This is the second of two posts that take a look at the submissions and recount some of what was said at the hearing in the first USMCA Rapid Response Labor Mechanism (RRM) dispute between the United States and Mexico. If you’re new to the discussion, check out the prior post here. Since my last post, however, the panel’s 119-page determination (including a separate view by one panelist and three annexes) was made public so I will comment briefly also on its findings where applicable.
In this post, I concentrate on two interrelated issues. One is the parties’ discussion about the meaning of “Covered Facility,” and the other is the parties’ dialogue with the panel about the panel’s purpose and the purpose of the RRM. If you're short on time, here are the two bottom-line points that came through from the panel proceedings: (1) the intersection of trade and labor and the issue of how the latter fits into the former are far from settled, and, (2) despite the extensive customs data that governments now collect, specific details about goods crossing borders remain challenging to prove – a point that is relevant also to other sustainability and due diligence laws beyond the RRM.
To be sure, the panel’s decision did not turn on either of these issues. Rather, the panel’s determination that it did not have “jurisdiction” over the dispute rested on its conclusion that, under the USMCA, a denial of rights finding “can only be applied to events . . . that are subject to [Mexico’s] 2019” Federal Labor Law and that the events alleged by the United States in this instance did not meet that criterion. I take up that analysis in a forthcoming case note; in the meantime, colleagues have summarized the panel’s discussion on their law firm websites in case of interest.
Covered facilities and their sales profiles
To remind us again, the Agreement defines “Covered Facility” as a facility in Mexico or the United States that “(i) produces a good or supplies a service traded between” Mexico and the United States; “or (ii) 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.” I will confess that, among all the topics that one could find legally or institutionally interesting (and, I suppose, controversial) in the RRM when the RRM was first announced, the definition of Covered Facility was relatively low on my list. It was on the list, sure, but I did not expect the extended discussion that played out among the parties and the panel, and perhaps I was not alone among stakeholders.
Throughout the hearing, the panel asked several questions about the meaning of “Covered Facility.” The issue was contentious as an evidentiary matter because the United States did not provide evidence to show that substances being mined at the San Martín facility were entering the United States. Rather, the United States took the position that it was sufficient to rely on the operating company’s U.S. Securities and Exchange Commission Form 10-K demonstrating that the company, which also operates other facilities, had recorded sales in the United States. Mexico later called out the United States on this point, saying that if the United States had wished to show that minerals from the mine were exported to the United States, it could have and should have submitted documents from U.S. Customs and Border Protection, but it did not. The panel subsequently had no difficulty dismissing the U.S. arguments with respect to the first possible definition, (i), of Covered Facility.
More challenging was the question of whether the facility produces something that competes in Mexico with a U.S. good or service under definition (ii). Let’s look back at the parties’ arguments.
The United States argued that the panel’s interpretation should “reach as many facilities as possible” to ensure that employers do not evade coverage under the RRM. Consequently, the U.S. position was that the good produced at a covered facility does not have to be exported or be put on the market to be considered a good that is traded between the parties or that competes in the territory of a party with a good of the other party. Rather, the United States maintained that where a good is a traded good, the circumstances of production of that good in any particular facility will affect the market for that good more generally. When questioned, the United States argued that “whether or not goods from the San Martín facility themselves are exported does not change the fact that if the labor rights of the workers producing those goods are not protected, costs are likely to fall,” affecting both the labor market and the economic market in which the facility operates.
Now this assertion sounds a lot like some of the arguments that arose in the U.S.-Guatemala dispute concerning the phrase “manner affecting trade” – a phrase that comprises part of an obligation on the parties to the CAFTA-DR. In the context of that dispute, there was some discussion as to whether a government’s failure to effectively enforce its labor laws would give firms in that country an economic advantage. It came to light that some economic studies have suggested that the opposite is true: firms -- and their host countries -- benefit financially where higher labor standards are enforced, not the other way around. Surely there are various layers of generality and nuance to such studies, and likely there is countervailing research. The point remains that these really complex interacting factors have contributed to the creative and still evolving experimentation in trade agreement drafting. For its part in the present dispute, Mexico offered that the United States failed to identify any U.S.-origin merchandise competing with the products from the mine.
Spoiler alert: The panel agreed with Mexico that the United States did not meet its burden in this regard. However, the panel nevertheless concluded that the mine was a Covered Facility on the basis of a statement made by the mine itself in its written submission. The mine argued, like Mexico, that the United States did not show that minerals produced at the mine competed against U.S.-origin goods, and that it could not do so, because the mine “has not sold any copper ore or concentrates to unaffiliated facilities in Mexico. It is all captively consumed.” This statement – that something is captively consumed – was sufficient for the panel to find that “production from the San Martín mine was in fact captured internally . . . presumably in Mexico”. The panel concluded that this statement “shows that the San Martín mine does indeed sell in Mexico and prima facie competes with other suppliers in the Mexican market.”
The place of “trade” in “trade & labor” disputes
The issues surrounding the RRM’s scope and the participants’ corresponding arguments are reflective of a broader conversation about the relationship between trade and labor and why we have labor chapters in trade agreements. Obviously, that is a question that many scholars and practitioners have addressed in the last 30 years. But it came to a clear point when the panel chair asked the following question on the second day of the hearing:
“As I sit here listening to the parties talk about USMCA as a trade agreement, I’m forced to wonder why I’m sitting in this chair. I was selected . . . because I have experience in labor matters. . . . Your repetition, both of you, that this is a trade agreement makes me wonder how you see the labor relations lens superimposing itself on a trade agreement.”
This debate about the panel’s role came up in several moments during the hearing. Mexico repeated more than once that “USMCA is not a labor treaty. It is a trade treaty.” A panel member at one point asked both sides whether the purpose of the Mechanism was to provide protection to the most workers possible. And, on another occasion, a panel member questioned the United States on the “ultimate purpose” of the RRM and whether it was to support a “notion that violations of freedom of association and collectively bargaining are a form of unfair competition.” As per the arguments I recounted above, the United States replied that the purpose was to prevent companies from producing in Mexico with an unfair advantage, which led the panelist to ask whether the panel ought to take into account in this dispute whether the actions complained of were giving Mexico an economic advantage. The conversation continued to the point where the panelist suggested that it would likely be to the advantage of the United States not to intervene on behalf of the striking workers as it would potentially eliminate a competitor for U.S. exporters.
These exchanges again showed the complications of the trade-labor relationship and the multiple functions of labor chapters in trade agreements: leveling the playing field and protecting human rights to name two common, but not obviously complementary, narratives. A footnote in the panel’s determination revealed just how many U.S. and Mexican companies are part of the corporate structure of this one mine. And some customs practitioners strongly believe that the RRM as presently structured inflicts more pain on U.S. companies (importers) than it does on the “misbehaving” facilities in Mexico.
In this context, these questions also intersect with issues of complementarity – is the RRM about strengthening Mexican institutions and what place for them in the story? At the hearing, Mexico raised concern that the United States was trying to broaden the Mechanism by creating “universal jurisdiction” over violations of Mexican labor law whereas, in Mexico’s view, the only law of relevance is the 2019 Federal Labor Law. Mexico argued that the panel could not act in this instance because to do otherwise would make it an appellate body over Mexican courts, which it is not.
Similarly, the panel did not get much into the standard for a “denial of rights,” but the parties did discuss it during the hearing. The United States argued that a denial of rights could be shown through a demonstration of a violation of Mexican law. Mexico replied a denial of rights is a term that is defined by the international agreement, not by domestic law, and must involve something more than just an ordinary violation of Mexican law. These questions about the relationship between Mexican law and treaty interpretation will have to wait for another day.
Looking ahead
As the next RRM panel gets underway, it will face its own set of interpretive challenges. What is clear thus far is that the language of the instrument has made it hard to square some of the parties’ intended review processes with traditional dispute settlement proceedings. The parties and the panel all appear to have struggled with reconciling these expectations and the text.
In the meantime, we will see if the United States carries on with accepting more RRM petitions in the months leading up to the election and, perhaps more importantly, in the period leading up to the USMCA review where both the United States and Mexico seem poised to want to make some changes to the current RRM arrangement.
