Is USMCA’s Dispute Settlement Mechanism Up To The Task Of Addressing Complaints Under Its Labor Chapter?
/The most significant trade issue currently facing Congress is the U.S.-Mexico-Canada Trade Agreement. USMCA will be an important step to reasserting American leadership and supporting U.S. competitiveness. A key issue in the agreement under discussion between the Administration and members of the House, are the provisions governing labor rights.
The piece below by Ted Posner, includes several recommendations regarding the labor provisions in USMCA. His last recommendation suggests that the time frame for adjudicating cases be extended to allow for more thorough reviews. While we understand his arguments, many labor cases reflect urgent situations and need to be expedited. Having meaningful and enforceable labor provisions in USMCA, together with robust capacity building assistance and a commitment to establishing rule of law in Mexico, will be essential to the success of USMCA.
By Theodore Posner, Partner at Weil Gotshal and Manges
In the midst of talk in the United States of impeachment and increasing tension between the President and the Congress on numerous fronts, one of the few agenda items that may offer a sliver of hope for bipartisan cooperation is approval of the U.S.-Canada-Mexico Agreement (USMCA). The USMCA was signed in November 2018 and approved by Mexico’s Senate in June 2019. It awaits approval by Canada and the United States.
At this writing, USMCA watchers are focused on the dialogue between the Democrat-controlled U.S. House of Representatives and the Republican Administration (it being presumed that USMCA will face minimal opposition in the Republican-controlled Senate). In June, House Speaker Nancy Pelosi delegated a nine-member Trade Working Group to consult with the Administration on concerns of Democrats to be addressed before legislation to approve and implement the Agreement is formally taken up by the House.
As of mid-October 2019, one of the issues left to be resolved between the Working Group and the Administration is the issue of the Agreement’s rules pertaining to labor (i.e., rules designed to ensure that a USMCA country cannot lower worker protections in order to gain a trade advantage). As they explained in letters to U.S. Trade Representative Robert Lighthizer in April of this year, House Democrats are concerned about both the substance of USMCA’s labor rules and the mechanisms USMCA provides for enforcing those rules – in particular, the mechanisms for resolving disputes when one Party considers that another Party has breached those rules.[1]
Given the long history of criticism of the North American Free Trade Agreement (NAFTA) by U.S. labor unions and their supporters in the U.S. Congress, it is not surprising that USMCA’s approach to labor issues would come under intense scrutiny and be among the last matters to be resolved before the House formally takes up USMCA approval and implementation. Nor is it surprising that negotiators, attuned to criticism of the way labor has been addressed in NAFTA and other free trade agreements, made significant innovations in USMCA to address that criticism.
The USMCA labor chapter is shaping up to be substantially more robust than the labor side agreement that accompanied NAFTA (formally known as the North American Agreement on Labor Cooperation or NAALC). The chapter includes a greater number of prescriptive obligations than the NAALC (as opposed to softer obligations to strive to achieve particular objectives). Those obligations are subject to the same enforcement mechanism as other USMCA obligations. And the limitations on those obligations (such as the condition that covered conduct be “in a manner affecting trade or investment among the Parties”) have been qualified in ways that lower the bar for a complaining Party to show that another Party’s conduct breaches the obligations.
With these changes from the last generation of trade agreement labor chapters, it is reasonable to expect a rise in trade agreement litigation. For that reason, it is understandable that in addition to seeking enhancements to the USMCA labor chapter itself, the Trade Working Group has focused on improving USMCA’s mechanism for resolving disputes between countries and enforcing the agreement’s obligations.
According to its publicly available statements, the Working Group has zeroed in on two aspects of dispute settlement and enforcement. The Working Group has sought to make the process for establishing dispute settlement panels more efficient (making it harder for a Party to block the establishment of a panel), and it has sought to expand the options available to a complaining Party when another Party is found to be out of compliance with labor obligations and fails to come into compliance voluntarily.[2] These would be important innovations. If they are included in the version of USMCA that enters into force, the agreement’s stronger labor provisions will be matched by stronger enforcement provisions.
But securing these innovations should be considered the beginning, not the end, of a process to modernize USMCA’s dispute settlement system to bring it up to the task of handling the kinds of claims and defenses likely to arise in cases under the Agreement’s labor chapter in particular. I would like to propose three other innovations that would go a long way towards making dispute settlement under the Agreement efficient and effective for trade disputes in general and trade-and-labor disputes in particular. Briefly, the USMCA Parties should (1) expand the time available for dispute settlement panels to adjudicate disputes, (2) adopt rules of evidence to govern dispute settlement proceedings, and (3) increase the pay (as compared to NAFTA and other free trade agreements) for the individuals who serve on dispute settlement panels making it commensurate with the experience and expertise the Parties expect.[3]
In USMCA as concluded last November, as in NAFTA and other free trade agreements, dispute settlement and enforcement mechanisms are designed for relatively straightforward cases that can be addressed in a short amount of time (measured in months), primarily through exchanges of legal briefs. They are not designed for evidence-intensive cases involving numerous claims and defenses, hundreds or thousands of pages of written submissions, and the potential need for a panel to render not just a single decision on the merits of the case, but also multiple interim procedural rulings to ensure that the process remains fair to the disputing Parties and other interested stakeholders.
Take the matter of the time allotted for dispute settlement proceedings. Disputes under USMCA that cannot be resolved amicably are to be adjudicated by five-member panels appointed through a cooperative process between the disputing Parties.[4] A panel ordinarily is required to reach a decision and present an “initial report” to the disputing Parties within 150 days after appointment of the fifth panelist.[5] I submit that 150 days – a mere five months – is far too little time in a case that could involve complex factual and legal issues. By contrast, under a different USMCA chapter, involving reviews of administrative determinations in trade remedy cases (i.e., anti-dumping and countervailing duty investigations and reviews), a panel ordinarily will have 255 days from selection of the last panelist in which to render a decision.[6] In such cases, by definition, an administrative agency (such as the U.S. Department of Commerce) has made findings of fact and conclusions of law as set forth in an administrative record, and the task for a dispute settlement panel is to review that record to determine whether the actions taken comport with applicable national law. In other words, unlike a panel in a USMCA labor case, for example, a panel in a trade remedies case would not be examining evidence and making findings of fact in the first instance. And yet, such a panel is allotted approximately 105 more days than a panel in a labor or other case to complete its work.
Another kind of dispute settlement provided for in USMCA is dispute settlement between a Party and an investor of another Party (so-called investor-State dispute settlement or ISDS). For example, if a U.S. investor in Mexico believes that the Government of Mexico has taken its property and failed to provide it just compensation (and if the investor and its investment meet certain other threshold conditions), it may sue Mexico under Chapter 14 of USMCA. Like a State-State dispute arising under USMCA’s labor chapter, such an investor-State proceeding may be expected to involve complicated facts and the examination of substantial evidence. But unlike a labor dispute settlement panel, an investment dispute settlement panel is not subject to any time restriction.[7]
Why should a panel adjudicating a dispute between two sovereign States involving matters of utmost sensitivity, such as claims that a Party has failed to effectively enforce its own labor laws, be constrained to reach a well-reasoned decision in a mere five months? While Parties understandably will want prompt resolutions of their disputes, I would propose that the allotted time be expanded in order to accommodate the factual and legal complexity of cases arising under USMCA. The Parties might even provide for flexibility so that time periods may be adjusted on a case-by-case basis depending on the complexity of each case.
The challenge associated with a short time period for adjudication of complex disputes is compounded by the absence of rules of evidence. Unlike national courts and other international dispute settlement systems, the dispute settlement system under USMCA, like the FTAs before it, lacks rules instructing Parties and panels on how evidence may be presented and tested. For some disputes, that may not be a problem. For example, if a country contends that another country’s law on its face is inconsistent with USMCA obligations, it may be possible to adjudicate the case with little more than the text of the law itself and some related documentary evidence (e.g., legislative history). But what of a case in which all of the relevant facts are in dispute – such as a case involving allegations about what regulators did or did not do to enforce a country’s labor laws? To the extent such a case is based on the testimony of eyewitnesses, how is a panel to receive that testimony? What opportunities should the other Party be given to cross-examine that testimony? What rules govern determination of the authenticity of documentary evidence? Should particular evidence be excluded based on the manner in which it was obtained? In the absence of rules to help answer these and other thorny questions, a panel will be forced to make decisions on an ad hoc basis. Making such decisions necessarily takes time, eating in to the five-month period allotted to a panel. Moreover, in the absence of agreed-upon rules of evidence, procedural decisions may vary from one case to another, and that may impair the perceived fairness of the dispute settlement system.
If the USMCA Parties wanted to adopt rules of evidence for dispute settlement proceedings, they would not have to start from a blank slate. There are established bodies of rules that are available for adoption by reference. For example, in investor-State dispute settlement proceedings it is common for panels to refer to the International Bar Association’s Rules on the Taking of Evidence in International Arbitration. While those or another off-the-shelf body of rules may have to be adapted to accommodate circumstances unique to USMCA, agreement on rules of evidence would be another valuable improvement that would make USMCA’s dispute settlement system better suited to the complex disputes likely to arise in the future.
Finally, the Parties should not neglect the matter of panelist pay. The persons who sit as members of dispute settlement panels under free trade agreements are private citizens who are experts in dispute settlement and/or the particular subject matter in question. They are often, but not always, lawyers or law professors. USMCA requires that persons eligible for these positions “have expertise or experience in international law, international trade, other matters covered by [USMCA], or the resolution of disputes arising under international trade agreements.”[8] Additionally, panelists in labor disputes must have “expertise or experience in labor law or practice.”[9] It obviously is in the Parties’ interests to enlist highly qualified individuals to serve as dispute settlement panel members.
While one can safely assume that no one volunteers to serve on trade agreement dispute settlement panels in the hopes of getting rich, one also can assume that the individuals qualified to do this job are busy people whose expertise is in high demand. The USMCA Parties should acknowledge this and set compensation accordingly.
This point warrants attention given the relatively low levels of compensation provided to dispute settlement panelists under other trade agreements. For example, the remuneration rate under Chapter 19 of NAFTA (the chapter on trade remedies dispute settlement, corresponding to USMCA Chapter 10) is 800 Canadian dollars (about 600 U.S. dollars) per 8-hour day (75 U.S. dollars per hour).[10] The US-DR-CAFTA remuneration rate agreed to in 2012 and unchanged since then is 75 U.S. dollars per hour, with total compensation per panelist not to exceed 19,000 U.S. dollars.[11]
Although the level of pay for dispute settlement panelists may seem like a true in-the-weeds sort of issue, it bears directly on the dispute settlement mechanism’s readiness to deal with complex cases. An effective dispute settlement mechanism requires not only robust procedural and evidentiary rules, but qualified people to apply those rules. Attracting such people to perform this service requires that compensation be commensurate with their expertise and experience. * * *
On the surface, the recommendations I have laid out above may seem to address technical issues. But that belies their importance. Critics of NAFTA and the post-NAFTA free trade agreements have emphasized the need to take better account of the interface between trade on the one hand and national and sub-national regulation in the public interest on the other. Doing so requires the development of detailed substantive rules of the kind reflected in USMCA’s labor chapter. But it also requires a modern, sophisticated dispute settlement system. Such a system requires elimination of obstacles to the establishment of dispute settlement panels and creative approaches to enforcement of obligations. But it also requires careful consideration of the mechanics of dispute settlement, including timelines, rules of evidence, and panelist remuneration. The House Working Group and other trade policy makers should address these issues as an essential corollary to the enhancement of USMCA’s labor provisions.
