Regulatory intelligence for US exporters
NOTE: The following report appears in both International Trade Today and Export Compliance Daily.

Handshake Deal Likely to Leave Many Compliance Details Undone, Stakeholders Say

Those who advise NAFTA stakeholders say that it looks like a factory-level inspection regime will be part of what Democrats get in their edits to the U.S.-Mexico-Canada Agreement, but how disruptive that will be for businesses is completely cloudy. Kellie Meiman Hock, a managing partner at McLarty Associates, said she thinks there are ways the inspections could be done that would not make Mexico feel like American government officials are deciding whether Mexican labor laws are being followed. Hock said the two governments could select inspectors who travel together, or it could be a coalition of non-governmental organizations, as was mobilized after more than 1,000 textile workers died in a factory collapse in Bangladesh.

“I think that what the Democrats are trying to do here is having a dispute settlement system that works better than CAFTA and better than NAFTA,” she said, and she thinks the U.S. trade representative is in tune with what Mexico can and cannot accept along those lines.

Dan Ujczo, a partner at Dickinson Wright and a close NAFTA watcher, said, “What we’re hearing is that certainly the concept of binational inspectors is still on the table and that it would be reciprocal. My understanding is what they’re arguing over now, do you end up barring the goods completely?” Ujczo said that those advocating for a harder line say that a 2.5 percent tariff on Mexican cars or car parts would not be enough to motivate companies to change how they treat their workers. According to the Center for Automotive Research, 37 percent of all auto parts imports came from Mexico.

Unions have talked about General Motors or Ford terminating their agreements with captive unions in Mexico and inviting free elections as a way to show their bona fides (see 1910250042).

Ujczo said his firm is advising automakers not to get ahead of labor reform, because they have contracts, and because some companies' unions have lawsuits pending that argue that the existing union is the legitimate representative of the workers. He said that if a company tried to start over with a new election, the existing union would ask for an injunction to prevent the election.

“We have to maintain fidelity to the rule of law,” he said. In fact, he's worried that Mexican courts and regulators may not have the new system sorted out before union contracts end in a year or two.

Ujczo said Detroit's Big Three frequently require that vendors be NAFTA-compliant to sell from Mexico or Canada. So even if a vendor could eat the tariff and still make a profit, it might be kicked out of the supply chain after a violation.

He said stakeholders are in the dark on all kinds of details that matter for how disruptive this regime could be. Who can initiate the process? If it's “outside civil society which is being mentioned,” how can companies share personnel records so the NGO can investigate whether someone was fired for union activism? When a union that represents that worker brings a claim, they can see those records. But how can outsiders?

He also asked how inspectors would be selected. If they find violations, is that it, is the punitive action at the border going to happen? Ujczo argues that wouldn't be right. That's not how labor investigations happen in U.S. domestic law. Here, a union makes a claim, then National Labor Relations Board lawyers decide if there's enough evidence to bring a complaint, then, if the two sides don't settle, there's a trial. After a trial, there are layers of appeals available.

“There’s got to be some period of consultation and opportunity to remedy in the process,” he said. He said businesses are hoping that after inspections, a labor secretariat or USMCA labor working group would evaluate the findings, and if the complainants weren't satisfied with those conclusions, it would go to a state-to-state dispute.

But what he's describing is the kind of slow justice that happened in the labor complaint with Guatemala. Even if the language is changed so that the labor violations don't have to be recurring, or affect trade -- as Democrats and unions insist -- the time itself is an issue for advocates. Meiman Hock said a lot of people don't like how the Guatemala labor case came out, not just unions. Of the negotiations right now, she said, “The unions are going to be pushing for as much as they can get. They are and they should.”

Ujczo said he doesn't think Democrats have talked about compliance or process at this level of detail. “They’re still going back on the broad strokes, what can you announce as a handshake deal,” he said. He said he's hearing that deal is coming soon.

If these kinds of details are not worked out before the handshake deal, stakeholders should expect the mock markup process to be involved -- and for lobbying to be heavy during it. “Everybody's kind of forgetting mock markup,” Ujczo said -- and the fact that the working group isn't even addressing some other issues that were bracketed as unresolved in USTR's Statement of Administrative Action, such as the status of Mexican truck drivers operating in the U.S., or reciprocal de minimis.

Ujczo said he doesn't expect U.S. de minimis levels to be lowered to match Canadian and Mexican levels, but he also doesn't expect Canadian and Mexican de minimis to be what was laid out in the USMCA text. Those countries agreed to raise their de minimis for tariffs to $100 Canadian, but kept lower thresholds for value-added taxes.

“It really creates some problems in the supply chain, it’s an administrative headache in our e-commerce companies,” he said. He said companies would rather have the VAT and de minimis at the same level, even if it's the lower VAT level -- and that they want it measured in U.S. dollars, because the goods were purchased with U.S. dollars, and fluctuating currency rates are an administrative nightmare.

Given all these details, Ujczo said, the idea that a vote can happen before Congress leaves Dec. 20 “is comical to me.” But Ujczo expects USMCA will be ratified in January or early February of 2020. “There’s no question that the majority makers want to get this through,” he said, referring to Democrats who won in swing districts in 2018. Meiman Hock agreed, and said that with impeachment, “here’s an even bigger interest in finding the sweet spot on USMCA.”