NAFTA Washington talks said to leave major differences untouched

WASHINGTON (Reuters) - NAFTA negotiatiors made some progress on less controversial issues this week but left untouched the thorniest subjects of autos, dispute settlement and an expiry clause to be tackled at pivotal talks in January in Montreal.

Some participants said on Friday the Washington "intersessional" round of negotiations to modernize the North American Free Trade agreement focused on technical issues and areas like environmental standards, digital trade, energy, telecommunications and regulatory practices.

Canada and Mexico have not yet offered counterproposals to the Trump administration's automotive demands that half the content for North American-made vehicles come from the United States along with sharply higher regional content, a proposal that would dramatically reshape the industry.

Canada and Mexico rejected the U.S. proposal as unworkable last month in Mexico City, but some officials said they expected alternatives to emerge in Montreal.

"There wasn’t much of a discussion on autos" at the Washington talks this week, Mexican chief negotiator Ken Smith told reporters.

"So we’ll take that conversation up again in Montreal, and hopefully, what I told my U.S. counterparts, is that we should start a dialogue that takes into consideration the position of the industries of the three countries because we cannot operate in a vacuum."

U.S. Trade Representative Robert Lighthizer has repeatedly expressed frustration that Canada and Mexico have not accepted his demands in autos and other areas to "rebalance" the trade agreement to shrink U.S. trade deficits.

"The United States continues to look for serious engagement and meaningful progress in these talks for a modernized and rebalanced NAFTA," USTR spokeswoman Amelia Breinig said in a statement on Friday as the talks wound down.

But she said the three countries did manage to substantively complete a sectoral annex on energy efficiency standards, marking the first time a NAFTA negotiating area or so-called chapter had closed since September.

"NO FIREWORKS"

Breinig said the meetings focused on narrowing remaining gaps in the chapters where previous progress had been made.

"I think the technical work is advancing pretty much as we expected it would," said Smith. "No fireworks, but no major obstacles."

However, even some minor chapters and annexes still had big differences as the talks closed.

U.S. textiles producers have been pushing to end rules of origin exclusions that allow Canada and Mexico to ship large quantities of products made with Chinese yarn to the United States duty-free but the issue was left unresolved, said Auggie Tantillo, president of the National Coalition of Textiles Organizations.

"I hate to say it, but bigger, more sensitive issues weren't discussed," Tantillo told Reuters. "Montreal should be interesting."

Mexico and Canada are unlikely to accept the Trump administration's demands on autos, a five-year sunset clause and a repeal of a trade dispute settlement system that largely shields them from U.S. anti-dumping duties, said Gary Hufbauer, a senior fellow and trade expert at the Peterson Institute for International Economics in Washington.

Without some concessions in Montreal, Hufbauer said President Donald Trump would be more tempted to issue a notice of withdrawal from NAFTA, as he has repeatedly threatened if U.S. terms cannot be met. Such a move would create massive uncertainty for companies and would likely draw legal challenges.

"We have a frozen situation," Hufbauer added. "Right now, I can't see the reconciliation but what I can see is a kind of zombie NAFTA in the year 2018."

(Reporting by David Lawder and Lesley Wroughton; Editing by James Dalgleish and Andrew Hay)