On January 16, 2020, the US Senate approved legislation implement the US-Mexico-Canada Agreement (USMCA) by a vote of 89 to 10, sending the legislation to President Trump to be signed into law. The Senate's approval follows a similarly lopsided vote in the House of Representatives, which approved the bill on December 19 by a vote of 385 to 41 (the widest margin in favor of any recent US trade agreement considered in the House). These votes occurred just weeks after the bill's introduction and publication, and despite the signing on December 10 of a "Protocol of Amendment" in which the Parties agreed on multiple, substantive changes to the USMCA text that had not previously been made public. Thus, despite Congress's approval of the USMCA, questions remain about the recent changes to the Agreement and how these and other novel USMCA provisions are reflected in the United States' implementing legislation. This report therefore examines the substance of the recent changes to the USMCA and the measures the United States intends to take in order to implement the Agreement. The report is organized as follows:
- Section I describes the key changes that the Parties agreed to in the Protocol of Amendment to the USMCA, signed in Mexico City on December 10;
- Section II provides an overview of the US implementing legislation, as well as the accompanying "Statement of Administrative Action" detailing actions the administration will take to implement the USMCA; and
- Section III discusses the likely next steps towards the USMCA's entry into force and the implications of the revised Agreement.
I. Key Updates to USMCA under Protocol of Amendment Addition of “Melted and Poured” Standard for Steel to Automotive Rules of Origin The USMCA as originally signed by the Parties provided that a passenger vehicle, light truck, or heavy truck could qualify as originating (and thus eligible for preferential tariff treatment) only if the producer could certify that, during the previous calendar year or a comparable timeframe specified in the Agreement, at least 70% of the producer’s North American purchases of steel and aluminium qualified as originating (Appendix to Annex 4B, Article 6). The Protocol of Amendment (“Protocol”) further tightened this rule by adding a requirement that, beginning seven years after the entry into force of the USMCA, steel may only qualify as originating for purposes of Article 6 if “all steel manufacturing processes…occur in one or more of the Parties, except for metallurgical processes involving the refinement of steel additives.” The added language clarifies that “[s]uch processes include the initial melting and mixing and continues through the coating stage”, and that “[t]his requirement does not apply to raw materials used in the steel manufacturing process, including steel scrap; iron ore; pig iron; reduced, processed, or pelletized iron ore; or raw alloys.” Though these terms and processes are not further defined in the Agreement, the US implementing legislation for the USMCA authorizes the Secretary of the Treasury to issue regulations pertaining to the steel purchase requirement, as well as the aluminum purchase requirement (which is not subject to a “melted and poured” standard).1 Such regulations may provide additional detail on how steel products may qualify as originating for purposes of Article 6. Creation of “Rapid-Response” Dispute Settlement Mechanism for Labor Complaints The Protocol added to the Dispute Settlement Chapter a new Facility-Specific Rapid Response Labor Mechanism (“Mechanism”) that will apply between the United States and Mexico (Annex 31-A). The stated goal of the Mechanism is to ensure workers in the two countries are not denied the right of free association and collective bargaining. The Mechanism establishes a two-stage process for addressing allegations that workers at a specific facility are being denied such rights: (1) an initial review period, during which the Parties may attempt to resolve the issue bilaterally; and (2) a formal dispute settlement process, in which an independent panel will determine whether the alleged “Denial of Rights” exists. Where a Panel determines that a Denial of Rights exists, the complaining Party will be authorized to impose remedies targeting imports of goods or services from the facility at issue. Annex 31-B 1 Rather, the Protocol amended the USMCA to provide that “[t]en years after entry into force of this Agreement, the Parties shall consider appropriate requirements that are in the interests of all three Parties for aluminum to be considered as originating under this Article.” 2 establishes an analogous Mechanism between Canada and Mexico. We provide a general summary of the Mechanism below: • Scope. A Party may bring an action under the Mechanism only where it concerns an alleged violation of free association and collective bargaining rights at a “covered facility”, defined as a facility in the territory of a Party that (1) produces a good or supplies a service that is traded between the Parties (or competes in the territory of a Party with a good or service of the other Party); and (2) is a facility in a “Priority Sector”, i.e., a sector that produces manufactured goods, supplies services, or involves mining. Manufactured goods are defined as including, but not limited to “aerospace products and components, autos and auto parts, cosmetic products, industrial baked goods, steel and aluminum, glass, pottery, plastic, forgings, and cement.” While this definition encompasses a wide range of activities, it does appear to exclude some important industries, such as agriculture. Moreover, the scope of the Mechanism is further limited by a requirement that alleged violations pertain to the domestic law of the party at issue. In particular, with respect to the United States, “a claim can be brought only with respect to an alleged Denial of Rights owed to workers at a covered facility under an enforced order of the National Labor Relations Board.” Similarly, with respect to Mexico, a claim can be brought only with respect to an alleged Denial of Rights “under legislation that complies with Annex 23-A” of the USMCA, which concerns worker representation in collective bargaining in Mexico. • Step 1: Requests for Review and Remediation. If a complainant Party “has a good faith basis to believe that a Denial of Rights is occurring at a Covered Facility”, it must first request that the respondent Party conduct its own review of whether a Denial of Rights exists, and that the respondent Party attempt to remediate any such Denial of Rights within 45 days of the request. The Mechanism provides multiple avenues for the dispute to be resolved at this initial stage, i.e., without the formation of a Panel or the imposition of remedies (for example, if the respondent Party determines that there is no Denial of Rights and this finding is accepted by the complainant, or if the respondent Party determines that there is a Denial of Rights and agrees with the complainant on a course of remediation). Alternatively, the complainant may request the formation of a “Rapid Response Labor Panel” (“Panel”) to conduct a separate verification and determination if (1) the respondent Party does not conduct the requested review; (2) the respondent Party finds that there is no Denial of Rights but the complainant disagrees; or (3) the Parties cannot agree on a course of remediation for a Denial of Rights. The Mechanism also provides that, in certain circumstances, the complainant Party may impose remedies without first obtaining a determination from a Panel that a Denial of Rights exists. Pursuant to Article 31-A.4.8, if the Parties agree upon a course of remediation but the complainant considers that the Denial of Rights has not been remediated by the agreed-upon date, the complainant may “notify the respondent of its intention to impose remedies at least 15 days prior to imposing remedies.” However, the respondent Party may, within 10 days of receiving such a notice, request a determination from a Panel as to whether the Denial of Rights persists, and the complainant Party will be prohibited from imposing remedies until the Panel makes its determination. • Step 2: Panel Proceedings and Verification. Once a Party has submitted a petition to the USMCA Secretariat requesting the establishment of a “rapid response” Panel, the Secretariat must appoint panelists within three days.2 Upon confirmation that the petition contains the relevant information, the Panel must issue a request for “verification” to the respondent Party (which the respondent Party may accept or refuse). If the respondent Party agrees to the verification, the Panel must conduct the verification within 30 days after the receipt of the request by the respondent Party, and observers from both Parties may accompany the Panel in any on-site verification if both Parties so request. Though the Agreement does not elaborate on what “verifications” will entail, this language indicates that they may include visits by the Panel to the covered facility at issue. Alternatively, if the respondent Party refuses the request for a verification or does not respond within seven business days, the complainant Party may request that the Panel make a determination as to whether there is a Denial of Rights, and the Panel “shall take the respondent Party’s refusal to allow a verification into account.” The Panel must make a determination as to whether there has been a Denial of Rights within 30 days after conducting a 2 The Secretariat must select by lot one panelist from the complainant Party’s list, one from the respondent Party’s list, and one from a Joint List. 3 verification, or within 30 days after it is constituted if there has not been a verification, and this determination will be made public. The Agreement provides that the Panel “shall provide both Parties an opportunity to be heard” before making its determination, but it does not elaborate on the process by which Parties may provide input to the Panel. • Step 3: Imposition of Remedies. After receipt of a determination by a Panel that there has been a Denial of Rights, the complainant Party may impose remedies after providing written notice to the respondent Party at least 5 business days in advance. The complainant Party is afforded broad discretion to “impose remedies that are the most appropriate to remedy the Denial of Rights.” Remedies may include (1) suspension of preferential tariff treatment for goods manufactured at the Covered Facility; or (2) the imposition of “penalties” (which are not defined in the Agreement) on goods manufactured at or services provided by the Covered Facility. The Agreement places no further limitations on the form or severity of any penalties, except that they must be “proportional to the severity of the Denial of Rights and shall take the panel’s views on the severity of the Denial of Rights into account[.]” In cases where a Covered Facility (or a Covered Facility owned or controlled by the same person producing the same or related goods) has received a prior Denial of Rights determination on at least two occasions, remedies may also include the denial of entry of goods (i.e., an import ban on goods produced by the Covered Facility). • Step 4: Removal of Remedies. After a Party has imposed remedies, the Parties “shall continue to consult on an ongoing basis in order to ensure the prompt remediation of the Denial of Rights and the removal of remedies.” If the Parties reach agreement that the Denial of Rights has been remediated, the remedies must be removed immediately. If the Parties are in disagreement as to whether the Denial of Rights has been remediated, the respondent Party may request an opportunity to demonstrate to the Panel that it has remediated the Denial of Rights, and the Panel must make a new determination within 30 days. However, if the Panel then determines that the Denial of Rights has not been remediated, the respondent will be prohibited from requesting another determination for 180 days, during which time the remedies may remain in place. • Recourse to State-to-State Dispute Settlement. A Party will have recourse to the USMCA’s state-to-state dispute settlement procedures under Chapter 31 if it considers that another Party “has not acted in good faith” in its use of the Mechanism, either with regard to (1) an invocation of the Mechanism itself; or (2) an imposition of remedies “that are excessive in light of the severity of the Denial of Rights found by the panel[.]” If a dispute settlement panel agrees that a Party “did not act in good faith” in its use of the Mechanism and the Parties are unable to resolve the issue through consultations, the complainant may elect to “prevent the responding Party from using [the Rapid Response Mechanism] for a period of two years”, or to impose another remedy permitted under the dispute settlement chapter. Though recent US trade agreements have included labor obligations that are subject to state-to-state dispute settlement, the “rapid response” Mechanism envisioned in Annex 31-A is novel in several important respects. Whereas state-to-state dispute settlement aims to determine whether government measures or patterns of behavior violate the Agreement, the Mechanism is aimed at identifying and remedying isolated instances in which labor rights are being denied by a specific private company (regardless of whether a USMCA Party government violated the Agreement). Thus, allegations under the Mechanism might occur more frequently than state-to-state disputes concerning labor obligations, which are relatively rare, particularly given that the US implementing legislation permits US parties such as labor unions to submit petitions for action under the Mechanism. Moreover, the Mechanism could result in remedial measures on specific companies that actually exceed the level of benefits that such companies accrue under the trade agreement. WTO and FTA dispute settlement systems traditionally limit the form and dollar value of any countermeasures authorized thereunder: violations suspend trade agreement benefits to match the level of harm experienced by the complaining party and do not permit the targeting of specific facilities. By contrast, the Mechanism gives a complaining Party discretion to suspend preferential tariff treatment and to impose additional, undefined “penalties” targeting offending facilities, provided that such remedies are “proportional” to the violation at issue. This could result in the goods of offending facilities being treated worse than the goods of a party not subject to the USMCA or another US trade agreement. Thus, while the Agreement 4 states that the goal of the Mechanism is “to ensure remediation of a Denial of Rights…not to restrict trade”, it might nonetheless prompt a wave of new allegations and company-specific trade restrictions targeting Mexican facilities, particularly in the “priority sectors” specified in the Agreement. Other Changes to Labor and Environment Chapters The Protocol makes several additional changes aimed at making the USMCA’s labor and environmental rules more easily enforceable through state-to-state dispute settlement, and expanding the scope of the environmental obligations: • Presumption that violations affect trade and investment. The USMCA originally provided that, to establish a violation of an obligation pertaining to Labor Rights under Article 23.3, a complaining Party must demonstrate that the respondent failed to adopt or maintain the required statutes, regulations, or practices “in a manner affecting trade or investment between the Parties.” A similar qualification applied to several other obligations in the Labor and Environment Chapters, including those set forth in Article 23.4 (Non-Derogation), Article 23.5 (Enforcement of Labor Laws), Article 23.6 (Forced or Compulsory Labor), Article 23.7 (Violence Against Workers), Article 24.4 (Enforcement of Environmental Laws), Article 24.8 (Multilateral Environmental Agreements), and Article 24.22 (Conservation and Trade), among others. The Protocol amended these provisions to establish that, “[f]or purposes of dispute settlement, a panel shall presume that a failure is in a manner affecting trade or investment between the Parties, unless the responding Party demonstrates otherwise”. By shifting the burden of proof to the responding Party, this change may make it easier for a complaining Party to establish that a violation of the USMCA’s labor or environmental commitments has occurred. • The Protocol revised Article 23.6.1 (Forced or Compulsory Labor) to establish that a Party “shall prohibit the importation of goods into its territory” that are produced by forced or compulsory labor, removing the caveat that a Party may do so “through measures it considers appropriate”. • The Protocol revised Article 23.7 (Violence Against Workers) to provide that “no Party shall fail to address violence or threats of violence against workers, directly related to exercising or attempting to exercise the rights set out in Article 23.3 (Labor Rights)” (whereas the USMCA originally prohibited such failures only where they occurred “through a sustained or recurring course of action or inaction”). • The Protocol added in Article 24.8 (Multilateral Environmental Agreements) a re