Counter.tsx starts with "use client" and imports Label.tsx, which has no directive. How is Label treated inside Counter?

"As client code" is correct. "use client" marks an entry point into the client module graph, so everything that file imports is bundled for the browser. That includes Label. You only need the directive at the boundary, not in every file below it. The tempting "As a Server Component, because it has no directive" is wrong: a missing directive does not make a module server-only when a client file imports it.