Autoliv Mexico East workers strike in Matamoros, Mexico, near Brownsville, Texas. Since January, strikes have hit more than 65 companies in Matamoros.
Traditionally, Mexico has offered foreign manufacturers cost advantages in the form of low wages. That may change soon.
Labor organizations in the U.S. and Canada often cite low wages and paltry workers' rights as the reasons why many jobs have been lost to Mexico. Hence, it is no surprise that the U.S. and Canada made it a point to include provisions that addressed these issues in the proposed replacement for the North American Free Trade Agreement.
Raul Rangel is a corporate attorney in Butzel Long’s Washington office.
For example, in addition to increased regional value content rules, the new United States-Mexico-Canada Agreement includes labor value content requirements. Under those provisions, 40 to 45 percent of a vehicle's value must be manufactured by employees earning at least $16 an hour. Automakers will be able to credit up to 10 percent from r&d and 5 percent for assembly in high-wage regions.
The precise formulas will be addressed in the uniform regulations still under discussion.
The underlying intention of this new requirement is to slow the outsourcing of U.S. manufacturing to Mexico. The unintended consequence is the increased compliance cost that will ultimately be transferred to the consumer.
Further, as part of the concluded trade deal, Mexico agreed to reform its labor laws. Passage of the USMCA by the U.S. Congress is conditioned on it. The two main objectives of the Mexican reforms are:
1. Achieving labor union democratization, transparency and liberty.
2. Shifting the dispute settlement process from local employment courts to the federal judicial branch.
Perhaps most important to labor organizations is the first, the issue of workers' representation in unions. It is widely claimed that Mexican labor unions don't legitimately represent their members' interests, lack transparency in their governance and are structured to advance economic interests over workers' rights. That is why many believe wages in Mexico have remained so low despite overall good macroeconomic performance in the country.
Mexico's Congress is already engaged in discussions and consultations on the labor law. Confrontations among union leaders, union members, industry associations and the government have surfaced. The spectrum of the discussion will be broad and full of land mines. But regardless of stakeholders' interests, any new laws and regulations will need to comply with international obligations not only in the USMCA but in the International Labor Organization Convention 98 on rights to organize and bargain collectively.
Moreover, if Mexico wants to increase the chances of USMCA passage in the U.S. Congress, the new law should also address enforcement concerns that have been voiced by labor groups and Democrats in the U.S. House.
The legislative discussion in Mexico's Congress is taking place during complicated times. Mexican labor unions and workers have become emboldened by the winds of change and have grown confident to fight for improved working conditions. Since January, more than 65 companies in the border town of Matamoros, near Brownsville, Texas, have been hit by workers' strikes. They began in January with maquiladora factories, jumped to a bottling company and continued on to mining companies.
Workers are demanding an increase in salary and a bonus. The results for workers thus far have been mixed. Some companies have capitulated, others have fired some of their employees and one company abruptly left Mexico. Legislators are faced with the herculean task of balancing the overdue necessity of granting Mexican workers better working conditions with discouraging corrupt union leaders from extorting businesses under the threat of a strike.
Companies on both sides of the border have begun to suffer disruptions in their supply chains. For instance, some maquiladora companies have been unable to meet their contractual obligations to their U.S. clients. Estimates by a Mexican local congresswoman point to a $1.5 million loss per week.
We have been asked by several companies to assess risk, either by calculating contractual damages or by determining whether the force majeure doctrine will excuse performance under a contract. The problem is compounded by the fear that the strikes may reach across industries and to other cities.
Most collective bargaining agreements in Mexico are renegotiated during the first five months of the year. Thus, without effective government intervention, we're likely to see more employment conflicts in the coming months.
The timing of these events could not have been worse in terms of foreign direct investment to Mexico. Global economies already started a slowdown, as the international investor community remains wary of the new Mexican president's policies. Rating agencies have slightly downgraded Mexican government bonds, including Pemex, the state-owned oil and gas enterprise, in the financial markets. The Organization for Economic Cooperation and Development just cut its growth estimates for Mexico. In addition, the benefits afforded to U.S. companies in the tax cut law passed in 2017 have further deterred foreign investment in Mexico.
While it is early to pass judgment on the economic performance of the new administration, the data are not encouraging. They show that foreign direct investment in the past three years has slowed.
As a result of major changes to Mexico's labor laws and their consequences, it is likely some of the low-wage advantages that Mexico offered will be lost. This issue just adds more uncertainty to an already politically shaken Mexico.
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