Mexico working on compromise on NAFTA rules of origin for vehicles, sources say

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The Mexican government is working on a compromise proposal to tighten the so-called rules of origin that govern the content of vehicles made under the North American free-trade agreement, The Globe and Mail has learned.

Sources with knowledge of the prospective proposal said Mexico City is trying to find a way to placate the Trump administration by squeezing overseas content out of North American-made cars and trucks, but without harming the auto industries in Mexico or Canada.

The idea would be aimed at resolving one of the toughest issues in the contentious renegotiation of the pact. It has not yet been finalized, the sources said, and will likely not be presented at the current round of talks.

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The move comes as Canada's chief negotiator acknowledged publicly on Friday that the talks are at loggerheads. The three sides are hunkered down until Tuesday at the Camino Real, a modernist luxury hotel in Mexico City's tony Polanco neighbourhood, for the fifth round of negotiations.

Under the current rules of origin, autos must contain 62.5 per cent North American content in order to be shipped between the NAFTA countries without paying tariffs. A list called the "tracing requirements" spells out which exact components of the vehicles count toward the content requirement.

The Trump administration has demanded that a new 50-per-cent U.S. content requirement be imposed on autos made in Canada and Mexico, the North American content requirement be jacked up to 85 per cent and the tracing list expanded to include every component of a vehicle.

The proposal Mexico is crafting, the sources said, would offer Mr. Trump a more extensive tracing list and possibly the 85 per cent North American content requirement in exchange for the United States withdrawing the 50-per-cent U.S. content provision. One source said Mexico is looking to write the tracing requirements in such a way as to ensure low-cost components from China and other countries in Asia are now instead sourced from within North America.

Rules of origin are scheduled for four days of discussion starting on Saturday, but one source said this round will mostly focus on ironing out technical matters while more substantive negotiations over the percentages the United States has demanded will be put off to a future session of talks.

The auto industry and Canadian government fear tougher rules of origin will make North American manufacturers less competitive than their overseas peers. The Mexican government is more open to tightening the rules, sources said, because it believes much of the extra work in manufacturing components would go to Mexico. Both Ottawa and Mexico City, however, agree that a U.S. content requirement is completely unacceptable.

The potential Mexican proposal shows an increasing desire by the Pena Nieto administration to play deal-maker and find ways to preserve NAFTA by offering victories to Mr. Trump. Earlier this week, Mexican Economy Minister Ildefonso Guajardo announced that he would propose a compromise on the U.S. demand to insert a sunset clause into NAFTA. Instead of the U.S. proposal – which would automatically kill NAFTA in five years unless all three countries agreed to extend it – Mr. Guajardo suggested a review of the pact every five years, under which all three countries could agree to make changes to the deal.

So far, the talks have been all but deadlocked on the most substantive matters. Besides rules of origin and the sunset clause, these include U.S. proposals to severely limit the amount of American government contracting Canadian and Mexican firms can bid on and to gut or abolish the deal's dispute-resolution mechanisms.

"We're just getting started. Long ways to go," Canada's chief negotiator, Steve Verheul, told reporters at the Camino Real on Friday. "It's a challenging negotiation. Really challenging. Sorry I keep saying that."

The leader of Canada's largest private-sector union, who has been advising the negotiating team, said Mr. Verheul told him privately that the United States is so far refusing to compromise on anything.

"Steve Verheul in essence is saying the United States is not showing any flexibility," Unifor president Jerry Dias said in the lobby of the Camino.

The current round of talks will mostly focus on easier NAFTA issues – such as expanding the deal to cover digital trade and cutting red tape at the border – while punting the hardest subjects to future rounds.