Canada and Mexico Seek to Head Off U.S. Exit From Nafta at Montreal Talks

By Paul Vieira in Ottawa, William Mauldin in Washington and Juan Montes in Mexico City Features Dow Jones Newswires

Canadian and Mexican trade officials in Montreal on Sunday will begin laying out proposals aimed at convincing their U.S. counterparts not to put an end to the North American Free Trade Agreement.

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Delegations from Canada and Mexico will present an array of responses to some of the Trump administration's most hard-line demands for changing the trade pact, in what many observers believe could be a make-or-break round of talks. Negotiators' initial focus will be on Washington's demands for increased U.S.-made content for cars made in North America.

The goal in the Montreal talks, according to Canadian and Mexican officials and people briefed on the matter, is to make enough progress that U.S. President Donald Trump won't be tempted to pull the plug on negotiations. If they don't, "the Americans will conclude the Nafta talks are pointless," said Sarah Goldfeder, a former U.S. diplomat once posted in Mexico and Canada who is now principal at Ottawa-based Earnscliffe Strategy Group.

Since August, the three countries have been locked in negotiations to renegotiate the 24-year-old trade pact, after Trump called it the "worst trade deal ever made" and threatened to pull out if sweeping changes weren't made.

Even as Mr. Trump this week tweeted that the deal is a "bad joke," his administration has recently softened its tone regarding the talks. Mr. Trump told The Wall Street Journal this month that he was willing to be "a little bit flexible" on Nafta talks given Mexico's upcoming presidential election, scheduled for July.

"The president does want to improve the agreement," a White House official said Friday. "He's made clear he will go in a different direction if that can't be done, but that doesn't mean he doesn't want to improve it."

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Despite the recent positive comments from the White House, many U.S. lawmakers and business groups who support Nafta continue to worry Mr. Trump could eventually take steps to exit from the pact.

Tensions flared earlier this month when Canada filed a sweeping complaint with the World Trade Organization against the U.S. trade regime and how it applies tariffs. Imports of Canadian lumber, airplanes and newsprint now face steep U.S. tariffs under the Trump administration, which says Canadian producers benefit from unfair government subsidies.

U.S. Trade Representative Robert Lighthizer, Washington's chief Nafta negotiator, condemned Canada's move, saying it could undermine the Trump administration's confidence in Canada's commitment to "mutually beneficial trade."

Late Friday, Canada took another step that could further roil U.S. trade officials when it requested Nafta dispute-resolution panels hear Canada's case against the Commerce Department's tariffs on softwood lumber and Bombardier Inc.'s commercial jets.

The talks start Sunday with a focus on agriculture and energy, and ramp up Tuesday with the arrival of chief negotiators. They are scheduled to end Monday, Jan. 29, with a meeting of top U.S., Canadian and Mexican ministers.

Mexico has previously made efforts to meet the U.S. halfway on Mr. Trump's most polarizing demands, including automobiles. The Trump administration has proposed regional content of light vehicles made in North America be increased to 85% from the current 62.5%, and half the vehicle's parts be U.S. made, to qualify for duty-free trade among the countries.

"We agree with the position of strengthening regional content," Mexican Economy Minister Ildefonso Guajardo said in a recent interview.

One senior Mexican official said raising regional content closer to 70% could be achievable and that enhanced tracing -- tracking precisely where parts come from -- is being considered.

Rather than offering a formal counterproposal to the U.S. demands in Montreal, Mexican negotiators would seek to nail down the specifics of strengthening the content rules and get a "road map" for further talks on the issue, officials say.

For Canada, whose chief negotiator last year called some U.S. demands "wholly unworkable," the recent decision to introduce counterproposals marks a shift. U.S. officials have criticized Canada for inflexibility, including an unwillingness to consider opening up its borders to more U.S. dairy products and poultry.

U.S. Agriculture Secretary Sonny Perdue urged his Canadian counterpart to "get his negotiators in the game" at a recent farmers' convention that Mr. Trump attended.

"When it comes to the more unconventional U.S. proposals, we have been doing some creative thinking," Chrystia Freeland, Canada's foreign minister, said at a recent cabinet retreat. "We have some new ideas that we look forward to talking to our U.S. and Mexican counterparts about them in Montreal."

Among the proposals Canada will introduce is broadening the definition of what counts as North American content in automobiles, according to four people briefed on talks. Canada will propose counting North American-produced steel and aluminum toward regional content, these people said. They said Canada would also propose that research and development in North America for car software should count toward the threshold required for duty-free trade.

Canada and Mexico remain opposed to more specifically U.S. content in cars, according to three people familiar with the matter.

Mr. Lighthizer declined to answer a question about Nafta's prospects after leaving a meeting with U.S. senators last week, but some lawmakers expressed optimism.

"I am hopeful" on Nafta, said Sen. Joni Ernst, an Iowa Republican who has met with Mr. Trump to dissuade him from exiting the trade agreement. "We would love to see the United States come out a winner on this."

Even if there is progress on autos, significant differences remain, most notably between the U.S. and Canada on how trade disputes are resolved. Canada has been adamant that independent panels of trade experts should rule on tariff disputes. Mr. Lighthizer, in contrast, wants the system scrapped because he feels it erodes U.S. sovereignty.

--Dudley Althaus and Santiago Perez contributed to this article.

(END) Dow Jones Newswires

January 21, 2018 07:14 ET (12:14 GMT)