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Canada’s envoy to Washington says NAFTA negotiators are under intense pressure to cut a preliminary deal before the Summit of the Americas in Peru late next week – but Mexico is resisting a U.S. proposal to boost wages in the auto industry, throwing up a difficult road block to an agreement.

Canadian Ambassador to the United States David MacNaughton told The Globe and Mail on Wednesday that the key to locking up a pact on reforming the North American free-trade agreement is reaching a deal on the all-important auto sector.

“If we can break the back on that one, then I think a lot of the other issues will go easier,” Mr. MacNaughton said.

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Autos are expected to be the centrepiece of any agreement-in-principle unveiled next week, said sources with knowledge of the rapidly accelerating talks, and have taken up the vast majority of time in three-way negotiations over the past month. Many other details of the deal are expected to be punted to future talks.

Mexico, however, is holding out against a demand from U.S. Trade Representative Robert Lighthizer that would require auto makers to source car parts from factories that pay workers at least US$15 an hour for those parts to count toward a vehicle’s North American content requirement.

Such a system would punish Mexico, where workers earn an average of US$3 an hour, and favour jobs in the United States and Canada.

Mexico’s Economy and Foreign ministers, Ildefonso Guajardo and Luis Videgaray, hunkered down on Wednesday with U.S. President Donald Trump’s son-in-law, Jared Kushner, and Mr. Lighthizer at his office in Washington in a bid to crack the issue.

Foreign Minister Chrystia Freeland and Mr. MacNaughton are scheduled to meet with Mr. Lighthizer in Washington on Thursday, with meetings between all three countries to occur on Friday.

The three countries are racing the clock to hammer out a deal that Mr. Trump, Prime Minister Justin Trudeau and Mexico’s Enrique Pena Nieto can announce in Peru.

“It is certainly what we are aiming for, but whether or not we can get there, we will see,” said Mr. MacNaughton, who was in Toronto for a speech by the new U.S. Ambassador to Canada, Kelly Craft.

The auto parts sector is concerned that higher wage standards will hurt the industry’s competitiveness. One senior executive in the sector noted that if wages rise to $15 an hour for suppliers in Mexico, it will increase costs throughout the supply chain, which means prices for finished vehicles throughout the continent will increase.

And Flavio Volpe, president of the Automotive Parts Manufacturers Association of Canada, said if auto makers and their suppliers are forced to boost wages, the implications go beyond Mexico to Canadian and U.S. parts companies.

“You’ve got American and Canadian firms with big exposure in Mexico in terms of their own work forces,” Mr. Volpe said.

If costs go up substantially in Mexico, parts companies could also shift work to lower-wage jurisdictions outside the NAFTA zone and opt to pay the 2.5-per-cent tariffs to import vehicles to the United States under World Trade Organization rules, analysts and companies have said.

Mr. MacNaughton praised Mexico for the constructive role it has played in the NAFTA talks, saying the Mexicans “have come a long way … and made some really helpful suggestions” on Canadian auto proposals first made in Montreal to break the deadlock.

It is unclear, however, how extensive any deal announced next week will be. The United States has signalled it is willing to be flexible on its demands for a sunset clause and the abolition or gutting of NAFTA’s Chapter 19 and Chapter 20 systems of dispute resolution, said people with knowledge of the discussions.

But Ottawa and Washington remain far apart on Mr. Lighthizer’s demands for stringent “Buy American” procurement rules and the end of Canada’s protectionist system of supply management for dairy, poultry and eggs, the sources said.

Daniel Ujczo, an Ohio-based trade lawyer with Dickinson Wright, said the U.S.’s aim is simply to move NAFTA to the back-burner at a busy time – with the escalating Chinese trade war, and the looming Mexican presidential and U.S. congressional elections – and then come back to the deal later on.

“Lighthizer just wants to say we are going to have a NAFTA deal, and we’re working out the details,” he said.

Ms. Craft, who took up her new post six months ago, told the Empire Club of Canada that she was confident a pact could be reached. She stressed that it must be modernized in a way that lifts the standards of working people.

“Prime Minister Trudeau does not share all of President Trump’s policy prescriptions to be sure, but they both have that finger-tip feel, that visceral sense that we are in a period of great possibility which can turn into a period of great peril if we don’t respond to the demands from working people in our countries who want dignity that results from having a good job,” the U.S. ambassador said.

Ms. Craft also listed off a series of trade irritants – including supply management, the inability of U.S. telecoms to gain access to the Canadian market, Canadian generic drugs and Canada’s extremely low threshold for duty-free consumer goods – that should be remedied.

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