Canada aims to break auto impasse in next round of NAFTA talks

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Canada will present more detailed proposals on auto manufacturing when NAFTA talks resume this weekend, in an attempt to break the deadlock over one of the Trump administration's toughest protectionist demands, sources familiar with the negotiations said.

Mexico, for its part, is aiming to play peacemaker, said people with knowledge of its negotiating strategy for the coming session, and will try to find compromises between the Canadian and American positions.

The seventh round of the renegotiations, unfolding at the luxury Camino Real Polanco in Mexico City, will be a crucial moment for the continental trade pact worth US$1.3-trillion annually, with the three sides at loggerheads over several of U.S. President Donald Trump's key demands and a fast-approaching Mexican presidential election cranking up the pressure.

It will also showcase the surprising dynamic that has developed between the three countries, with Canada as primary foil to the United States 's nationalist agenda and Mexico – despite its status as Mr. Trump's long-time bogeyman – acting as conciliator trying to move the three sides closer to a deal.

U.S. chief negotiator John Melle travelled to Ottawa on Friday for talks with his Canadian counterpart, Steve Verheul, to lay the groundwork for the Mexico City negotiations that begin on Sunday, sources said, with discussions on several hot-button topics including the Chapter 11 system that allows corporations to sue governments at trade tribunals.

And Mr. Trump served notice that he expected movement on autos – a key issue to the rust-belt constituency he must keep in midterm congressional elections later this year.

"NAFTA is no good, it never was any good. They emptied our factories. You ought to see the car plants and the auto plants in Mexico. You've never seen anything like it before. I want those companies, I want them back here," Mr. Trump told the Conservative Political Action Conference at a resort hotel on Friday in National Harbor, Md. "Hate to say it, but if we can't make a fair deal for the United States, we'll terminate the deal, we'll start all over again."

Mr. Trump continues to single out the auto industry in Mexico as a target of his wrath, even after his previous outbursts about auto investment in that country appear to have played a role in some auto makers announcing new investment in the United States. Toyota Motor Corp. scrapped plans to assemble its Corolla in Mexico and instead has begun constructing a new joint-venture assembly plant with Mazda Motor Corp. in Alabama. Fiat Chrysler Automobiles NV will spend more than US$1-billion to shift production of heavy-duty pickup trucks from Mexico to a plant in Michigan.

In the trade talks, the U.S. has demanded that North American content in autos made in the NAFTA zone be boosted from 62.5 per cent to 85 per cent, and all vehicles manufactured in Canada and Mexico and exported to the U.S. contain 50-per-cent American content. Ottawa and Mexico City have flatly rejected that demand.

In the past round of talks, in Montreal, Canadian negotiators floated a compromise, which would change the way the content of autos is calculated to incorporate more high-tech components and software development. U.S. Trade Representative Robert Lighthizer criticized Canada's ideas as not doing enough to create more manufacturing jobs.

In Mexico City, Canada is planning to try again. Among other things, it is expected to present more detail on a series of proposed incentives for auto companies to build new factories or expand existing ones in North America, use more North American steel and aluminum and spend more on research and development. One source who had seen Canada's proposals said Ottawa will not, however, be proposing any numbers, such as specific content percentages.

A presentation being circulated by the federal government and obtained by The Globe and Mail sets out a series of proposed "credits" that auto companies could earn toward their North American content requirements. Among other things, capital expenditure on auto plants, using steel or aluminum from North America and building new technology vehicles, such as electric cars, would all generate credits.

Earlier this week, Mexican Economy Minister Ildefonso Guajardo told reporters in Mexico City there would be a "Mexican proposal" on autos in this round.

Mexico will build on Canada's position on autos, seeking to add more detail to the rough concepts that Ottawa has outlined, said Mexican government and industry sources. Another source said Mexico is mulling a proposal on specific content percentages – something higher than 62.5 but lower than 85 – filling in a key hole in the Canadian proposal.

Mexico's strategy is to position itself somewhere between Canada and the U.S. and find ways to "bridge the gap" between the two, the Mexican government source said. The source characterized the Mexican-Canadian dynamic as "good cop/bad cop," with Canada taking a harder stand against the U.S. at the negotiating table and Mexico presenting itself as more amenable to compromise.

One source with knowledge of Mexico's strategizing said that, behind the scenes, the government so badly wants to keep NAFTA that it is willing to make deep concessions on autos and other areas.

The U.S. has grumbled for months about the Canadians' intransigence in the talks. At a roundtable on trade at the White House earlier this month, Mr. Lighthizer pointedly said NAFTA renegotiations were going "particularly well with the Mexicans."

Christopher Wilson, deputy director of the Mexico Institute think tank in Washington, said he believes the Americans are frustrated because they did not expect Canada to play hardball.

"When the U.S. made their tough proposals, I think they just expected that would bring everyone to the negotiating table, and that would put them in a position of strength. But it didn't always work," he said in an interview.

Foreign Affairs Minister Chrystia Freeland and Mr. Guajardo are in regular, direct contact, say sources with knowledge of their discussions, but the two sides don't tell each other everything: Last fall, for instance, Canadian negotiators were surprised when Mr. Guajardo proposed adding a review mechanism to NAFTA as an alternative to the U.S.'s proposed sunset clause.

Andres Rozental, a former high-ranking Mexican diplomat, said he believed the U.S. was using a divide-and-conquer tactic, targeting Mexico some times and Canada others in hopes of keeping the two from forming a united front.

"I think that Washington is playing what you call 'good cop, bad cop' and using the strategy of alternating attacks against both Canada and Mexico as a negotiating tactic," Mr. Rozental wrote in an e-mail. "[The U.S. is] hoping to split the opposition, which I don't think will succeed."