By Daina Beth Solomon

MEXICO CITY The U.S. wants Mexico's government to build strong institutions to protect worker rights as companies aiming to avoid supply chain disruptions in far-off production spots bring more jobs to the country, a top U.S. labor official told Reuters.

Mexico has begun to benefit from "nearshoring" in which companies seek to move production closer to the U.S. market while maintaining competitive costs.

The trend is further testing a trade deal known as the U.S.-Mexico-Canada Agreement (USMCA), in effect since July 2020.

The pact has tougher labor rules than its 1994 predecessor and underpins new Mexican laws that empower workers to push for better wages and conditions after years of stagnant salaries and pro-business union contracts.

Three years into the deal, experts say, some workers have begun to benefit but broad impacts are still far off.

"Hopefully that will ensure that Mexico doesn't become a dumping ground for companies looking for cheap labor and lax regulations," said Thea Lee, U.S. Deputy Undersecretary for International Labor Affairs who polices USMCA compliance.

She said in an interview that Mexico was working to fulfill its commitments, backed by leadership keen on helping workers.

Mexico's new regulations favor companies taking on higher ethical standards, she said.

"Maybe 20 years ago it was okay for a multinational corporation to throw up their hands and say, 'we have no idea what's in our supply chain, what the labor conditions are,'" she added.

"That doesn't seem to be acceptable anymore."

Mexico has made progress improving labor courts, resolving worker complaints faster and easing union organization, but needs to do more, Lee said.

"Our hope is that Mexico will be well-poised to take advantage of nearshoring ... if they continue on the path towards really building labor institutions that work, where workers can have confidence."

Since 2020, several U.S. labor complaints in Mexico have paved the way for independent unions to land pay raises and even expand. Lee said such examples inspire workers who in the past may have feared threats or dismissals for trying to organize.

Four more cases are under review: At a garment factory, an auto parts plant, a Goodyear tire plant, and a mine owned by conglomerate Grupo Mexico.

Yet one employer that faced two USMCA complaints, U.S.-based VU Manufacturing that makes interior car parts in the northern city of Piedras Negras, recently dismissed dozens of employees just months after a new union, La Liga, pressed for better wages. VU did not respond to a request for comment.

Lee said the company risks penalties if it does not uphold an agreement around worker rights. But La Liga members have already been laid off, and fear the company aims to discourage organizing, said union leader Cristina Ramirez, who lost her job.

"It's very disappointing and frustrating," Ramirez said. "We wanted to fight for things to improve."

(Reporting by Daina Beth Solomon; Editing by David Gregorio)