Consequences of Non-compliance with USMCA Labor Provisions: Potential Effects on Exporting Firms

This paper aims to analyze the consequences that firms may face when they are not in compliance with U.S. FTAs’ labor provisions. The paper reviews key labor provisions in all U.S. FTAs as well as the submissions filed by the United States against member countries. We find that except for the USMCA, the labor provisions in all previous U.S. FTAs have not been enforceable in practice due to lengthy dispute settlements with ambiguous language. The USMCA, however, contains labor provisions and a dispute settlement mechanism with a clear language and a new response mechanism, which addresses disputes expeditiously. The dispute settlement mechanism permits the United States government to file a complaint directly against a facility allegedly failing to comply with its labor obligations under that agreement. Consequences of the failure may include suspension of preferential tariffs, imposition of penalties, and denial of entry of goods or services produced by the firm. To illustrate this, the paper discusses two recent cases filed by the United States against two firms operating in Mexico. The submissions were filed under the USMCA’s U.S.-Mexico Facility-Specific Rapid Response Mechanism. The analysis of these cases show that the agreement does not have the shortcomings of past U.S. FTAs. Therefore, firms operating in Mexico and exporting to the United States under the USMCA preferences face substantial risks of losing their benefits if they fail to comply with the labor provisions of the agreement.