NAFTA partners at an impasse over auto-content rules as deadline looms

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The NAFTA renegotiation is deadlocked over U.S. demands for new rules that would push the auto industry to move jobs out of Mexico and use more North American-made steel – even as a May 17 congressional deadline for a deal looms, sources with knowledge of the talks said.

Foreign Affairs Minister Chrystia Freeland finished five days of negotiations in Washington with U.S. Trade Representative Robert Lighthizer and Mexican Economy Minister Ildefonso Guajardo on Friday without an agreement. But she said negotiators will keep talking.

U.S. House Speaker Paul Ryan said this week that if the North American free-trade agreement is not settled by next Thursday, there will not be enough time for Congress to vote on the deal this year – a prospect that could prolong uncertainty for business and hurt investment in the NAFTA countries. The United States has also threatened to hit Canada and Mexico with tariffs on steel and aluminium if they do not finish NAFTA by June 1.

But Ms. Freeland insisted she would not be pressured into an agreement by any deadlines.

“What we want is a good deal, not just any deal,” she told reporters outside Mr. Lighthizer’s office on Friday. “The negotiation will take as long as it takes.”

In a statement, Mr. Lighthizer described NAFTA as “seriously flawed,” but said he was “ready to continue working with Mexico and Canada” on a deal.

One Canadian source said U.S. negotiators seemed disorganized and overwhelmed this week: They had trouble scheduling anything more than a few hours in advance, and would often call their Canadian and Mexican counterparts in for meetings on short notice. On at least one occasion, the official confided, Canadian negotiators arrived for a meeting only to find the Americans appeared to have forgotten about the scheduled sit-down and were unprepared for it.

The U.S. disputed this characterization: “This is complete nonsense. There was no disorganization at all. In fact, there were numerous meetings with both the ministers and professional staff throughout the week,” Mr. Lighthizer’s office wrote in an e-mail to The Globe.

People briefed on the confidential talks said two pieces of the United States’ proposed tightening of the “rules of origin” – regulations that dictate how much NAFTA-zone content must be used in North American-made cars and trucks to qualify for tariff-free shipping between the three countries – are the top stumbling blocks in the negotiations.

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One is a demand that would require 40 per cent to 45 per cent of vehicle parts to come from factories paying employees at least US$15 to US$17 an hour – a move meant to make auto makers source fewer parts from Mexican factories, where workers earn closer to US$4 an hour.

The other would oblige auto makers to use at least 70 per cent North American-made steel, aluminium and glass.

The bargaining-table battle is primarily playing out between the United States and Mexico, which is fighting to push back on U.S. demands, the sources said, with Canada showing more flexibility and largely waiting out the conflict on the sidelines.

“I think the only thing that’s at play is this Mexican labour piece,” said Flavio Volpe, president of the Automotive Parts Manufacturers’ Association of Canada. The two countries must settle the issue if there is to be a deal on autos.

Mr. Guajardo said on Friday that Mexico is making “a very good effort” and that “there is a way to solve the autos.” Mexico’s chief negotiator, Kenneth Smith Ramos, said there had to be “flexibility on all sides” to get to a deal.

Mexico made a counterproposal on autos earlier this week that would set an overall North American content requirement of 70 per cent, but would not force companies to use a certain percentage of North American steel or source a specific percentage of parts from higher-wage factories.

While the rules-of-origin issue remains unresolved, negotiators have declined to start compromising on other contentious matters, the sources said. These include Trump administration demands for stricter “Buy American” rules for government contracting, the abolition or gutting of NAFTA’s dispute-settlement provisions, a sunset clause the could terminate NAFTA in five years and the dismantling of Canada’s protectionist supply-management system in the dairy sector.

At a White House meeting on Friday with auto-industry executives, U.S. President Donald Trump warned that Canada and Mexico could “lose the golden goose” if they don’t make a deal to overhaul the pact.

“NAFTA has been a horrible, horrible disaster for this country and we’ll see if we can make it reasonable,” he said.

Auto companies have warned that Mr. Trump’s protectionist proposals could hurt their businesses by disrupting their supply chains, which span the entire continent.

Don Walker, chief executive officer of Magna International Inc., the largest auto-parts supplier in North America, told his company’s annual meeting this week that the continent needs a low-cost country to produce parts or it becomes less competitive against Asia and Europe.

“If we can’t source low-cost work in Mexico that we cannot get done in Canada or the U.S. − [where] people don’t want to do it − then all that work moves from Mexico to other regions of the world,” he said.