Rapid Response Mechanism Hasn't Proved Its Worth, Analysts Say

Chad Bown, a Peterson Institute for International Economics fellow, and Kathleen Claussen, a trade law professor who also served on a panel on the autos rules of origin in USMCA, wrote the recent paper.

They said the "data reveal little about whether the RRM has a deterrent effect, and they shed almost no light on the long-run outcome for Mexican or US workers overall."

The Office of the U.S. Trade Representative accepted nine petitions for rapid response complaints, and self-initiated two; the paper said it's known that USTR rejected two petitions, but it's not known if there were more. Canada approved one petition, as well, the only request it received.

The authors noted that the first complaint was the most prominent one -- against a General Motors plant in Silao, where workers assembled pickup trucks, which would be subject to a 25% tariff if not for USMCA (and NAFTA before it). They said more than 5,000 workers voted in a union election, and when they moved from a protection union to an independent one, they received an 8.5% wage increase the first year, and a 10% increase the second year.

"That one of the first RRM situations was so high profile likely put on notice all of the other automakers with assembly facilities and supply chains in Mexico. However, the next RRM situation was very different. It was also more typical of the other situations to emerge," the authors wrote. Most of the targets of the RRM have been companies that do not have brand recognition in the U.S., and much smaller factories. "Available evidence suggests the VU Manufacturing, Unique, and Draxton situations involved fewer than 500 workers," they wrote. Across all 11 U.S. complaints, approximately 16,500 Mexican workers were involved, they said.

But the RRM convinced Democrats in the House, and the AFL-CIO, to support the NAFTA rewrite, and Congress dedicated more than $200 million to support the Mexican labor reform that the rapid response mechanism is designed to bolster. The paper noted that there is more than $180 million for the Labor Department to support Mexico's labor reforms, including $50 million to civil society organizations to raise awareness of the possibility of new unions among workers and employers. There are new U.S. government workers in Mexico to monitor compliance, as well as new lawyers at USTR back in Washington.

Even if most of the cases were not against big names like GM or Stellantis, the authors noted that nine of the 11 were against Mexican subsidiaries of foreign-headquartered companies, perhaps because U.S. unions or civil society were more able to become aware of the situations at those firms and report them to the government.

"Some of the situations involved Mexican facilities with potentially very small direct exports to the United States," they wrote. "An open (legal) question is whether the US government would attempt to sanction inputs embedded by the second plant if the threat of suspension of liquidation of direct US imports was not a big enough penalty to induce compliance at the first facility."

As the RRM continues, the authors wondered if it could raise prices in Mexico, if enough workers got substantial wages. They also wondered if it would convince multinationals to switch sourcing outside of Mexico -- VU did close a factory after it was targeted twice for labor violations.

"If the government misdiagnosed the problem and low wages were not the result of firms holding monopsony power, raising wages may shrink (and not expand) employment" in Mexico, they wrote. Monopsony is when companies have outsize market power, and therefore can hold wages down because workers do not have the option to work somewhere that would pay more.

They also wondered if more cars would be exported to the U.S. under a 2.5% tariff if rules of origin are too onerous to meet; if that happens, "the threat of loss of duty-free trade may lose its bite as a penalty."