February 2023
Labor chapters improve supply chain resilience: The case of the USMCA
Labor provisions are increasingly becoming standard features of contemporary free trade agreements.1 Their inclusion has several drivers, including, for example, concerns about unfair wage competition, human rights, and growing demands from consumers and citizens for goods made in ways that do not violate the conscience or implicate oneself in human rights abuses.
Less attention has been paid, however, to the business and policy case for trade-based labor standards as a tool to improve supply chain resilience and disruption. This piece briefly surveys the justifications for labor provisions in trade agreements, describes some of the components and institutions negotiated into the USMCA’s labor chapter, and offers some arguments for why addressing labor 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: Labor provisions in free trade agreements
Most countries, with the notable exception of India which has long standing objections to such provisions,2 are party to at least one trade agreement with labor provision and language. Indeed, no country has been more aggressive in that effort than the United States, with Canada arguably a close second. It should thus come as little surprise that the USMCA would contain the most developed and forward leaning labor provisions of any free trade agreement (FTA) to date. The European Union is undergoing a reevaluation of its own trade, sustainability, and development chapters, which include labor provisions, and appears to be moving closer to the North American model, including the possible introduction of trade remedies for material breaches of international labor standards.3
The purpose of including labor provisions is multifaceted. One oft cited historical driver has been protectionism. That is, certain constituencies have hoped to mitigate incentives for firms to relocate or source from abroad based on wage differentials. The hope would be that creating labor standard baselines would even the so-called “playing field.” But this explanation is of limited explanatory value. Labor standards, to the extent they have been implemented, almost never require comparable wage levels in trading partners despite the historical efforts of some American unions and legislators to do so. As such, they have done little to raise the costs of outsourcing enough to impact a firm’s make or buy, or sourcing decisions. However, it should be noted that the USMCA’s provisions on minimum average wages for workers in auto manufacturing are one of the few trade provisions that directly address substantive wage levels. Rather, labor provisions across FTAs generally require some mixture of adherence to the principles of the International Labour Organization (ILO) core conventions and enforcement of, and non-derogation from, a country’s own labor laws, while leaving a fair amount of discretion on wage setting.
A more nuanced approach to drivers of labor provisions in trade agreements must therefore consider the fact that ILO conventions address broadly accepted standards that derive from universal human rights law and norms. These include rights to freedom of association and collective bargaining, bans on forced labor, non-discrimination in the workplace, and minimum work ages for different kinds of work. These are what scholars have referred to as “non-cash standards,” because they do not directly prescribe increased costs to supplier, lead firms, or governments through wages or benefits.4 Rather, they require enforcement of procedural guarantees that workers participate in the labor market as freely consenting individuals who are treated equally, and who retain the right to act collectively in relation to their employer.
The USMCA’s labor provisions
Like most labor chapters, the USMCA’s are born from a variety of objectives. Previous labor provisions were largely the result of advocacy from Democratic legislators and their union constituencies. When President Bill Clinton negotiated the NAALC, he did so in part as an effort to increase Democratic support for NAFTA and for free trade more generally. The Republican party in the U.S. had been firmly pro-trade and opposed to the inclusion of labor conditionality in NAFTA. However, unlike in NAFTA, newly trade-skeptical and working class-aligned Republican legislators, along with union backed Democrats, supported strong labor provisions in the USMCA that went beyond any previously negotiated U.S. labor provisions.5
The USMCA’s labor provisions reflect the standard North American approach to labor provisions but also include several innovations from previous FTAs. The first set involve state obligations, including strengthening certain labor rights guarantees such as bans on forced labor and increased protections for migrant works.[For a summary see Congressional Research Service, USMCA: Labor Provisions, Jan 20, 2022, available at https://crsreports.congress.gov/product/pdf/IF/IF11308.] It also adds clarifying language that could make it easier to prevail in a state-to-state dispute. But perhaps more politically significant was an annex provision entitled “Worker Representation in Collective Bargaining in Mexico” that specified what labor law reforms Mexico had to make to implement its 2017 constitutional reforms. The reforms included creating labor courts in place of Mexico’s compromised arbitration boards, ensuring verification processes for fair elections of union leaders, and addressing so-called protection contracts by requiring a majority showing of support for newly negotiated collective bargaining agreements.
There is a strong argument that FTA labor chapters should be viewed positively as a tool to mitigate supply chain risk and increase resiliency, which are important economic and political objectives.
A second significant evolution in the USMCA’s labor regime is the new Facility- Specific Rapid Response Mechanism (RRM). The RRM is the result of advocacy by U.S. unions and labor advocates who had long hoped to create the ability to address violations for freedom of association and collective bargaining at the factory level in real time. State-to-state mechanisms of resolving labor law enforcement problems took too long and historically had little to show in terms of results. The RRM addresses this problem by granting governments the right to embargo goods from a specific facility if there is a credible allegation of violation of freedom of association and collective bargaining rights. Notably, the U.S. and Canada are only subject to this provision if their respective labor law agencies have issued a finding of labor law violations in a domestic facility. Each country has chosen a list of potential panelists, who were selected based on their backgrounds, to engage in verification of a factory’s compliance or determine whether there has been a “denial of rights” in that facility.6
As of this writing, there have been five known complaints brought using the RRM, none of which thus far have involved a rapid response labor panel. Two were resolved through negotiated agreements between the U.S. government and the facilities,7 two cases were resolved when the Mexican government acted to the satisfaction of the U.S. government,8 and the fifth petition was resolved without the U.S. resorting to an official RRM dispute process.9 Some of the companies in question were wholly owned subsidiaries of American companies, such as GM, Cardone, and Panasonic Automotive Systems. The rapid pace of factory-specific disputes signals a new aggressiveness by the U.S. to address labor rights violations in supply chains, and specifically those concerning freedom of association and collective bargaining rights.
Supply chain resilience and labor
But to what ends does aggressive inclusion of enforcement of trade and labor conditionality serve generally, and specifically in the USMCA? Some might dismiss the U.S. efforts as misguided concessions to protectionist constituencies that reduce trade and hurt consumers and the economies of trade partners. The protectionist effects of labor conditions are arguable. But regardless, there is a strong argument that FTA labor chapters should be viewed positively as a tool to mitigate supply chain risk and increase resiliency, which are important economic and political objectives.
The COVID-19 pandemic brought to policymakers’ attention a problem that had previously occupied mostly supply chain managers and researchers: How do you manage disruptions to the supply chain and ensure that it is resilient? Supply chain resilience can be defined in many ways, but from a firm’s perspective it concerns its ability to “prepare for and/or respond to disruptions, to make a timely and cost effective recovery, and therefore progress to a post-disruption state of operations – ideally, a better state than prior to the disruption.”10 Just-in-time logistics and lean supply chains were for many years the operating principles of supply chain managers who sought to shake out inefficiencies in their supply, logistics, and warehousing operations. But such an approach leaves little room for error or exogenous shocks like natural disasters, wars, political instability, or global pandemics.
While businesses might make individual and even concerted efforts to plan around these contingencies, broken and unreliable supply chains also have implications for national security, political stability, and meeting citizen consumer demands for the goods they need and desire. Accordingly, governments, including the U.S. executive branch, have focused their attention on forming policies to address supply chain resiliency as it relates to national security and policy aims. The White House’s 2021 report on supply chains highlights risks, vulnerabilities, and resilience in four critical sectors: semiconductors, large capacity batteries, critical minerals and materials, and pharmaceuticals.11 Among those sectors, Mexico has capacity in some mineral production, and is currently among the top three suppliers of 14 of the 58 import-reliant minerals that the U.S. Department of Defense has designated as critical.12
But supply chain resilience and risk mitigation are important not just for national security issues and the four sectors identified by the Biden administration, but also for firms and the national economy more generally. Therefore, there needs to be more analysis of how different elements of trade agreements, including labor chapters, might serve to promote supply chain resilience.
The White House report emphasizes increasing resiliency by strengthening domestic supply chains and ensuring American workers earn high wages and are allowed union representation. These are worthy goals, and such a workforce would theoretically be more stable and less likely to cause disruptions, and workers would be eager to join a well-paid workforce thus increasing workforce participation rates. But as the White House report notes, it is highly unrealistic to think that supply chains will be completely reshored or even “friend-shored.” That means we need to examine how poor labor standards and weak union rights in global supply chains might be detrimental to supply chain resiliency and ask what institutions or tools would serve to strengthen it.
First, the most evident labor risk in supply chains is labor disputes that disrupt production. This is one of the few domains that researchers have explicitly identified as a risk factor.13 There is little data to show that labor provisions themselves have been effective in reducing strikes or increasing labor stability. But as a precondition of entering into a trade agreement, the U.S. often requires extensive changes to domestic labor laws and enforcement that bring it into conformance with international and/or U.S. standards. These changes will often provide for clearer procedures for conducting legal strikes and stronger protections to organize unions. By creating stronger institutions, clear rules, and better enforcement, workers will have less reason to organize strikes, especially wildcat strikes, to realize their demands or, in the case of Mexico, to protest the imposition of a union or collective bargaining agreement that they did not choose to have.
Second, labor provisions are intended in part to reduce domestic anti-trade political risk. Many voters are not supportive of free trade. Opposition to trade originates not only from workers that will be affected by job losses and significant readjustments. Researchers have also shown that citizens will oppose trade out of sympathy with one’s compatriots who might be economically harmed by moving to a free trade regime. The inclusion of labor and human rights provisions to make free trade appear more like “fair trade” is intended to lessen the opposition to the negotiation of FTAs. Moreover, consumers—who are also citizens and therefore vote—have increasingly voiced their desire to have their goods produced in ways that are consistent with international labor rights. If liberalizing trade and facilitating global supply chains are associated with exploitative and abusive working conditions, conscientious consumers will oppose free trade expansion and possibly support supply chain retrenchment, leading to more uncertainty and consumer pressure on firms with established global supply chains.
Third, the U.S. used the USMCA negotiations as leverage to pressure Mexico to reform its labor laws that implement changes already made in its 2017 constitutional reforms. Accordingly, Mexico has changed its rules on union recognition procedures, implemented laws to guarantee union democracy, and improved the institutional framework for resolving disputes through the creation of labor courts. The principles of free voting, choosing one’s own union leadership, voting on contracts, and union independence are now consistent with the U.S. and with international labor law norms.
On the one hand, this process might raise questions of sovereignty and colonial-type relationships whereby the U.S. imposes legal reform on a less powerful trading partner.
But on the other hand, improving industrial relations systems and creating responsive and effective institutions to resolve disputes might lead to less conflict between employers and employees. This could in turn mitigate supply chain risks by potentially reducing the number of work stoppages and workplace actions.
Fourth, there are increasing supply chain risks because of the passage and greater enforcement of import restrictions on goods made with forced labor. The U.S. has some of the strictest rules on forced labor imports, and it also recently passed the Uyghur Forced Labor Prevention Act, which bans from entry into the U.S. any goods that are suspected of originating wholly or in part from the Xinjiang Uyghur Autonomous Region of the People’s Republic of China, unless an importer can show otherwise. The ban includes goods that might be entering through a country other than China, or intermediate goods that emanate from Xinjiang. While the USMCA does not require that a similar law be implemented in partner countries, the USMCA bans the importation of goods made with forced labor into any of the USMCA countries, thus creating one more regulatory assurance for firms that goods coming in through Mexico will not contain components made through forced labor, reducing the risk of impoundment by U.S. Customs.
Fifth, one might argue that supply chain resilience is improved when supply chains are located in democratic countries that are responsive to its citizens. As the contemporary examples of China and Russia demonstrate, autocratic regimes can be unreliable economic partners, and the benefits of investing in, and sourcing from, authoritarian economies are being called into question.14 Autocratic states and democratic states are beginning to economically segregate, increasing the incentives for firms to build supply chains in politically similar countries.15 Moreover, non-democratic regimes often prioritize nationalism and social control over economic prosperity and global integration, which does not result in stable and predictable supply chains. It is for this reason that many Western companies are seeking to diversify their supply chains, and anecdotal evidence suggests that even Chinese contract manufacturers working with Western firms are looking to source outside of China to reduce their own exposure to the country’s political risk.16 It should also be noted that institutions like the USMCA’s RRM can help facilitate the creation of independent unions and help develop genuine trade union leaders. Democratic unions can be training grounds for participation, advocacy, and leadership of democratic institutions in supplier countries.17
Finally, some might argue that firms have sufficient incentives to enforce labor provisions in their own supply chains without the help of state-to-state labor provisions. But this is not true. Firms are mostly concerned with avoiding bad news, and most are not concerned about generating good publicity about their supply chains. This is because firms are more likely to be punished by consumers and the media for their sins, but not necessarily rewarded for their good deeds.18 Thus, there needs to be a variety of policy tools at work at both the firm and state levels to make progress in labor conditions and governance. The labor chapter in the USMCA uniquely contributes to these efforts by targeting both state action and firm-level conduct. Doing so also helps solve collective action problems for lead firms that might not want to engage too aggressively with their suppliers if competing firms are not doing so as well.
The USMCA labor chapter and institutions are the most developed and multifaceted of any thus far. With institutions that address state failure and firm-level labor violations, and a strong pre-ratification process that helped move Mexico to implement important labor law reforms, the agreement might very well serve the broader policy goals of building supply chain resilience, benefitting both the nation, as well as individual firms. Policymakers should view labor chapters not only in the frame of fair or ethical trade, or in terms of human rights promotion, but also in economic and political context of supply chain resilience.
#Economy, #Employers
Published on The Perfect Enemy at https://bit.ly/3xXUFQb.
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