Summary:
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This article provides a brief overview of the justifications for labour provisions in trade agreements, describes some of the components and institutions negotiated into the USMCA’s labour chapter, and makes some arguments for why addressing labour issues in trade agreements through state-to-state and state-to-firm mechanisms, as the USMCA does, is part of increasing supply chain resilience and reducing risk.
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The new facility-specific quick reaction mechanism is a second fundamental change in the USMCA’s labour policy (RRM).
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The quick pace of factory-specific disputes indicates a new zeal on the part of the United States to address labor rights breaches in supply chains, particularly those involving freedom of association and collective bargaining rights.
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Nonetheless, there is a strong case that FTA labour chapters should be seen favourably as a tool for mitigating supply chain risk and increasing resilience, both of which are economical and political goals.
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With institutions that address state failure, firm-level labour violations, and a solid pre-ratification process that pushed Mexico to implement necessary labour law reforms, the agreement could serve the broader policy goal of building supply chain resilience, benefiting both the nation and individual firms.
Labour provisions are becoming increasingly common in modern free trade agreements
Their inclusion is motivated by several factors, including worries about unfair wage competition, human rights, and growing consumer and public demand for items created in ways that do not violate one’s conscience or implicate oneself in human rights violations.
Yet, the commercial and policy rationale for trade-based labour standards to increase supply chain resilience and disruption has received less attention. This article provides a brief overview of the justifications for labour provisions in trade agreements, describes some of the components and institutions negotiated into the USMCA’s labour chapter, and makes some arguments for why addressing labour issues in trade agreements through state-to-state and state-to-firm mechanisms, as the USMCA does, is part of increasing supply chain resilience and reducing risk.
Background: Free trade agreements include labour requirements
With the notable exception of India, which has historically objected to such measures2, most countries are parties to at least one trade agreement that includes labour and language requirements. No country has been more vigorous in this endeavour than the United States, with Canada a close second. As a result, it should come as no surprise that the USMCA would have the most advanced and forward-thinking labour provisions of any free trade agreement (FTA) to date. The European Union is rethinking its trade, sustainability, and development chapters, which include labour rules. It appears to be moving closer to the North American model, including the possibility of introducing trade remedies for substantial violations of international labour standards. 3
The inclusion of labour provisions serves several purposes. Protectionism has been an often-mentioned historical driver. In other words, some groups wanted to make it harder for businesses to move or get supplies from other countries because of pay differences. The hope is that establishing baseline labour standards will level the so-called “playing field.” Yet, this explanation has limited explanatory power. Even though some American unions and lawmakers have tried in the past, labour standards, when they have been put into place, rarely require trading partners to pay the same wages. So, they haven’t done much to raise the cost of outsourcing enough to change a company’s decision about making or buying something. It’s important to note, though, that the USMCA’s rules about minimum average pay for workers in the auto industry are some of the few trade rules that directly address wage levels. Instead, labour clauses in FTAs often require some combination of adherence to the principles of the International Labour Organization’s (ILO) basic conventions and enforcement of, and non-derogation from, a country’s labour laws while leaving some pay-setting freedom.
For a more nuanced look at what makes labour provisions in trade agreements important, it’s also important to remember that ILO conventions deal with widely accepted standards from human rights laws and values. They include freedom of association and collective bargaining rights, prohibitions on forced labour, non-discrimination in the workplace, and minimum work ages for various types of work. Academics call them “non-cash standards” because they don’t clarify that suppliers, lead firms, or governments must pay more wages or benefits. 4 Rather, they call for applying procedural safeguards to ensure that workers enter the labour market as freely consenting individuals who are treated equally and have the right to collaborate with their employer.
The labour clauses of the USMCA
The USMCA, like most labour chapters, is founded on a range of goals. Earlier labour provisions mainly resulted from Democratic legislators and union constituencies advocating for them. As President Bill Clinton worked on the NAALC, he tried to get Democrats to back NAFTA and free trade. The Republican Party in the United States has been staunchly pro-trade and opposed the inclusion of labour conditions in NAFTA. Unlike with NAFTA, however, suddenly, trade-sceptical and working-class-aligned Republican legislators, along with union-backed Democrats, approved significant labour protections in the USMCA that went above and beyond any previously negotiated U.S. labour standards. 5
The labour provisions of the USMCA replicate the traditional North American approach to labour laws while including many novelties from prior FTAs. The first group consists of state commitments, such as enhancing some labour rights guarantees, prohibitions on forced labour and increased protections for migrant workers. It also includes clarifying wording that may help states prevail in a state-to-state dispute. Maybe more politically significant was an annexe provision titled “Worker Representation in Collective Bargaining in Mexico,” which stated what labour law reforms Mexico would have to enact to fulfil its 2017 constitutional reforms. The reforms included the establishment of labour courts in place of Mexico’s tainted arbitration boards, establishing verification processes for fair elections of union leaders, and eliminating of so-called protection contracts by requiring a majority showing support for newly negotiated collective bargaining agreements.
There is a strong case to be made that FTA labour chapters should be seen favourably as a tool for reducing supply chain risk and increasing resilience, both of which are key economic and political goals.
The new facility-specific quick reaction mechanism is a second fundamental change in the USMCA’s labour policy (RRM). The RRM is the culmination of years of effort by US unions and labour advocates who hoped for a way to address violations of free association and collective bargaining at the factory level in real-time. State-to-state processes for settling labour law enforcement issues took too long and produced few outcomes in the past. The RRM solves this problem by giving governments the power to put embargoes on goods from a particular facility if there is a good reason to believe that free association and collective bargaining rights have been violated. Note: The United States and Canada are susceptible to this provision only if their respective labour law agencies have found labour law violations in a domestic institution. Each government has chosen a list of possible panellists based on their histories to verify a factory’s compliance or evaluate whether a “denial of rights” occurred in that facility. 6
As of this writing, there have been five known RRM complaints, none involving a fast-response labor panel. Two cases were settled through negotiated agreements between the US government and the facilities,7 two cases were dropped after the Mexican government acted to the satisfaction of the US government8, and the fifth petition was settled without the US resorting to an official RRM dispute process. 9 Some of the companies in question were wholly owned subsidiaries of American corporations like General Motors, Cardone, and Panasonic Automotive Systems. The quick pace of factory-specific disputes indicates a new zeal on the part of the United States to address labor rights breaches in supply chains, particularly those involving freedom of association and collective bargaining rights.
The resilience of supply chains and labour
But what purpose does vital inclusion of trade and labour conditionality enforcement, specifically in the USMCA, serve? Some may consider the United States’ initiatives as unwise compromises to protectionist constituencies that limit trade and harm consumers’ and trading partners’ economies. Labour conditions’ protectionist consequences are debatable. Nonetheless, there is a strong case that FTA labour chapters should be seen favourably as a tool for mitigating supply chain risk and increasing resilience, both of which are economical and political goals.
The COVID-19 pandemic brought to the attention of policymakers a topic that had hitherto engaged largely supply chain managers and researchers: how do you manage supply chain interruptions and ensure resilience? Supply chain resilience can be defined in a variety of ways. Still, from a company’s standpoint, it refers to its ability to “prepare for and respond to disruptions, to make a timely and cost-effective recovery, and thus progress to a post-disruption state of operations—ideally, a better state than before the disruption.” 10 For many years, supply chain managers who tried eliminating inefficiencies in their supply, logistics, and warehousing operations used just-in-time logistics and lean supply chains as operational concepts. Yet, such a strategy offers little tolerance for error or external shocks like natural disasters, wars, political unrest, or worldwide pandemics.
While corporations may make individual and even concerted efforts to plan for these unforeseen events, broken and unreliable supply chains have ramifications for national security, political stability, and meeting consumer expectations for the commodities they require and desire. As a result, governments, especially the United States executive branch, have focused on developing policies to address supply chain resilience regarding national security and policy objectives. The White House’s 2021 report on supply chains focuses on four important sectors: semiconductors, large capacity batteries, critical minerals and resources, and pharmaceuticals. 11 Mexico has capability in some mineral production and is currently one of the top three suppliers of 14 of the 58 import-reliant minerals identified as vital by the US Department of Defense. 12
Yet, supply chain resilience and risk mitigation are critical not only for national security and the four sectors outlined by the Biden administration but also for businesses and the national economy. As a result, additional research is needed to determine how various parts of trade agreements, particularly labour chapters, can help increase supply chain resilience.
The White House study emphasizes boosting resiliency by strengthening domestic supply chains and ensuring American employees are paid well and have the right to unionize. These are admirable ideals, and a workforce like this would theoretically be more stable and less prone to causing disruptions. People would be eager to join well-paid employment, raising labour participation rates. But, as the White House report points out, it is unreasonable to expect supply chains to be totally restored or even “friend-shored.” That means we must examine how bad labour standards and inadequate union rights in global supply chains can harm supply chain resilience and consider what institutions or mechanisms can help strengthen it.
First, labour disputes that disrupt production are supply chains’ most visible labour risk. This is one of the few domains expressly identified by researchers as a risk factor. 13 There is scant evidence that labour provisions have reduced strikes or increased labour stability. Yet, as a condition of entering into a trade agreement, the United States frequently requires significant modifications to domestic labour laws and enforcement to align them with international and U.S. standards. These improvements will often include clearer processes for launching legal strikes and improved protections for union organizers. Workers will have less motive to organize strikes, particularly wildcat strikes, to achieve their goals or, as in the case of Mexico, to oppose the imposition of a union or collective bargaining agreement they did not pick.
Second, labour protections are designed to mitigate domestic anti-trade political risk. Many voters are opposed to free trade. Trade opponents include workers whose job losses may harm and large reorganizations. Researchers have also discovered that citizens will reject a business to demonstrate solidarity with their fellow citizens, who may suffer economically due to the transition to a free trade system. Adding labour and human rights measures to make free trade appear more like “fair trade” is meant to reduce resistance to FTA negotiations.
Furthermore, consumers, who are also citizens and thus have the ability to vote, have increasingly expressed a wish for their goods to be produced by international labour laws. Suppose trade liberalization and global supply chain facilitation are associated with exploitative and abusive working conditions. In that case, conscientious consumers will oppose free trade expansion and may support supply chain decrease, resulting in increased uncertainty and consumer pressure on firms with established global supply chains.
Finally, the US used the USMCA discussions to pressure Mexico to alter its labour rules to implement changes made in its 2017 constitutional amendments. As a result, Mexico has revised its laws on union recognition procedures, enacted legislation to ensure union democracy, and strengthened the institutional framework for settling disputes by establishing labour courts. The ideas of free voting, choosing one’s union leadership, contract voting and union independence are now by US and international labour law norms.
On the one hand, this approach may create issues of sovereignty and colonial-style ties in which the United States pushes legal reform on a weaker economic partner.
Yet, enhancing industrial relations systems and establishing responsive and effective dispute resolution organizations may reduce conflict between employers and employees. This, in turn, could reduce supply chain risks by reducing the number of work stoppages and workplace actions.
Fourth, supply chain risks are increasing due to the passage and improved implementation of import prohibitions on goods created with forced labour. The United States has some of the strictest rules on forced labour imports, and it recently passed the Uyghur Forced Labor Prevention Act, which prohibits the entry of goods suspected of originating wholly or partially in the People’s Republic of China’s Xinjiang Uyghur Autonomous Region, unless an importer can demonstrate otherwise. The ban encompasses commodities that may enter a country other than China and intermediary goods originating in Xinjiang. While the USMCA does not require partner countries to implement a similar law, it prohibits the importation of goods made with forced labour into any of the USMCA countries, providing firms with another regulatory assurance that goods entering through Mexico will not contain components made with forced labour, reducing the risk of impoundment by US Customs.
Fifth, supply chain resilience may be strengthened when supply chains are based in democratic countries responsive to their citizens. Recent instances in China and Russia show that autocratic regimes may be untrustworthy economic partners, and the benefits of investing in and sourcing from authoritarian economies are being questioned. 14 Economically, autocratic and democratic regimes are beginning to separate, boosting the incentives for corporations to create supply networks in politically comparable countries. 15 Furthermore, non-democratic regimes frequently value nationalism and social control over economic development and global integration, resulting in unstable and unpredictable supply networks. For this reason, several Western corporations aim to diversify their supply chains, and anecdotal evidence suggests that even Chinese contract manufacturers working with Western enterprises prefer to source outside of China to limit their exposure to the country’s political risk. 16 It should also be highlighted that organizations such as the USMCA’s RRM can aid in forming independent unions and developing genuine trade union leaders. Democratic unions can provide a training ground for democratic institutions in supplier countries through participation, lobbying, and leadership. 17
The labour chapter and institutions of the USMCA are the most complex and multifaceted of any thus far. With institutions that address state failure, firm-level labour violations, and a solid pre-ratification process that pushed Mexico to implement necessary labour law reforms, the agreement could serve the broader policy goal of building supply chain resilience, benefiting the nation and individual firms. Policymakers should view labour chapters regarding fair or ethical trade or human rights advocacy and supply chain resilience’s economic and political context.
