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U.S. to seek tough NAFTA rules of origin in auto sector: trade czar

U.S. Trade Representative Robert Lighthizer, right, speaks with Canadian Foreign Affairs Minister Chrystia Freeland, as they leave a news conference, which included Mexico's Secretary of Economy Ildefonso Guajardo Villarreal, Wednesday, Aug. 16, 2017, at the start of NAFTA renegotiations in Washington.

Jacquelyn Martin/AP Photo

The Trump administration will demand significant concessions from Canada and Mexico in the renegotiation of the North American free-trade agreement, including a requirement for cars and trucks made in the free-trade zone to have U.S. content.

Robert Lighthizer, President Donald Trump's trade czar, delivered this stark message on the first day of NAFTA talks in Washington.

At a tense opening session in the ballroom of the Marriott Wardman Park hotel, Mr. Lighthizer lambasted the deal as a failure – while his Canadian and Mexican counterparts took subtle shots at Mr. Trump's nationalistic economic policies.

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"We feel that NAFTA has fundamentally failed many, many Americans and needs major improvement," Mr. Lighthizer said, adding that the trade pact has cost 700,000 Americans their jobs.

Mr. Trump, he said, "is not interested in a mere tweaking of a few provisions and a couple of updated chapters."

The hard-hitting opening speech served notice that the United States will not accept the Canadian and Mexican aim of simply expanding the deal to cover more areas of trade and social policy.

Instead, Mr. Trump intends to make good on his campaign pledge to bring in protectionist measures in a bid to bring factory jobs back to the U.S. rust belt.

Mr. Lighthizer's toughest demand was stricter rules on how much content in manufactured goods must be produced within the NAFTA zone to be exported among the countries without paying tariffs.

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The provisions, known as the rules of origin, apply to scores of common products, including clothing, but are particularly important for the auto sector, which currently must have 62.5 per cent of its content made in NAFTA countries.

Mr. Lighthizer said he wants that percentage increased – and a U.S. content requirement added on top of it.

"Rules of origin, particularly on autos and auto parts, must require higher NAFTA content and substantial U.S. content," he said.

The opening speeches were the first formal event in the talks. The night before, Mr. Lighthizer hosted Foreign Minister Chrystia Freeland and Mexican Economy Secretary Ildefonso Guajardo and their respective negotiating teams at Washington's Metropolitan Club for an ice-breaking dinner. But any lingering bonhomie was swiftly dispensed with on Wednesday morning.

"We cannot ignore the huge trade deficits, the lost manufacturing jobs, the businesses that have closed or moved because of incentives – intended or not – in the current agreement," Mr. Lighthizer said.

Ms. Freeland and Mr. Guajardo, by contrast, used their speeches to laud NAFTA as a successful deal that was delivering economic benefits, and stronger ties, for all three countries. Ms. Freeland opened her presentation with photographs of U.S. and Mexican firefighters heading to battle wildfires in British Columbia to emphasize the closeness of the continental neighbours.

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Mr. Trump believes his country's trade deficit is a consequence of companies moving jobs out of the country, an assertion many economists dispute. Ms. Freeland said Canada does not believe trade deficits are important in evaluating if trade is working.

"We pursue trade, free and fair, knowing it's not a zero-sum game," she said. "Canada does not view trade surpluses or deficits as a primary measure of whether a trading relationship works."

Mr. Guajardo said any changes to the deal have to ensure more trade and not less, and warned that the talks cannot be "about going back to the past."

Mr. Lighthizer's demands included revamping dispute-settlement provisions, certain to affect the binational trade panels of Chapter 19, which the United States wants to eliminate but Canada has sworn to preserve at all costs; getting more market access for U.S. agricultural products; slashing the trade deficit; and battling currency manipulation, which the United States says makes foreign goods cheaper than U.S. ones.

Both Ms. Freeland and Mr. Guajardo said they were open to negotiating the rules of origin – but rejected a U.S. content requirement.

"Canada is not in favour of specific national content in rules of origin," she told reporters on the terrace of the Canadian embassy at the end of the negotiating day, which had included a further private trilateral meeting with Mr. Lighthtizer and Mr. Guajardo. "It's going to be very important ... to take great care in any changes to ensure they don't disrupt supply chains."

Mr. Guajardo said at a news conference at the Mexican embassy that the "rigidity" of a U.S. content requirement is "not good for U.S. companies, it's not good for Mexican companies."

Such a move would severely disrupt the integrated network of the auto industry. Vehicles and parts are made in all three countries and shipped among them duty-free.

"It goes against the way the deal has been operating for 23 years, where there has been uniform regulations across the three countries," said David Worts, executive director of the Japan Automobile Manufacturers Association of Canada, which urges maintaining the rules of origin at 62.5 per cent and having no country-specific level of content. "That has supported the development of supply chains and the nature of the industry."

NAFTA has led to a system where parts that are labour-intensive, such as wiring harnesses and fabrics for seats, are made in Mexico and shipped to assembly plants or seating plants in the United States and Canada.

Mr. Trump's alarm stems from Mexico's growth as an automotive powerhouse. Before NAFTA, Mexico produced 1.1 million vehicles annually or about 8 per cent of the vehicles made in North America. By last year, that had risen to 4 million or 21 per cent.

Flavio Volpe, president of the Automotive Parts Manufacturers' Association, expressed hope that Mr. Lighthizer's demand was only an opening gambit and would be bargained down.

"I understand that's the objective – to raise some of the U.S. activity in the supply sector – so I wasn't surprised to hear it," Mr. Volpe said on the sidelines of the speech. "I think, maybe, at the final draft, we'll see other ways to get there."

Ms. Freeland took a similar tack, and tried to brush off suggestions that Mr. Lighthizer's harsh words portend badly for the future of the trade zone.

"We know that trade negotiations, although they can sometimes seem soporific in the details, can include moments of excitement," she said. "We're prepared for moments of rhetoric."

Video: Freeland meets with Mexican minister ahead of NAFTA talks (The Canadian Press)
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About the Authors
Washington correspondent

Adrian Morrow covers U.S. politics from Washington, D.C. Previously he was The Globe's Ontario politics reporter. He's covered news, crime and sports for The Globe since 2010. He won the National Newspaper Award for politics reporting in 2016. More

Auto and Steel Industry Reporter

Greg Keenan has covered the automotive and steel industries for The Globe and Mail since 1995. He also writes about broader manufacturing trends. He is a graduate of the University of Toronto and of the University of Western Ontario School of Journalism. More

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