Canadian auto plan in doubt after lifting NAFTA talks

MONTREAL (Reuters) - Canada's compromise plan to boost NAFTA auto content rules lifted talks in Montreal, following negotiation gridlock during earlier rounds, but its future looked doubtful after President Donald Trump's trade chief declared it unworkable on Monday.

Reaching a deal on autos, a key export sector for the United States, Canada and Mexico, has emerged as one of the toughest issues negotiators face in modernizing the 1994 North American Free Trade Agreement.

Canada's plan to include expenses for engineering, research and development and other high-value work to be counted in higher targets for North American content was aimed at safeguarding high-paying jobs in the region, with Mexico calling it "innovative," but declining to offer its own specific position.

U.S. Trade Representative Robert Lighthizer said the Canadian idea would allow too many parts from China and other low-cost Asian countries to be included in the autos exempt from tariffs under NAFTA.

"The reality is, you're going to have much, much less regional content, and that's clearly fewer jobs for us, clearly fewer jobs for the Canadians and I believe, fewer jobs for Mexico," he told reporters in Montreal.

Under NAFTA, at least 62.5 percent of the net cost of a passenger car or light truck must originate in the United States, Canada or Mexico to avoid tariffs. U.S. President Donald Trump’s administration wants the threshold raised to 85 percent, with half of the content made in the United States, a proposal that is untenable for Canada and Mexico.

Canadian negotiators presented their so-called creative ideas as a counterpoint to the U.S. demands, but offered no numbers of their own, Lighthizer told reporters.

Eduardo Solis, the head of Mexico's main auto industry group, also reacted coolly to the Canadian proposal, telling reporters he needed to ensure that North America's auto industry remained competitive.

"There is no counterproposal. We will review this conceptual framework, these ideas before answering," said Solis, president of the Mexican Automotive Industry Association.

Flavio Volpe, president ‎of the Toronto-based Automotive Parts Manufacturers' Association, suggested Lighthizer's tough rhetoric was a negotiating tactic.

"A year ago we were talking about a 35 percent import tariff and we were talking about tariffs that were going to be specific to certain companies," he said. "I think it’s part of rhetorical evolution of this administration in the way they negotiate."

Canada and the United States have found common ground on the desire to include labor conditions in the deal.

With auto manufacturing soaring in lower-cost Mexico, where the next round of talks is to begin on Feb. 26, Canada and the United States have both called for a new NAFTA deal to include strong, enforceable labor provisions.

(Reporting by David Lawder, Allison Lampert, Anthony Esposito and David Ljunggren in Montreal; Editing by Matthew Lewis)