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A Ford SUV sits at the assembly plant in Oakville, Ont., in 2015.

<252>Peter Power/The Globe and Mail

Canada is working on a proposal to boost the amount of North American-made content in cars and trucks manufactured in the NAFTA zone, sources say, in a bid to break the deadlock over one of the most contentious subjects in the trade deal's renegotiation.

Ottawa is also crafting a series of potential compromises on the North American free-trade agreement's dispute-resolution provisions, another major sticking point in the talks between Canada, the United States and Mexico.

But even as Canada offers President Donald Trump an olive branch, it is serving notice that it will not be pushed around: Trade Minister François-Philippe Champagne said a World Trade Organization case made public earlier this week was about winning the United States' "respect" by firing a shot across its bow.

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In the case, Ottawa accuses Washington of breaking international trade rules with the punitive duties it has slapped on Canadian softwood lumber as well as a host of products from other countries.

"When you stand strong in sending a message that says we will stand up for our forestry industry, we'll stand up for our aerospace industry, we'll stand up for Canadian workers, you get respect," Mr. Champagne said Thursday at a cabinet retreat in London, Ont. "When people see that you're firm, you get respect. And I think that the message that has been sent [Wednesday] is one of firmness."

The prospective NAFTA proposals, according to sources with knowledge of the discussions, are aimed at salvaging the acrimonious negotiations by offering the Trump administration compromises to back off its tough protectionist demands. The sources spoke on condition of anonymity to describe confidential discussions of proposals that have not yet been tabled.

The auto and dispute-settlement propositions are likely to be put on the table at the next round of talks, slated to start Jan. 23 in Montreal. Mexico has also been working on an auto compromise since at least last fall.

Canada has so far flatly rejected all of the United States' most nationalistic demands. Mr. Trump has proposed forcing all Canadian and Mexican vehicles exported to the United States contain at least 50 per cent U.S. content or pay punitive duties, abolishing or gutting NAFTA's dispute-settlement mechanisms and capping the amount of U.S. procurement Canadian and Mexican companies can bid on.

But now, Ottawa will seek common ground. "We've been talking with Canadian stakeholders and we have some new ideas that we look forward to talking with our U.S. and Mexican counterparts about in Montreal," Foreign Affairs Minister Chrystia Freeland said Thursday.

The draft auto proposal would see changes made to the formula for calculating the North American content of vehicles. Currently, vehicles made in the NAFTA zone must contain 62.5 per cent North American content to be shipped between the three countries without paying duties. But that content requirement only applies to some components, codified on what is called the "tracing list." Canada is considering proposing that the content requirement instead be calculated on the total value of the vehicle, which would ensure that some things currently not covered – such as the development of software that runs the computer systems in vehicles – is included in the total, said sources familiar with the draft proposals.

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Another possibility, one source said, is to exclude from the calculation components that are commodities, such as brakes, wheels and windows, but include spending related to research and development and software. Such an approach would capture content that is more crucial as technology related to self-driving vehicles becomes more important.

Yet, another option under consideration is to adopt the content formula that was negotiated for autos in the Trans-Pacific Partnership. Under such a system, content from outside North America could be considered North American content if it undergoes "substantial transformation" in a NAFTA country. For instance, an auto part made from steel imported from outside North America that is stamped, forged, or formed into parts could qualify as North American content if this sort of proposal were adopted, said one source.

As The Globe and Mail revealed in November, Mexico has been working on an auto counterproposal that would offer to significantly tighten the rules on North American content in vehicles in exchange for Mr. Trump dropping the U.S. content requirement.

Flavio Volpe, president of the Automotive Parts Manufacturers' Association of Canada, said whatever ideas Canadian officials intend to raise in Montreal should remain confidential. "You don't really play poker with your cards up," Mr. Volpe said.

And he cautioned that sorting out the automotive chapters of a new NAFTA agreement will be laborious.

"I think it would be naive for any of us to think we're going to walk out of Montreal with an auto solution," he said.

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One source said Canada is also mulling various ideas on NAFTA's dispute-settlement provisions – chapters 11, 19 and 20 – but has not decided what exactly to propose. Canada is adamant about keeping in Chapter 19, in which NAFTA tribunals can overrule punitive anti-dumping duties. The United States wants to delete Chapter 19 entirely; allow countries to opt out of Chapter 11, which permits companies to sue governments for hurting their business; and allow countries to disregard the decisions of Chapter 20 panels, which adjudicate disputes between governments.

Mr. Trump on Thursday offered an olive branch of his own. In an interview with the Wall Street Journal, he hinted that he would extend negotiations beyond their current March timeline to after the Mexican presidential election in July, saying he was "leaving it a little bit flexible." In that vote, the governing Institutional Revolutionary Party faces an uphill battle against, among others, leftist firebrand Andres Manuel Lopez Obrador.

"I understand that a lot of things are hard to negotiate prior to an election," the paper quoted Mr. Trump as saying. "They have an election coming up fairly shortly. I understand that makes it a little bit difficult for them."

He also told the Wall Street Journal that Mexico would pay for his promised wall along its border with the United States through NAFTA. Mr. Trump did not appear to specify how such an arrangement would work.

"We make a good deal on NAFTA, and, say, 'I'm going to take a small percentage of that money and it's going toward the wall,'" he said. "Guess what? Mexico's paying.

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