Mexico City, December 17, 2019

Dear clients and friends,

As you may know, the final negotiations between Mexico, the United States of
America, and Canada to modify the USMCA concluded last week. The revision of the
commercial agreement resulted in changes to the chapters of labor, environment,
pharmaceutical products, and the dispute resolution mechanisms.

The Labor Chapter had significant changes, especially in the creation of new
mechanisms to solve controversies through FACILITY-SPECIFIC RAPID RESPONSE
LABOR MECHANISMS. Essentially, standing panels of experts will be appointed by each
Party (government) to consider complaints regarding violations of the USMCA agreements.
Significantly, if the panel confirms the complaint and the facility does not correct the issues,
the complaining Party shall “select a remedy proportional to the Denial of Rights”, including
suspension of tariff treatment or the imposition of penalties on the goods and services
provided by the covered facility.

Below you may find a summary of the main changes stated in the Protocol to the
USMCA:

1. Each country must adopt and maintain in its statutes and regulations a protection to
the following rights: freedom of association and right to collective bargaining,
elimination of all forms of forced labor, abolition of child labor, elimination of
discrimination and enforcement of the obligations acquired by the parties (specifically
the Mexican government under Annex 23-A of the USMCA).

2. According to the USMCA, failure to comply with the labor obligations stated above
are considered to affect the trade or investment between the Parties if it involves:

i. A person or industry that produces a good or supplies a service traded

between the Parties or has an investment in the territory of the Party that
has failed to comply with this obligation.

ii. A person or industry that produces a good or supplies a service that

competes in the territory of a Party with a good or service of another Party.

3. Should any of the Parties have a complaint on a good faith basis against another
Party for violations on the right of free association and collective bargaining
(Denial of Rights), the complainant party may start a FACILITY-SPECIFIC RAPID
RESPONSE LABOR MECHANISM though a Panel. This mechanism may be
invoked between the United States of America and Mexico (Annex 31-A) or between
Mexico and Canada (Annex 31-B) under the following rules:

a) The procedure is designed to obtain a fast remedy against violations to freedom of

association and collective bargaining (Denial of Rights) committed by a specific
company (Covered Facility).

b) A claim can be brought only with respect to an alleged Denial of Rights owed to
workers at a Covered Facility in the following cases:
 a. Mexico: alleged Denial of Rights under legislation that complies with Annex
23-A
b. United States: alleged Denial of Rights owed to workers at a Covered Facility
under an enforced order of the National Labor Relations Board.
c. Canada: alleged Denial of Rights owed to workers at a Covered Facility under
an enforced order of the Canada Industrial Relations Board.

c) For purposes of dispute settlement, the Panel shall presume that a violation is in a
manner affecting trade or investment between the Parties, unless the responding
Party demonstrates otherwise.
d) If a complainant Party has a good faith basis to believe that a Denial of Rights is
occurring at a Covered Facility, it shall first request the respondent Party to conduct
its own review.
e) If the complainant Party disagrees with the remedies determined by the respondent
Party, a Panel of 3 experts in labor law (previously selected from a roster of each
country) may be requested to verify the Covered Facility’s compliance with the law
in question and determine whether there has been a Denial of Rights.
f) The Panel shall conduct an on-site verification within 30 days after receipt of the
request by the respondent Party. Observers from both Parties may accompany
the Panel.
g) The remedies imposed by the complainant party must be proportional to the Denial
of Rights, including suspension of tariff treatment, the imposition of penalties on the
goods and services provided by the covered facility, or even the denial of entry of
such goods (in case a company has been sanctioned on at least two occations).
h) The respondent country has 30 days to demonstrate to the panel that it has taken
action to remediate the Denial of Rights. If the panel determines that the Denial of
Rights has not been remediated, the respondent Party may not request another
determination for 180 days, and any remedies shall remain in place.
i) If a dispute settlement panel finds that a Party did not act in good faith in its use, it
may be prevented from using this mechanism for 2 years.

As you may appreciate, the changes of the USMCA are extended to the persons and
entities that are benefited from the commercial agreement. Even though the treaty does not
allow a government inspection on labor compliance inside the companies, it is well known
that the USA plans to include in its legislation Labor Attachés that will be based in Mexico
and will proceed on-the-ground information about Mexico’s labor practices.

As clear as the new procedure may be, there is a serious risk of subjective judgement
from the complainant party regarding the remedies taken by the respondent party.
Additionally, since the claims are funded under Good faith, there is nothing to prevent them
that their origin comes from a third party whose only intention is to destabilize a company.

This treaty reaffirms the need to comply with the labor regulations in the workplace. In
Bufete Yllanes Ramos we have professionals that may help you with your needs and
concern regarding this important topic.

Best regards,

Lic. Fernando Yllanes Almanza