NAFTA Renegotiations Must Protect 20 Years of Progress on Labour and Environmental Protections in Trade Agreements and Address New Risks

Over the last few decades, many free trade agreements have included commitments to promote good labour and environmental laws and outcomes.

The logic is that countries should not gain competitive advantage in trade by undermining or failing to protect workers’ rights and the environment. These commitments typically require adherence to national and/or international labour and environmental standards, laws or conventions.

In the 25 years since the establishment of the first of these clauses, only one case alleging a party’s failure to comply has gone to arbitration. That was a case filed in 2011 by the United States against Guatemala under the U.S.-Dominican Republic-Central America Free Trade Agreement (CAFTA-DR), claiming that Guatemala had failed to effectively enforce its labour laws across a range of issues, sectors and enterprises.

In June 2017 the panel issued its decision: it concluded that, “the United States has not proven that Guatemala failed to conform to its obligations under Article 16.2.1(a) of the CAFTA-DR.”

Given the breadth and detail of the allegations in the complaint, coupled with the widespread documentation of a culture of non-compliance with labour laws and labour rights in Guatemala, the decision came as a shock to most observers.

The panel, made up of one arbitrator selected by the U.S., one selected by Guatemala, and a Canadian chair, reached its decision that Guatemala had not breached its obligations because the violations had not occurred “in a manner affecting trade” between the parties.

That limiting phrase first appeared in the U.S.-Jordan Free Trade Agreement in 2000, and has been included in all subsequent U.S.-negotiated labour and environmental chapters, including the negotiated text of the Trans-Pacific Partnership (TPP). In that draft agreement, the parties—which include the United States, Canada and Mexico—agreed to the following language:

“No Party shall fail to effectively enforce its [labour] and [environmental] laws through a sustained or recurring course of action or inaction in a manner affecting trade or investment between the Parties.”

Although the United States has now withdrawn from the TPP and its future status is unknown, there have been indications that the TPP text may be tabled by one or more parties as a basis for the renegotiation of the North American Free Trade Agreement (NAFTA).

The arbitral panel in the Guatemala case adopted an extremely demanding interpretation of what a country would be required to prove to establish that violations had affected trade between the parties. In effect, the accusing party would need to prove that violators of labour laws at the firm level had obtained significant cost advantages through the violations. Demonstrating changes at this level would require access to sensitive internal company accounts. Such a threshold would not be required under domestic labour laws. It could not be met without subpoena power (at a minimum), which does not exist under the trade agreements.

Since this was the first labour-related trade arbitration, the language requiring that violations occur “in a manner affecting trade” had never been tested before. In addition, although the panel did not offer a final interpretation on the other limiting phrase in the labour and environmental chapter obligations (through “a sustained or recurring course of action or inaction”), they pointed toward an equally demanding approach.

The decision is disturbing because of the injustice it imposes on the affected Guatemalan workers. It also violated the parties’ explicit commitment to broad enforcement of labour rights contained both in the obligatory commitments and the overall stated purposes of the agreement. And as the first, and as of now only, arbitration arising from a labour clause (or environmental clause), it has set a precedent for future cases.

The United States has published its key objectives for the renegotiations of NAFTA, including a labour chapter based on the TPP labour language. After the decision and precedent of the Guatemala case, this would result in a de facto evisceration of the labour and environment commitments. Twenty years of negotiated progress regarding other aspects of the scope and rigor of these commitments would be for naught.

It should be noted that there are no such limits to the obligations to protect, for example, intellectual property rights in U.S. trade agreements. Arbitration can be sought regardless of whether alleged violations of such rights affected trade or were part of a sustained or recurring course of action or inaction. The lack of limiting conditions follows the logic that protection of core rights is necessary to level the playing field among trading partners and not allow unfair competitive advantage to be gained through their violation.

The fact that the United States has recognized this and avoided limiting such obligations with respect to intellectual property rights suggests that those rights have been given a higher priority and greater care in negotiations than labour and environment rights. The Guatemala case has proven that the easily exploited loopholes in the enforcement of labour and environment obligations amount to lesser protection for those rights than for intellectual property or, for that matter, for investment or other rights. The stated U.S. approach—that for trade to benefit all partners, there must be convergence on the basic rules of competition and protection for essential rights and public policies—has been shown to have glaring gaps.

The renegotiation of the NAFTA agreement presents an urgent, immediate opportunity to eliminate these gaps. The best solution will be to eliminate the two limiting provisions (“through a sustained or recurring course of action or inaction in a manner affecting trade or investment between the Parties”) entirely, and allow enforcement of the labour and environmental obligations on par with those protecting intellectual property and other rights.

At a minimum, the parties should be pressed to include definitional footnotes that would constrain overly broad interpretations of the limiting phrases. For example, “in a manner affecting trade” could be defined by a footnote such as:

For greater certainty, the parties understand “in a manner affecting trade” to mean trade related to or occurring in a tradable sector.

Similarly, “a sustained or recurring course of action or inaction” could be defined as “meaning more than one instance of action or inaction.” 

Advocates of labour and environmental rights should insist that, in the current renegotiation of NAFTA, there cannot be limitations on enforcement of labour and environmental commitments that in effect negate the commitments.

Sandra Polaski is an expert on labour and social policy issues at national and global levels. She was the Deputy Director-General for Policy of the International Labour Organisation (ILO) from 2012 to 2016 and served as ILO Sherpa to the G20. Earlier she was the U S Deputy Undersecretary of Labour in charge of international labour affairs.