Photographer: Luke Sharrett/Bloomberg

politics

U.S. Shows Flexibility on Key Auto Demand Amid Nafta Progress

Updated on
  • Canadian ambassador calls the development a ‘positive thing’
  • Loonie, peso and stocks all rise on renewed optimism

The U.S., Canada and Mexico are making headway on the key Nafta issue of auto rules, sending the loonie and peso higher in the latest sign of progress in months-long talks.

There are indications the U.S. is willing to budge on one of its core demands as President Donald Trump pushes to get a deal ahead of looming Mexican elections. One person familiar with the talks, speaking on condition of anonymity, said the Americans are showing flexibility on a demand for a 50 percent U.S.-content requirement, but it hasn’t been formally withdrawn. Another person familiar cautioned against being too confident in how the U.S. will proceed.

U.S. Trade Representative Robert Lighthizer said Wednesday his goal was to bring auto manufacturing jobs back to his country, but didn’t address the U.S.-specific content requirement. “We are in a position where we’re finally starting to converge" on autos, he told lawmakers in Washington. “I can’t really say exactly what’s going to end up happening but I think we’re in a pretty good place.”

Canadian Prime Minister Justin Trudeau also struck an upbeat note, saying talks are picking up steam but will still face challenges. “There seems to be a certain momentum around the table now that I certainly take as positive,” he told reporters in Toronto.

50% Content

The Mexican peso had its biggest advance since June on the news, while Canada’s dollar rose the most since Dec. 1. The yield on Canada’s two-year government bonds rose to the highest in nearly seven years.

Auto and car-part stocks also advanced on the renewed optimism for a deal. Linamar Inc. rose 2.5 percent while Martinrea International Inc. jumped 1.5 percent. General Motors Co. added 1.9 percent and Fiat Chrysler Automobile NV was up 1.8 percent.

Canada’s ambassador to Washington, David MacNaughton, told reporters Tuesday the U.S. has made suggestions on auto rules that “were actually quite creative” and, if taken “to their logical conclusion,” would eliminate the need for the 50 percent requirement. His comments were reported by the Canadian Press news agency.

The envoy warned gaps remain. “Did we get to somewhere where you could shake hands and say, ‘We’ve got a deal?’ Absolutely not,” MacNaughton told the agency. “Whether or not we can get there I don’t know. But I took it as being a positive thing that they had another way of getting at that issue.”

The Globe and Mail newspaper, citing unidentified sources, reported Tuesday the U.S. had altogether dropped its demand for 50 percent U.S. content in vehicles.

Jerry Dias -- head of Unifor, Canada’s largest private sector union representing auto workers -- said the U.S. has indeed withdrawn the proposal, but that it was just one part of the automotive issue. If negotiators reach an agreement on autos, other Nafta disputes will get easier to solve.

“Auto is the big issue,” Dias said in a phone interview. “If we get through it, and we get auto, then I think other things are going to fall into place.”

Lighthizer stuck by some of his more contentious proposals, while a spokeswoman didn’t respond to a request for comment on the autos issue. “Our objective is to try to find the line to encourage them to bring” more auto manufacturing back to the U.S. from Mexico, Lighthizer told the House Committee on Ways and Means. Canada also wants to bring back auto jobs lost to Mexico, he said. “We are trying to work our way through that.”

‘Major’ Gaps

“The news on Nafta is good, but maybe not that good,” Avery Shenfeld, chief economist of the Canadian Imperial Bank of Commerce, said in a note Wednesday. “The U.S. had a couple of important reasons to soften their stance on automotive content, largely tied to the need to show some progress at this round.” Shenfeld said there are still “major gaps” and that he expects talks to “drag on well past this spring.”

Nafta talks have taken an upbeat tone in recent weeks, as the U.S. opens the door to “compromise” and Trump and Trudeau have expressed optimism a deal can be reached. Mexican negotiators are in Washington Wednesday to meet with U.S. officials. Canadian officials did so last week.

Lighthizer defended U.S. proposals for a sunset clause and an end to Canada’s regime of dairy quotas and tariffs, known as supply management.

Read more about how Trump’s auto demands in Nafta talks could backfire

Auto rules are arguably the biggest sticking point in talks. Currently, a typical car traded under Nafta requires 62.5 percent of its content to be from the U.S., Canada and Mexico -- though, critically, only certain products’ origin is traced.

The U.S. proposed raising that to 85 percent, adding the 50 percent U.S.-specific requirement -- a notion regularly rejected by Canada and Mexico -- while also expanding the products whose origins are traced. The three demands all link to each other: the effect of a particular content requirement is unclear without knowing what parts of a car are actually traced.

Nafta talks began in August, with Trump initially wanting a deal by December. Talks were extended through this month, and are expected to continue until next month. Mexico has warned that a deal must be done by the end of April, or talks will otherwise likely stretch until the end of 2018, after elections in Mexico and the U.S.

The U.S. is under pressure to not blow up the deal, including from former generals. Lawmakers also urged the administration this week not to opt out of Investor-State Dispute Settlement panels.

— With assistance by Eric Martin

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE