The United States–Mexico–Canada Agreement (USMCA) is a free-trade pact that was announced on November 30, 2018. This agreement changes the current rules governing North American trade contained in the North American Free Trade Agreement (NAFTA).
Branded as the “new NAFTA,” the USMCA represents a collective effort to modernize the free-trade system and increase economic activity among the participating countries while establishing a rule book for mutually beneficial cross-border business activity.
After approving several amendments to the USMCA, the participating countries reached a final agreement on December 10, 2019. On January 16, 2020, after an 89–10 vote in the Senate on implementing the legislation, the U.S. Congress gave final approval to the USMCA. President Donald Trump is expected to sign the deal this week. Mexico has already approved the deal, but it still requires ratification in Canada to enter into force and replace NAFTA. This is anticipated to take place in the early part of 2020.
Employers should be aware of the changes expected to come by way of the USMCA and anticipate any potential impact to their industries and their specific workforces and operations. This article addresses key changes in the USMCA, with a close focus on auto manufacturing and the agreement’s labour rules.
The USMCA contains special rules (Chapter 4, Rules of Orgin that will affect employers in the automotive sector and related industries. Overall, there is a push to establish regulatory requirements that will drive “Made in North America” cars and auto parts.
The agreement requires passenger vehicles and light trucks to contain 75 percent of North American-made content by January 1, 2020 (or three years after the date of entry into force of the agreement, whichever is later), and heavy trucks to contain 70 percent of North American-made content—up from 62.5 percent and 60 percent, respectively, under NAFTA—by January 1, 2027 (or seven years after the date of entry into force of the agreement, whichever is later). This is intended to ensure cars remain free from tariffs when moving between the participating countries.
There are also “Labour Value Content” rules that require proof that 40 to 45 percent of the content of a car is made by workers earning at least $16 per hour. There is, however, a credit of up to 15 percent of this “Labour Value Content” that can be provided to auto manufacturers for wages paid in activities such as research, development, and engineering.
Additionally, the USMCA contains a side letter in which Canada protects up to 2.6 million U.S.-destined passenger vehicles from any potential tariffs on an annual basis. (The letter also completely exempts light trucks from tariffs.) These protections exceed Canada’s historical export levels to the United States.
Stronger Labour Laws
Under NAFTA, labor requirements were addressed in a side agreement. The USMCA, however, provides a significant development over NAFTA by addressing these requirements in a labour-specific chapter (Chapter 23, Labor) in the main body of the agreement, signaling that labour rules will take on more importance under the USMCA.
Among the labour regulations, the USMCA includes labour rules addressing sex-based discrimination, migrant workers, and violence against workers. For example, the section on “sex-based discrimination in the workplace” requires participating nations to engage in policies that:
“protect workers against employment discrimination on the basis of sex (including with regard to sexual harassment), pregnancy, sexual orientation, gender identity, and caregiving responsibilities; provide job-protected leave for [the] birth or adoption of a child and care of family members; and protect against wage discrimination.”
In addition, the USMCA’s labour chapter contains a Mexico-specific annex. This annex looks to adjust Mexico’s union contract system. It requires all Mexican collective bargaining agreements to be renegotiated at least once within four years after the legislation goes into effect to address salary and working condition issues.
The collective bargaining agreements must receive majority support from the members through a “personal, free, and secret vote.” Although this process has been ongoing at the federal level in Mexico for some time, its inclusion in the USMCA is likely to bolster that process. (Up to December 31, 2019, there had been only 29 legitimizations of collective bargaining agreements.) The USMCA also creates a separate and independent body to regulate collective bargaining agreements in Mexico.
Implementation and Enforcement
The implementation and enforcement of labour rules is a critical piece of the USMCA. To improve enforcement, the parties have committed to enforcing their national labour laws to ensure they respect the obligations set out in the USMCA. Failure to meet these obligations could lead a participating country to activate a dispute resolution process under the USMCA.
Finally, the labour chapter contains some “re-opener” language that may lead to further regulations affecting workplaces. For example, within one year of the USMCA’s coming into force and thereafter, every two years, a labour council will meet to consider any issues contained in the labour chapter.
Recently, the United States and Mexico resolved an 11th-hour dispute that might have threatened to spoil a planned congressional vote on the USMCA.
After the two countries made the amendments, Mexico objected to the language in the U.S. legislation implementing the USMCA. The legislation stated that the United States would name up to five additional U.S. Department of Labor officials as attachés to the U.S. Embassy in Mexico City. Mexican representatives were concerned that these officials would effectively act as labour inspectors.
In response to these concerns, U.S. Trade Representative Robert Lighthizer released a public letter clarifying the role of the attachés stating that they would not be labour inspectors and would abide by all relevant Mexican laws. Mexican representatives were satisfied with the explanation provided in the letter.
The attachés will work with Mexican workers and civil society groups on the implementation of Mexican labour reforms and help make changes to ensure compliance with the USMCA.
Assessing the Impact of the USMCA
Employers in various industries have long utilized the NAFTA allowance to locate or relocate production to Mexico, where labour costs are lower. The USMCA aims to reduce the level of wage disparity between the participating countries through, among other things, the implementation and enforcement of the new labour rules (particularly in Mexico).
The labour movement appears empowered by the contents of the USMCA. In a public statement, Richard Trumka, president of the AFL-CIO, said,
“For the first time, there truly will be enforceable labor standards—including a process that allows for the inspections of factories and facilities that are not living up to their obligations.”
In the United States, specifically, the reduction in wage disparity between U.S. and Mexican workers is anticipated to drive investment back into the United States and reduce relocation of U.S. production to Mexico. Changes in Mexican labour law driven by the USMCA may ultimately result in a labour environment that is increasingly similar to the U.S. experience and through coalitions and alliances may ultimately strengthen trade unions in the United States.
In Mexico, the USMCA may increase worker participation in the collective bargaining process by encouraging worker-controlled unions. Further, the outcome of improved wages will help reverse the trend of wage depression in Mexico.
For Canada, the USMCA is anticipated to support the automotive sector and provide advantages for Canadian autoworkers. As a result of the negotiated side letter between Canada and the United States, the agreement is also expected to protect Canadian exports from being subject to high tariffs.
Next Steps in Implementation
The USMCA still awaits implementation in Canada. While trade experts worried that the USMCA might die as a result of politics in Congress, the vote of the House of Representatives in December 2019 and the Senate’s vote approving the USMCA appear to make the trade deal a certainty.
Ogletree Deakins’ Cross-Border Practice Group will continue to monitor developments related to the implementation of the USMCA and will post updates on the Cross-Border blog as additional information becomes available.
Stephen Shore is a partner in the Toronto office of Ogletree Deakins.
Pietro Straulino-Rodríguez is a partner in the Mexico City office of Ogletree Deakins.
Jordan Romano is a 2019 graduate of the University of Western Ontario Faculty of Law and is currently an articling student awaiting admission to the Law Society of Ontario.