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Protection of fundamental labour rights in free trade agreements (FTAs): A total failure?

16 April 2018
Free trade agreements (FTAs) contain a labour chapter, including a grievance mechanism for examining labour complaints that could ultimately sanction the offending party. But there is debate over whether the link between trade and labour provisions is positive, or if it weakens international protection for workers.

The adoption of free trade agreements (FTAs) flourished in the 2000s. There were around 60 FTAs until 2013 and the US alone signed 12 of them with 17 countries between 2004 and 2012, excluding the Trans-Pacific Partnership (TPP) of 2016. These agreements are notorious among other things because they include a “labour chapter”. It’s not that the “labour chapter” or clause is a novelty itself; after all, their cousins – the bilateral investment treaties (BITs), popular in the 80’s and 90’s – already included one. The main difference is that unlike the BITs, the “labour chapter” in the FTAs have teeth:  they also include a grievance mechanism for examining labour complaints that could ultimately sanction the offending party.

Question: is this mechanism having any positive results?

The most common argument for linking trade and labour provisions is that it can strengthen the status of international labour standards and help their enforcement. For instance, the government of Malaysia recently stated that “as a signatory to the Trans-Pacific Partnership (TPP), [it] was embarking on labour law reforms” to allow collective bargaining rights for public sector workers. [1]

Critics of FTAs state, on the contrary, that trade agreements are decentralized and do not require the same interpretation or application, leading – in the case of labour standards – to an increasing fragmentation within international labour law and the weakening of the attempts of the ILO to improve international protection for workers. This makes even more sense for countries that have signed different trade agreements with as many different parties.

The US has – at least partially – addressed these concerns by (i) having very similar labour chapters in all bilateral or multilateral FTAs it has signed, which refer to the four core labour rights embedded in the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up (the ILO Declaration), of 1998, and by (ii) specifically designating the Monitoring & Enforcement of Trade Agreements Division (META), within the Office of Trade and Labor Affairs (OTLA) of the Department of Labor (DOL), as the single “contact point” that receives and reviews submissions made under the labour chapter of US FTAs. This would allow coherence in the application of the labour clause.

However, another controversial issue has not been solved; whereas a breach of FTA’s intellectual property or telecommunications chapter is a breach of intellectual property and telecommunication rights under FTAs, most FTAs, including those signed by the US, provide that for there to be a breach of the labour chapter, there must be a failure to protect fundamental labour rights “in a manner affecting trade”. In other words, complainants have the additional burden to prove and provide evidence that a labour violation under the FTA influences cross border activity and creates a competitive advantage for the infringing party. This was made even more evident with the decision of the Arbitral Panel established for In the Matter of Guatemala – Issues Relating to the Obligations Under Article 16.2.1(a) of the CAFTA-DR.

The case of Guatemala

In 2008, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) and six Guatemalan unions filed a submission against Guatemala with the META. They accused the Guatemalan government of not conforming to its obligations under Article 16.2.1(a) of the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR), regarding the effective enforcement of Guatemalan labour laws related to the right to freedom of association, to organize and bargain collectively, and decent work. META exhausted all the procedural steps until in 2015 the US government finally submitted the case to Dispute Settlement, becoming the first labour violation case to reach that level under an FTA.

The US government – among other things – argued to the Panel that “in a manner affecting trade” means “that has a bearing on, influences or changes cross-border economic activity, including by influencing conditions of competition within and among the CAFTA-DR Parties,” and that “an econometric analysis of the effects on trade of a failure to effectively enforce labor laws is not required by the text, context or object and purpose of the CAFTA-DR”. The US also contended that demonstrating actual trade effects is not reasonable or feasible in the context of labour disputes under the CAFTA-DR – it pointed out that it does not have access to the internal books and records of Guatemalan companies, and that therefore, in its view, even if it were possible to identify a reduction in the price of a good it would be impossible to show that it was due to a failure to enforce Guatemala’s labour laws.  The US also reiterated that interpreting Article 16.2.1(a) as prohibiting a Party from influencing conditions of competition between the CAFTA-DR Parties through a failure to effectively enforce labour laws is consistent with the objective in Article 1 to “promote conditions of fair competition in the free trade area.” Finally, the US stated that there was no reason to limit a “conditions of competition” analysis to situations in which a comparison between the treatment of domestic and imported products is required.

In June 2017, the Arbitration Panel ruled against the US government and the unions, despite the history of violence against trade union leaders in Guatemala – 66 killed at the time of the original submission; 86 killed up to September 2017 – and the struggle to accomplish the most basic labour standards. The Panel partially agreed with the US arguments on the scope of “in a manner affecting trade” and found that “a failure to effectively enforce a Party’s labour laws through a sustained or recurring course of action or inaction is “in a manner affecting trade between the Parties” if it confers some competitive advantage on an employer or employers engaged in trade between the Parties.”

However, the Panel also found that another requisite of the CAFTA-DR labour chapter was not fulfilled. The Panel stated that there was no proof that failure to effectively enforce labour laws in Guatemala were “sustained and recurrent” – the original submission by AFL-CIO outlined (only) five separate cases in which Guatemala allegedly failed to effectively enforce its domestic labour laws with regard to freedom of association, the right to organize and bargain collectively, and decent work.

The Panel ruled that the two conditions – “in a manner affecting trade” and “sustained and recurrent” – are cumulative. The Panel explained that a violation would have been observed if the two conditions were not cumulative (DR – CA – US FTA, Final report of the Arbitral Panel, 14 June 2017, para 502). Had it decided otherwise, the Panel would have made an exemplary sentence, condemning violence against trade unionists in Guatemala, which would have been in line with the ruling of the ILO Committee on Freedom of Association, case 2540 (Report 351, November 2011, para 894).

The future of FTA’s labour chapter 

The result of the Guatemalan case undeniably calls into question the feasibility of this mechanism to resolve labour disputes within the framework of FTAs, as well as the political will of the US and other countries to deal with the scourge of systematic labour violations.

The fact that the US Trump administration withdrew from the TPP, is renegotiating NAFTA, and announced its intention to terminate the Korea-US Free Trade Agreement, will definitely kill the labour chapter grievance mechanism… or could it be an opportunity to make it better? It’s yet an open finale.

However, the only way FTAs will be accepted by labour and civil society is if they become an effective tool that works in favour of the people as well as trade. For FTAs to work and be trustworthy to all stakeholders, their labour chapters and grievance mechanisms must be applicable independently of the impact on trade and should be linked to the findings of the ILO supervisory mechanisms. The violation of one of the fundamental principles and rights at work is a human rights violation that cannot be subject to a simple economic appraisal or to the commercial interests of the signatory parties.

To be continued.

[1] ILO, Report of the Committee on the Application of Standards (2016), Provisional Record 16(rev.) Part 2, 105th International Labour Conference, p. 107, available at http://www.ilo.org/wcmsp5/groups/public/---ed_norm/---relconf/documents/meetingdocument/wcms_489124.pdf (last visited 17 July 2016).

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