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National flags representing Canada, Mexico, and the U.S. are lit by stage lights at NAFTA renegotiations, in Mexico City, Sept. 5, 2017.

Marco Ugarte/The Associated Press

Ottawa is seeking guarantees from the United States that it will not hit Canada with punitive tariffs on the country’s automotive exports under a new NAFTA deal, increasing friction in the trade talks.

U.S. President Donald Trump has repeatedly threatened to impose tariffs on Canadian vehicles and parts, worth about $80-billion a year, if the federal government does not reach an agreement with Washington on an overhaul of the continental trade pact.

But the matter has become a sticking point in talks, said people briefed on the closed-door negotiations.

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While Canada is seeking an absolute guarantee that Mr. Trump will not impose the levies, negotiators also expect the United States to push for a more complicated agreement concerning the auto sector – similar to one it made last month with Mexico. Under the terms of that deal, contained in a side letter that is separate from the actual text of the North American free-trade agreement, most automotive exports from Mexico are exempt from tariffs, but Washington is allowed to impose levies on vehicles that exceed a specific export quota and do not comply with stricter content rules.

If Canada is not able to secure protections from auto tariffs, Mr. Trump may ultimately reserve the right to set tariffs on all Canadian vehicles – even if Ottawa agrees to a NAFTA deal.

NAFTA’s saga so far: A guide to trade, the talks and Trump

Such tariffs would be catastrophic for the Canadian auto sector, which exports roughly 85 per cent of its production to the United States. The Canadian Automobile Dealers Association has estimated that U.S. levies would kill 100,000 manufacturing jobs and cause a recession.

“Much of the urgency on the NAFTA renegotiations schedule is the auto and auto parts tariff threat by the Americans,” said Flavio Volpe, president of the Automotive Parts Manufacturers Association of Canada. “I think it would be prudent for us to be demanding, by that logic, that if we close NAFTA we’d like assurances that we’re not subject to the tariff.”

The threatened tariffs are one of several unresolved issues in the frantic talks between Foreign Affairs Minister Chrystia Freeland and U.S. Trade Representative Robert Lighthizer, which resumed Wednesday in Washington. Dispute resolution mechanisms, greater access to Canada’s dairy market for U.S. farmers and protections for Canadian cultural industries are also points of contention.

The prospective auto tariffs would be imposed under Section 232 of the Trade Expansion Act, which allows the U.S. administration to place levies on foreign imports for “national security” reasons. Mr. Trump used this same provision to hit Canadian steel and aluminium with tariffs in June. As The Globe and Mail has reported, it remains unclear whether Canada will have those tariffs lifted under a new deal.

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David Worts, president of the Japan Automobile Manufacturers Association of Canada, pointed to comments earlier this year from U.S. Commerce Secretary Wilbur Ross, who conceded at a congressional hearing that the tariff threat was purely a way of pressuring Canada into a trade deal.

“Wilbur Ross was pretty clear: He said Canada’s not a threat to national security, they were just using it as a tactic. So if they get a NAFTA, [an exemption] should be automatic,” Mr. Worts said.

Read more: Dairy farmers press Canada to stand firm in NAFTA talks

The U.S. trade agreement with Mexico reached in August contains a side letter that caps vehicle exports at 2.4 million units annually exempt from tariffs, according to sources. Vehicles that comply with NAFTA’s new automotive content rules are similarly exempt. Those rules specify that at least 75 per cent of the content of a vehicle must be manufactured in the NAFTA zone and 40 per cent to 45 per cent must come from factories paying workers at least US$16 an hour – a bid to push more auto jobs away from Mexico, where workers earn US$4 an hour.

The intent is to force all vehicles over current export levels to comply with NAFTA’s new content rules – Mr. Trump’s single-largest victory over Mexico in NAFTA talks – or risk being hit with 25-per-cent tariffs. Without the Section 232 tariffs, autos that ignore the NAFTA rules would pay a tariff of just 2.5 per cent under World Trade Organization rules. The likely effect, one source said, is to slam the brakes on new auto investment in Mexico.

Mexican auto parts will also be exempt from Section 232 tariffs, up to US$108-billion annually – some 40 per cent more than the US$75-billion Mexico exported to the United States last year, according to sources.

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One industry source with knowledge of the discussions said the White House wants to set a cap on Canadian auto exports that would be slightly higher than the 1.7 million vehicles Canada sent to the United States last year. Anything over the cap that did not comply with the new content rules could be subject to Section 232 tariffs.

Instead, three sources said, Canada is demanding a total exemption without quotas or other conditions. The matter could be left unresolved when Ottawa agrees to a new NAFTA deal, leaving a key sector unprotected.

Canada produces fewer vehicles than Mexico, but automakers in this country ship a higher percentage of those cars, crossovers and pickups – about 85 per cent – to the U.S. market.

Unifor president Jerry Dias, whose union represents Canadian autoworkers, said the wording in the new agreement needs to include “comprehensive language that says, ‘Here’s the deal on the auto industry,’ which will include no 232 tariffs.”

That language should also say the tariffs on Canadian steel and aluminum will be eliminated and that they should not be levied on other Canadian products, such as softwood lumber, Mr. Dias added.

Ontario Economic Development Minister Jim Wilson, who was in Washington on Wednesday to press the Canadian negotiators to protect his province’s auto, steel and agricultural industries in the talks, said a guarantee of no Section 232 tariffs is an essential element of any deal.

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“There’s no sense in having a NAFTA deal if the President or someone on the U.S. side can just willy-nilly slap tariffs on whatever sector they feel like that day,” Mr. Wilson said in the lobby of the Canadian embassy after meeting with Ambassador David MacNaughton. “That would just undermine any type of … free-trade deal.”

But Linda Hasenfratz, chief executive of Linamar Corp., Canada’s second-largest auto-parts maker by revenue, said the tariffs are illegal, so there is not much point signing an exemption deal with the United States.

“If the U.S. wants to impose illegal tariffs,” she said, “they obviously are happy to do so regardless of trade agreement language.”

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