June 20, 2024

Analysis

Driving Capital

The USMCA, the IRA, and Mexico’s electric vehicle boom

Since President Biden signed the Inflation Reduction Act (IRA) into law in August 2022, the Mexican auto assembly and parts industries have been booming. Tesla and the Chinese state-owned carmaker Jetour announced the construction of new factories for electric vehicles (EVs) and gasoline cars, spurring investments down the supply chain. Tesla’s glass supplier AGP Group plans to open a factory accompanying Tesla’s in Santa Catarina, Nuevo León. In August 2023, Metalsa, a chassis manufacturer for Toyota, opened its second factory in Guanajuato. Tatiana Clouthier, Mexico’s former Secretary of the Economy, stated approvingly that the IRA “doesn’t discriminate against [Mexico’s] automotive industry,” echoing widespread optimism about the IRA as a massive investment in the Mexican auto industry that will generate jobs.1

By tightly linking the car manufacturing sector with the mining sector and climate strategy, the US law has major socioeconomic and political implications across borders. EVs, the digital economy, and the energy transition require nickel, copper, cobalt, and most importantly, lithium—all of which are now listed as “critical minerals” by the Mexican, Canadian, and US governments. The reception of the IRA in Mexico stands in stark contrast to criticisms from European nations, whose automakers are largely excluded from EV tax credits that require mineral and/or battery components to be sourced and processed in the US or in a country, such as Mexico, member to a US trade partnership. 

The IRA arrives three years after the United States-Mexico-Canada Agreement (USMCA), joining a composite of policies that have transformed Mexico’s longstanding auto industry into an electric car manufacturing hub. To qualify for the IRA’s Clean Vehicle Credit, a vehicle must have undergone final assembly in North America, defined as the United States, Puerto Rico, Canada, and Mexico. This “regional value content” requirement for producers seeking to sell into the new US tax-subsidized consumer market reinforces the USMCA’s “rules of origin” standards for goods to qualify for the trade agreements tariff exemptions.

Financial incentives for employers to geographically reorganize production also carry the promise of empowering Mexico’s workforce to bargain for higher wages, benefits, and participation in the economic life of their country. Two recent examples of this struggle between workers and producers in the auto industry, however, demonstrate the limitations the USMCA places on workers and government officials in Mexico and the United States who might otherwise attempt to make good on this continental promise. Parts makers VU Manufacturing and Unique Fabricating, both Michigan-headquartered companies, have responded to workers requests for collective bargaining through the USMCA provisions with capital flight—choosing to not comply with the labor provisions found in both the 2019 Mexican Labor Code and in what is seen as a historic agreement between Mexico and the United States. Whether the IRA will benefit Mexican workforces employed in the regional supply chains of car production remains an open question. 

Labor and free trade

Prompted by critiques of free trade during the Trump administration, the renegotiation of NAFTA in 2017 provided an opportunity to include labor in the main body of the agreement.2 The resultant USCMA devotes multiple chapters to assuaging fears over the loss of US manufacturing jobs to Mexican workers. Voiced by both the protectionist right and the labor left, this concern thus invites a variety of solutions. In a set of recommendations for the renegotiation, the AFL-CIO argued that wages for Mexican auto workers should be high enough to grant them and their families a decent standard of living—access to food, water, housing, education, health care, clothing, transportation, and the ability to save for retirement and emergencies. Chapter 4 of the final agreement, “Rules of Origins,” reflects this concern, requiring “40-45 percent of auto content be made by workers earning at least $16 per hour.” 

In addition to wage increases, the US’s largest labor federation recommended strengthening unionization, workplace democracy, and collective bargaining rights. Instead of pulling back trade, as more conservative protectionist rhetoric often recommends, these standards would level the playing field among North American auto workers. Thus, the final USMCA includes diverse mechanisms related to labor rights in Mexico. Chapter 23 “Labor” and Annex-23 A “Worker Representation in Collective Bargaining in Mexico” outline rights at the workplace and are in line with ILO Declaration on Fundamental Principles and Rights at Work. Annex 31-A, “Facility-Specific Rapid Response Labor Mechanism” (RRLM), which applies to Mexico and the US, allows workers to file petitions when their labor rights and freedom of association are denied; failing to comply with the UMSCA’s labor provisions can result in the suspension of preferential tariff treatment, imposition of penalties, and the prevention of the entry of products or services produced by the company.3 Since the enactment of the USMCA in July 2020, the RRLM has been deployed eighteen times.4

The USMCA also established the Interagency Labor Committee (ILC) to enforce labor obligations, with an Independent Mexico Labor Expert Board to monitor and evaluate Mexico’s labor reforms. Together, these measures aim to uphold basic labor rights and raise wages in Mexico, correcting for asymmetries in labor’s power along the North American auto supply chain. Heralding this combination of high-road employment and international trade, the US Department of Labor’s Bureau of International Labor Affairs described the USMCA as having  “the strongest and most-far reaching labor provisions of any trade agreement.”

Mexico’s labor model

Prior to NAFTA, domestic industrial policy in Mexico largely shaped investment into the automotive sector. Considered capital and labor intensive, car production was central in industrializing the country and forming its industrial workforce during the era of import-substitution-industrialization (ISI, 1940-1970s). The government’s heavy intervention in economic development relied upon and strengthened a corporatist labor model that sought to empower industrial unionized workforces under the state’s main union, the Confederation of Mexican Workers (Confederación de Trabajadores de México, or the CTM).5 This model morphed into governing labor relations authoritatively and repressively benefiting the state and companies.

Workers’ labor conditions and wages were determined by “employer protection contracts,” which are labor agreements that seek to protect investments over workforces’ interests. These contracts, which are endorsed by the government, are signed by employers and unions affiliated mainly to the CTM yet without the rank and file knowledge on the terms of the agreement. Employer protection contracts are a significant barrier to freedom of association and collective bargaining, creating a tight relationship between employers, unelected unions, and state officials to maintain optimal investment conditions. For decades, autoworkers—along with workers employed in other industrial sectors—have fought against the CTM and unions affiliated to this labor confederation. Thus, by extension, they have challenged the state and companies with the goal of improving labor conditions, workplace democracy, and worker representation. 

In 2018, under the slogan of “The Fourth Transformation,” President Andrés Manuel López Obrador (2018-2024) began a series of structural reforms to Mexico’s economic model. On May 1, 2019—International Workers’ Day—López Obrador signed into law what could be considered the most significant reform’s to Mexico’s labor relations, terminating the existing model that created and perpetuated the “employer protection contracts.” The reforms to Mexico’s Federal Labor Code stipulated, among other changes, wage increases, the freedom to engage in collective bargaining, the freedom of association, and respect to unions. Between 2018 and 2024, the minimum wage increased by 110 percent, giving Mexico the sixth highest minimum wage in Latin America. The 2019 labor reforms were preceded by Mexico’s 2019 ratification of the Convention on Freedom of Association and Protection of the Right to Organize (Convention 98) of the International Labour Organization (ILO). The US has yet to ratify ILO Convention 98, while Canada ratified it in 2017. This was the domestic political context within Mexico when the country entered into negotiations with the Trump administration over reopening NAFTA and writing the terms of the new USMCA. 

The 2019 reforms offer greater protections around collective bargaining than the USMCA—particularly on the all-important question of the right to strike. Mexico’s Labor Code article 387 stipulates that if the employer refuses to enter into collective bargaining, the workers can exercise that right. Under NAFTA, the right to strike was reduced to “mere consultation and left out of any enforcement mechanism [as] trade policy trumped labor policy.”6 Under the UMSCA, the right to strike appears as a footnote in section 23.3: Labor Rights instead of the main legal binding body of Chapter 23. 

Since 2020, labor legislation in Mexico has been determined primarily by two legal bodies: the USMCA’s chapter 23, Annex-23 A of the USMCA, and Mexico’s 2019 labor law. While these may appear aligned, the contradictions between the goals of raising labor standards and of increasing international trade and investments become clear when considering the kinds of enforcement mechanisms the USMCA, like NAFTA, includes and for whom. 

Capital flight

At both VU Manufacturing in Piedras Negras, Coahuila and Unique Fabricating in Santiago de Queretáro, Queretáro, factories shut down operations in Mexico after they were ordered to comply with basic labor rights under the USMCA and Mexico’s Labor Code.

VU Manufacturing produces plastic and vinyl interior automotive pieces with its headquarters in Troy, Michigan. Workers in the VU Mexico factory filed two complaints under the RRLM. The first complaint, concerning freedom of association, was successful, leading to the election of an independent union, La Liga. The second complaint alleged that VU refused to engage in contract bargaining. Mexico and the US declared the complaint valid, giving VU six months to implement a “course of remediation.” Instead, the VU shut down its Mexico factory and blacklisted VU labor leaders. The US Department of Labor investigation, which began in January 2023, was closed in October 2023.  Deputy Undersecretary of International Affairs Thea Lee responded to the factory closure by insisting, “We knew employers would not choose compliance in every instance.” The US Trade Representative Katherine Tai urged the Mexican government to “seek remedies for the affected workers and strategies to prevent retaliation against former VU workers at other facilities.”

A similar scenario played out at Unique Fabricating, a plastics, foam, and rubber manufacturer headquartered in Michigan. After filing two complaints with the Labor Court in Queretaro, with no response, the democratically elected union Transformacion Sindical (TS) filed a complaint with the RRLM. Preliminary investigations confirmed the TS complaints, and the Queretaro Labor Court ruled in favor of TS. In April 2023, the Mexican and the US government announced the successful completion of the labor complaint filed under the RRLM. Unique Fabricating agreed to respect workers’ freedom of association and to comply with the 2019 Labor Code legal obligations. But in November 2023, the company announced bankruptcy and shut down its factories in Mexico, the US, and Canada. The Office of the US Trade Representative declined to conduct an investigation. The result was the same: workers lost their jobs, the state was forced to find “remedies,” and companies headquartered in the US faced little to no consequences.

These cases shed light on the challenges in implementing the UMSCA’s labor provisions. The UMSCA lacks legal tools to enjoin corporations from defying their obligations to workers or the public good. Compare this absence with legally binding regulations that protect corporations’ investments, such as the investor-state dispute settlement (ISDS) enshrined in Chapter 14 and Chapter 31 of the USMCA, or NAFTA Chapter 11, used to sue the governments of Mexico, Canada, and the US. The ISDS enables corporations to receive monetary awards from the state if investments or even future profit are put in jeopardy by projects that benefit the common good—including for public health benefits, environmental protections, or the affordability of services such as electricity. According to Scott Sinclair, the ISDS empowers corporations to use a private justice system “to challenge vital and legitimate public policy measures.” The ISDS forces governments to either repeal laws and regulations for the public good, or pay “damages” to corporations with public money.7

Under NAFTA, Mexico and Canada have paid millions of dollars to corporations in monetary damages plus legal fees, while the US has never lost a case. The USMCA was modified to significantly limit the ISDS for the US and Canada, but the mechanism can still be pursued in Mexico. Under the USMCA, the US and Canada have initiated two trade disputes against Mexico: the first is over Mexico’s energy reform, which gives preference to Mexico’s state-owned company over the distribution of electricity; the second concerns Mexico’s ban on genetically modified corn imported from the US. The cases suggest that like NAFTA, the UMSCA’s main goal is to continue facilitating investments regardless of their social and environmental consequences.

VU Manufacturing and Unique Fabricating exemplify how multinationals respond with capital flight when investments in Mexico are threatened by labor provisions found in the UMSCA and Mexico’s labor code. There are no mechanisms similar to the investor-state dispute settlement (ISDS) found in Chapter 14 and Chapter 31 of the USMCA, or NAFTA Chapter 11, to hold corporations accountable in the sites where their subsidiaries are located and to the workforces in such locations. That US multinationals closed down operations in Mexico with such ease, and the US government was unwilling to intervene, suggests that the UMSCA is a mechanism to protect the investments of US corporations. 

These cases also demonstrate how US-based corporations—and by extension the US government—transfer the costs and responsibilities of their subsidiaries to the Mexican and Canadian governments. In addition to compensating corporations through the ISDS mechanism, the Mexican and Canadian states must make up for the loss of employer-based benefits through severance payments, unemployment benefits, and clean-up expenses once a subsidiary shuts down.8 This builds on over five decades in which corporations have transferred the costs of social reproduction to Mexican households and the Mexican government, a result of labor flexibilization, tax breaks, and refusal to pay severance. VU Manufacturing, for instance, continues to owe workers unpaid wages and severance pay, but with the closure of the Mexican subsidiary, the company will face no penalty. 

While the US government has distanced itself from the case of VU Manufacturing, under the USMCA, it continues to serve as the watchdog of Mexican workers’ labor rights in the automotive sector. This disjuncture illuminates a fundamental aspect of the agreement. While celebrated as the first free trade agreement committed to stronger labor rights, the USMCA firmly entrenches corporate power while eliding the 2019 Mexican labor laws. For Mexican workers employed in the supply chain of car production, so long as US-based corporations face little accountability for retaliation and capital flight, achieving labor rights and improved conditions approximating those of autoworkers in the United States will continue to be an uphill battle. With the US taking on the role of enforcer, effective reform requires accountability mechanisms to be built into the existing structure of the UMSCA. 

Labor struggles

In the US, while the IRA is tied to labor standards and prevailing wage rates in some sectors, the automotive sector remains outside these specifications. Although car companies have received generous incentives to manufacture EVs, Shawn Fain, president of the United Auto Workers (UAW), has pointed out that the incentives do not guarantee workers’ wages and labor conditions. Mexican workers face a similar dilemma, with the USMCA prioritizing mechanisms to protect investments over legal obligations toward workforces. 

The IRA’s incentives could lead to different outcomes in Mexico. The EV tax credit could strengthen Mexico’s supply chain of car production, but the incentives to car manufacturers in the US could also result in the “reshoring” of the supply chain. The lack of USMCA regulatory mechanisms to prevent capital flight make the latter option more probable. If confronted by labor complaints in the future, more US multinationals may shut down their operations in Mexico. VU Manufacturing and Unique Fabricating have a set dangerous precedent for Mexican workers: under the USMCA and US labor enforcement, US-based corporations can respond to labor protections by shutting down their subsidiaries. 

To serve workers across borders, as the USMCA claims to do, the trade agreement must penalize corporations when their subsidiaries fail to meet international labor standards. But such solutions seem far-fetched in a reality in which free trade agreements are investment agreements, the results of negotiations between states to primarily benefit corporations and their shareholders, with the consequence of constraining domestic policy space. Following the recent election of Mexico’s next president, Claudia Sheinbaum, the planned review of the USMCA in 2026 could prove crucial for limiting multinationals’ ability to evade labor compliance. But in the absence of mechanisms to hold US-based corporations accountable for labor violations, the IRA is likely to speed up the race to the bottom.

  1. Besides the EV tax credit, the IRA offers generous funding and loan packages to existing automotive facilities located in the US to refurbish factories.

  2. The original NAFTA relegated “labor” to the appendix “The North American Agreement on Labor Cooperation” (NAACL). It was signed last-minute in 1993 to assuage the critics in the U.S. and Mexico as a way to address the labor disjunctures.

  3.  Governments can also initiate RRLM actions against individual factories denying workers’ rights and workplace democracy.

  4. See “What Rapid Response Labor Complaints Have Achieved for Mexican Workers” for more information.

  5. De la Garza, Enrique, “Cultura y crisis del corporativismo en México,” Transicion a la democracia y reforma del Estado en México, edited by José Luis Barros, Javier Hurtado and Germán Pérez, Mexico: Universidad de Guadalajara/Miguel Ángel Porrúa and FLACSO de México (1991): 235–268.

  6. Lance Compa, “American Trade Unions and NAFTA,” Cornell eCommons, 1994.

  7. Canada has been the most sued country within the North American geo-economic region. One of the worst rulings has been against Mexico, see Sinclair 2021; 2023.

  8. See the AbitibiBowater case against Canada.


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