behalf of the U.S. Government.

Lorena Montes de Oca

Lorena Montes de Oca is a policy advisor in Covington’s Public Policy Practice-Latin America through which she provides strategic advisory and regulatory advice to clients doing business across Latin America.

Lorena, a non-lawyer, has over a decade of experience in public policy and…

Lorena Montes de Oca is a policy advisor in Covington’s Public Policy Practice-Latin America through which she provides strategic advisory and regulatory advice to clients doing business across Latin America.

Lorena, a non-lawyer, has over a decade of experience in public policy and international trade. During this time, she has supported private sector companies and policymakers on a broad range of sectors such as energy, trade and investment, technology, policymaking and economic development.

In addition, Lorena has particular experience in supporting companies with complex cross border projects between the U.S. and Mexico.