(Bloomberg) -- The U.S., Canada and Mexico kicked off a crucial round of Nafta negotiations with little sign of progress on the critical issue of automobiles.
As the latest session of North American Free Trade Agreement talks get underway in Montreal, observers say progress must be made to keep U.S. President Donald Trump from following through on his threat to withdraw. Yet Canada and Mexico aren’t arriving with a specific proposal to counter U.S. demands on the auto sector, suggesting a breakthrough is unlikely on one of the foremost disputes in the 24-year-old deal.
Trump proposes hiking the share of a typical car that must be built in the three countries to 85 percent, from 62.5 percent currently, and adding an additional requirement for 50 percent U.S. content. Canada and Mexico have dismissed those proposals, but Canada’s chief negotiator indicated his side will bring new thinking to the table, without giving details.
“We don’t see a lot of value in making a counter-proposal, a formal counter-proposal right now,” Steve Verheul told reporters in Montreal. “We think we need to take a step back, talk about ideas, generate some traction with some ideas and move in that direction,” he said, adding the Canadians “will be bringing new ideas on the autos rules of origin issue.”
The Mexican delegation will also not present a counter-proposal but is willing to discuss the issue, according to a person familiar with negotiations, who spoke on condition they not be identified.
Talks in Montreal on rules of origin, which govern what share of manufactured goods, such as cars, must come from member countries to receive duty-free treatment, are scheduled to begin Wednesday and last through Friday, according to a preliminary schedule seen by Bloomberg.
Verheul and Mexican counterpart Kenneth Smith Ramos spoke to reporters as Nafta talks formally began Tuesday, though negotiations on a smaller number of issues had resumed on Sunday. As Trump himself signaled he thought talks were going well, both the Canadian and Mexican lead negotiators put a positive spin on negotiations.
“We’re working constructively with the U.S. and with Canada with a clear goal of modernizing the Nafta,” Smith Ramos said. Negotiators are trying to advance as much as possible on the most controversial issues and finalize those where consensus exists, he said, adding they hope to near completion on telecommunications, anti-corruption, measures to protect against disease and pests and technical barriers to trade, he said.
The three countries might make a breakthrough on autos by discussing changes to how the actual value of a car is calculated, Dennis Darby, chief executive officer of the Canadian Manufacturers and Exporters industry group, said in a telephone interview.
“If there’s a willingness to talk about how you calculate the rules of origin in terms of what gets included, there’s possibility for movement,” Darby said. Industry has discussed expanding the “definition of the value chain” to include, in part, technological developments in cars, he said. “What we understand from the negotiators is that’s at least something” being considered, he said.
Trump wants to expand the list of parts whose origin is actually traced, something that would add a paperwork burden for automakers and potentially lead to certain parts, currently deemed domestic because they aren’t traced, being counted as foreign. To raise the auto threshold without changing how it’s calculated “is just not practical,” Darby said.
Mexico’s Economy Minister, Ildefonso Guajardo, and the nation’s ambassador to the U.S. have signaled in recent weeks the country would be willing to explore ways to tighten the rules of origin in order to reach a compromise and move talks forward.
The Montreal talks are “crucial because it’s the first time we have to send clear signals of where we find possible accommodations," Guajardo told a gathering of Mexican diplomats on Jan. 9. For the car industry, "the solution is without a doubt for a strengthened rule of origin in regional automotive content.”
©2018 Bloomberg L.P.