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New Lexus vehicles are built on the line at the Lexus plant in Cambridge, Ont., on June 18, 2014.

Peter Power/The Globe and Mail

Negotiators for Canada, the U.S. and Mexico are meeting in Washington to try to break a deadlock over autos – one of the biggest stumbling blocks to a massive Pacific Rim trade pact between 12 countries.

They are facing pressure from firms in the Canadian and Mexican auto sectors for a better deal.

Canada's chief negotiator for the Trans-Pacific Partnership talks, Kirsten Hillman, is heading to the U.S. capital on Thursday to join discussions that sources say are part of an effort to clinch an accord by mid-September.

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The three NAFTA countries are trying to settle a question with potential consequences for their respective manufacturing sectors: What portion of an auto part, or a car, must originate in this proposed trade zone to avoid tariffs?

Mexican auto-industry officials this week said a Trans-Pacific Partnership (TPP) deal must guarantee that half of the content of cars is manufactured within signatory countries, and that the minimum content rule for auto parts is close to that portion.

And Canada's auto-parts manufacturing association said Wednesday it agrees with Mexico.

"We know that Canada must give a little to get a little and are prepared to support our negotiators in pursuit of a more balanced position. However, our interests are strongly aligned with the Mexicans' and we continue to have a strong technical working relationship with their advisers as well," said Flavio Volpe, president of Canada's Automotive Parts Manufacturers' Association.

The minimum TPP content rules sought by Canadian and Mexican auto-sector officials are higher than the 30 per cent for parts and 45 per cent for light-duty vehicles that sources say Japan and the United States had provisionally agreed to before things stalled.

Negotiations to create the Trans-Pacific Partnership, which would include countries from Japan to Chile and 40 per cent of the world's economic output, failed to reach a deal in Hawaii in late July. Officials at Canada's Department of Foreign Affairs, Trade and Development had little to say on Wednesday, saying Ms. Hillman's visit to Washington was scheduled to last only one day.

Last week, Australian Trade Minister Andrew Robb said the two biggest remaining obstacles to an agreement are autos and dairy imports between Canada, the U.S., Japan and Mexico, saying if the four countries could settle their differences, "I think we could complete this in a couple of days of sitting."

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Canada and Mexico are concerned about giving Japan too much leeway to source auto parts from low-cost suppliers outside Trans-Pacific signatory countries such as Thailand.

As The Globe and Mail has reported, Canada and Mexico only learned when they arrived at the Hawaii round of Trans-Pacific talks in late July that the U.S. and Japan had brokered a deal on vehicle imports that could hit the NAFTA partners' auto sectors hard. Furthermore, Washington had assured Tokyo that its North American neighbours would accept the side deal.

Ottawa and Mexico City discovered in Hawaii that Japan and the U.S. had cut the side deal lowering the threshold for how much of an auto part and car would have to come from Trans-Pacific signatory countries to avoid hefty duties. The remainder of the auto could come from low-cost suppliers outside Trans-Pacific countries, currently a major source of parts for Japanese auto makers.

Under North American free-trade rules today, more than 60 per cent of a light-duty vehicle must be made in Canada, Mexico or the United States for it to enter these markets free of tariffs. The biggest problem for Canada, however, is proposed exemptions within the TPP content formula that Washington hammered out with Tokyo – one that grants Japan the right to use some parts that contain even less content from Trans-Pacific countries, a source close to the talks said.

The assumption among all parties in the TPP auto talks is that the TPP content rules for auto parts will end up being lower than the rules for autos, or light-duty vehicles, themselves.

Both Mexican and Canadian auto-parts makers, however, are anxious to avoid setting content rules for autos and auto parts that are substantially different. After all, they say, three-quarters of a car is auto parts.

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As Canada, Mexico and the U.S. try to resolve autos, the chief American trade official, U.S. Trade Representative Michael Froman, and the chief U.S. negotiator, Barbara Weisel, are heading to Malaysia to continue TPP discussions on the sidelines of a meeting of economic ministers of the Association of Southeast Asian Nations, taking place in Kuala Lumpur starting this weekend.

The U.S. has reportedly negotiated safeguards in its side deal with Japan on autos that would restore tariffs on Japanese vehicles entering the United States if domestic sales of American autos fall sharply due to Tokyo violating the TPP deal.

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