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First FTA Labor Case Results in U.S. Loss, Report Says

Tuesday, June 27, 2017
Sandler, Travis & Rosenberg Trade Report

The U.S. has reportedly lost to Guatemala the first-ever labor dispute under one of its free trade agreements, effectively ending the threat of fines of up to $15 million a year or the suspension of trade benefits.

In August 2011 the U.S. requested an arbitral panel under the CAFTA-DR dispute settlement chapter to address Guatemala’s alleged failure to effectively enforce its labor laws. The two sides subsequently negotiated an enforcement plan under which Guatemala committed to strengthen its labor inspections, expedite and streamline the process of sanctioning employers and ordering remediation of labor violations, increase labor law compliance by companies engaged in exporting, improve the monitoring and enforcement of labor court orders, publish labor law enforcement information, and establish mechanisms to ensure that workers are properly compensated upon closure of a company. The U.S. suspended the panel three times over the next 17 months to allow Guatemala time to implement its commitments.

In September 2014 the U.S. resumed the case after concluding that the terms of the enforcement plan had not been met and that concerns over the enforcement of Guatemala’s labor laws had not been resolved. The U.S. argued that Guatemala had violated its FTA obligations through a sustained and recurring course of inaction in a manner affecting trade between the CAFTA-DR parties. For example, the U.S. claimed that Guatemala’s failure to enforce applicable labor requirements had allowed manufacturers in the apparel, stevedore, agricultural, and other industries to evade associated compliance costs.

However, an Inside US Trade article cites unnamed sources as saying that during the week of June 19 the arbitral panel ruled that the U.S. had not sufficiently demonstrated that Guatemala’s deficiencies in enforcing its labor laws had affected trade. This decision, details of which are expected to be made public in the near future, appears to be final since CAFTA-DR has no appeal mechanism. According to the article, sources say the panel’s ruling could “call into question [labor] obligations in existing and future trade agreements” that are similar to those in CAFTA-DR, which could include a renegotiated NAFTA.

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