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published on 25 October 2023 | reading time approx. 9 minutes
In their compliance efforts, internationally operating companies should also consider trade agreements. First and foremost, trade agreements strive to remove trade barriers and create better trade opportunities. This also includes opening up new market opportunities, cheaper import of essential goods and services and securing foreign direct investment. In this way, they contribute significantly to economic growth and job creation. Nonetheless, they usually implement subordinate regulatory frameworks with the aim of fairer and more sustainable trade and to promote internationally recognised human rights standards.
From a development perspective, the promotion of trade is thus an important instrument for sustainable growth. Nevertheless, trade agreements are regularly criticised. This is because in the case of adverse impacts on human rights and the environment caused by global companies, the affected rights holders have so far lacked the means to effectively enforce these rights and obtain redress. Using the example of the United States-Mexico-Canada Agreement (USMCA), this article explains the trend to remedy this shortcoming through binding obligations in free trade agreements to establish due diligence in the supply chain. In addition, the article gives an outlook on the strategy of the European Union (EU) with regard to trade agreements as an instrument for more sustainable trade.
The USMCA, also known as CUSMA in Canada and T-MEC in Mexico, is a trilateral trade agreement that replaced the North American Free Trade Agreement (NAFTA) and entered into force on 1 July 2020.The USMCA includes provisions related to supply chain due diligence to address concerns about unethical labour practices and severe environmental violations. These provisions aim to improve transparency, accountability, and protection for workers, particularly in the context of forced labour. This aligns with the broad international consensus that forced labour is a grave violation of human rights and must be eradicated from supply chains (e.g. the German Supply Chain Due Diligence Act). However, the ratifying countries take different approaches to the implementation of the agreement.
One of the key objectives of the USMCA is to address labour concerns that arose during NAFTA’s tenure. The agreement aims to improve labour conditions, increase wages, and ensure workers’ rights are generally respected, particularly in Mexico. By improving labour conditions in Mexico, the agreement aims to prevent a race to the bottom, where companies might move their operations to countries with lower labour standards to cut costs. Under the USMCA, Mexico is therefore required to implement significant changes in its labour laws and enforcement mechanisms to meet higher labour standards.Now that the most recent labour market reform has been fully implemented, Mexico took its first step to comply with its forced labour import ban obligations under the USMCA (Article 23.6 of USMCA) on 18 May 2023. Namely, the Forced Labour Resolution came into effect. It includes regulations to prohibit the importation of goods produced wholly or partly by forced or compulsory labour, including child labour. The Forced Labour Resolution allows the Ministry of Labour and Social Welfare, (Secretaría de Trabajo y Prevención Social, STPS) to commence an inquiry, either on its own or upon request from a private entity or natural person, to investigate whether forced labour was employed in the manufacturing of goods. After conducting the procedure, if the STPS concludes that specific goods were indeed produced using forced labour, it will publish these findings (referred to as “resolutions”) on its website in accordance with the Forced Labour Regulation. Consequently, any goods falling under these resolutions will be barred from entry into Mexico. The decision of the authorities must be made principally within six months after the petition is filed and the import ban on the covered goods becomes effective 90 days after the decision was published.Mexican importers will be required to retain information and documentation proving that the goods they import are not included in the lists posted on the STPS website. To comply with this requirement, companies must implement strong and efficient due diligence measures. This includes adopting appropriate systems, controls, and training in accordance with industry’s best practices, ensuring greater traceability and transparency within their supply chains, and formulating prevention plans that align with regulatory expectations.
Under the USMCA, Canada has pledged to prohibit the importation of goods produced through forced labour, too (Article 23.6 of USMCA in connection with No. 9897.00.00 of the Canadian Customs Tariff). This prohibition has served as a powerful tool in holding all trading partners accountable for ensuring ethical labour practices. Notwithstanding, reports show that the Canada Border Services Agency (CBSA) does not have the resources for the effective enforcement. That is why Canada has taken a different approach and embraced the concept of supply chain due diligence.
The measures introduced through Bill S-211 necessitate businesses to conduct thorough assessments of their supply chains to identify and address any potential risks of forced labour within their operations. This legislation is going to come into force on 1 January 2024. It aims to ensure that supply chain due diligence not only helps identify problem areas, but also sets incentives for companies to implement effective remediation strategies.
The USMCA and in accordance with it the Bill S-211 emphasise transparency as a vital aspect of combating forced labour and ensuring responsible supply chains. Therefore, the bill imposes an obligation on certain entities and governmental institutions to submit detailed annual reports for the previous financial year regarding their activities and supply chains, forced labour and due diligence policies, and measures taken to reduce the risk of child or forced labour in their global supply chains, among other information. Consequently, the first reports will be due on 31 May 2024 and those reports have to be made available to the public in twofold way: Both, through an electronic registry on Public Safety Canada’s website (coordination authority for public safety) and through a prominent location on the website of the reporting entity or institution.1. Annual Report RequirementThis new incorporated law applies to every corporation, trust, partnership, or other unincorporated organization whose activities include producing, selling, or distributing goods in Canada or elsewhere, importing goods into Canada or controlling an entity engaged in the aforementioned. Additionally, the entities covered by the law must be either listed on the Canadian stock exchange, have a place of business, do business, or have assets in Canada and meet two of the following three criteria for at least one of its two most recent financial years: at least CAD 20 million or more in assets; CAD 40 million or more in revenue; employs at least 250 employees on average.2. Report detailsThe report must include the following details about the company:
The law establishes an offense, imposing a fine of up to CAD 250,000 for failing to meet annual reporting obligations, disobeying ministerial orders, hindering designated persons to enforce the law, or providing false/misleading statements. These offenses are treated as summary convictions.Furthermore, directors, officers, and agents of an entity are considered personally liable if they participate directly or authorize an offense committed by the entity. For instance, a director who approves a report with false information may be held accountable.Lastly, one provision of the law presumes that employees and agents act on behalf of their employer when committing offenses unless the employer can prove they took reasonable measures to prevent the offense.
Furthermore, the Bill S-211 amends the Customs Tariff and consequently extends the current import ban on goods wholly or partly obtained, produced, or manufactured by forced labour or child labour.
The USMCA contains an enforcement regulation which is called the Rapid Response Labour Mechanism (Annex 31-A USMCA) and only applies between Mexico and the United States. It allows the aforementioned parties to take enforcement actions against individual factories if they fail to comply with domestic freedom of association and collective bargaining laws. The mechanism comes into effect every time if one party has a good faith basis belief that a covered facility denies rights under the USMCA. For example, the RRM was already applied for a facility of “General Motors” in Silao, Mexico, and for “Tridonex”, a subsidiary of “Cardone Industries”, in an auto parts facility in Matamoros, Mexico.As a result, companies must be able to prove that they are compliant with the USMCA regulations. Otherwise, remedies may include suspension of preferential tariff treatment for goods manufactured at the covered facility or the imposition of penalties on goods manufactured at or services provided by the covered facility.
To meet the requirements of the USMCA, the CBP enforces a longstanding federal tariff act (Section 307 of the Tariff Act of 1930 – 19 U.S.C. 1307) to prevent merchandise produced in whole or in part in a foreign country using forced labour from being imported into the United States. Further, the Uyghur Forced Labour Prevention Act (UFLPA) establishes a rebuttable presumption that the importation of any goods mined, produced, or manufactured wholly or in part in China’s Xinjiang Uyghur Autonomous Region, or produced by certain entities, is prohibited, because of forced labour manufacturing circumstances.For this reason, every importer in the U.S. should be aware that any imported goods suspected of having been produced using forced labour are subject to a detention order. Importers have 30 days to rebut the presumption that the offending goods were produced using forced labour, or those goods will be returned or destroyed. Therefore, importers should provide a detailed report on the supply chain of their products.
The chapter regarding environmental protection within the USMCA is mainly designed to establish clear minimum standards for environmental protection, to establish a dispute settlement mechanism for environmental issues and to install a complaints procedure for the public (Article 24.27 USMCA). The regulations also include provisions to protect biodiversity, prevent the introduction of invasive alien species, promote sustainable fisheries management, reduce fisheries subsidies, protect cetaceans and other marine wildlife, combat illegal, unreported, and unregulated fishing, combat illegal wildlife trade, and ensure sustainable forest management, among other things, through measures against illegal logging.
All modern EU trade agreements have included comprehensive sustainability chapters (so-called Trade and Sustainability Chapter, TSC) for several years now. The EU Commission generally combines the negotiation of agreements with the promotion of essential European values and the commitment of partner states to ratify international human rights standards (International Labour Organisation (ILO) core labour standards, et cetera). The TSCs contain a wide range of mutually agreed obligations for fair and environmentally sustainable trade. However, the actual effectiveness of TSCs has been limited to date due to a lack of effective enforcement mechanisms. Moreover, the blanket commitment of trading partners without consideration of concrete implementation capacities has been overall ineffective.Since the EU Trade Strategy was adopted in 2021, in which the Commission responded to numerous political and structural changes in trade policy challenges, the EU is now aiming for comprehensive “green and sustainable trade partnerships”. In the third quarter of 2022, the EU Commission also presented a concrete action plan to focus on the actual implementation and enforcement of the TSCs. Among other measures, this plan envisages in particular sanctioning partner states if important labour and climate commitments are not met. In future and ongoing negotiations, “material breaches of key TSC provisions” are to lead to trade sanctions. The EU is thus no longer relying solely on the commitment of partner countries, but rather plans to introduce legally binding sustainability chapters with common trade dispute settlement and sanction mechanisms. Overall, the capacity of trade agreements as a whole to promote sustainable trade in a wide range of areas is to be strengthened. This will include the objective of working with partner countries on coherence and to incorporate other relevant EU policy instruments, including the European Green Deal.
While the USMCA sets a framework for addressing forced labour and supply chain due diligence, effective implementation and enforcement gradually gains importance. For companies operating in North America, it will be crucial to incorporate these recent legislative actions into supply chain due diligence and import compliance strategies. These adaptations can simultaneously serve to meet the requirements of the EU TSCs.
Anne Egensperger
Senior Associate
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Yannic Ratt
Associate
