Hopes of NAFTA progress rise as Canada, Mexico eye auto progress

There are signals of a possible breakthrough in one of the biggest sticking points in NAFTA discussions after Canada joined Mexico in indicating room for negotiation in the auto sector.

The development comes one day after markets dipped on Canadian fears odds are rising U.S. President Donald Trump will walk away, and suggests officials are looking for progress in upcoming talks in Montreal as a way to keep negotiations moving.

Canada is preparing new talks related to autos at the Montreal negotiations, two government officials said, speaking on condition they not be identified. Mexico has also signaled there’s room for a breakthrough on autos, after the U.S. unveiled contentious proposals in previous discussions. Shares of auto parts makers Magna International Inc. and Linamar Corp. traded higher Thursday after Bloomberg initially reported the news.

Canadian Foreign Minister Chrystia Freeland, speaking to reporters Thursday, said the country would bring “new ideas” for “unconventional” U.S. proposals, though she didn’t say which. One of the Canadian officials said Freeland was referring to the auto sector. Both officials said Canada wouldn’t give a full autos counterproposal.

The three countries are also “close” to reaching agreements on some individual subjects, known as chapters, of the North American Free Trade Agreement, Freeland said, describing them as “bread and butter” issues. The most contentious U.S. demands are on dairy, automotive content, dispute panels, government procurement and a sunset clause.

“When it comes to the more unconventional U.S. proposals, we have been doing some creative thinking, we have been talking with Canadian stakeholders, and we have some new ideas that we look forward to talking with our U.S. and Mexican counterparts about in Montreal,” Freeland said in London, Ontario in comments aired by the Canadian Broadcasting Corp. “I think if there’s goodwill on all sides, we could have a great outcome in Montreal.”

Officials are jockeying for position ahead of the sixth round of talks which begin Jan. 23 in Montreal. The Canadian dollar, the Mexican peso and the stocks some auto maker and parts makers that rely on NAFTA slumped Wednesday after Canadian officials said they think the chances are rising that Trump will give notice of withdrawal from the pact. A White House official later said the president’s position on NAFTA hadn’t changed.

The chief executive of the region’s biggest parts supplier, Magna, warned earlier this week that overly complex NAFTA changes could leave U.S., Mexican and Canadian manufacturers vulnerable. Magna’s shares rose 0.4 percent as of 11:32 a.m. in New York after the news of Canada’s involvement. Linamar reversed declines, trading up 1 percent.

“If it becomes too complicated, too bureaucratic, too costly that –you can’t get low-cost, high-labor products into this region — then all of a sudden we have damaged the whole NAFTA region,” Chief Executive Officer Don Walker said. “It’s going to be a lose-lose-lose.”

Flavio Volpe, president of the Toronto-based Automotive Parts Manufacturers Association, said progress was made on autos during a mini-round of talks last month in Washington. “All sides understand each other’s core imperatives much better now,” he said Thursday in an email. “The tone is respectful and everyone appears to actually want a solution that the others will be able to sign off on.”

The U.S. is proposing to raise the minimum content requirement, for a vehicle or auto part to be traded under NAFTA, to 85 percent from the current 62.5 percent, while also requiring that a full 50 percent of content comes from the U.S. The proposals were flatly dismissed by Canada and Mexico. The U.S. also wants to substantially expand the so-called tracing list, which means more products and parts would need their origins tracked and documented.

Freeland didn’t say whether she believes the chances of a U.S. withdrawal notice are rising. Such a notice, which would be given under Article 2205, isn’t binding, meaning it could still be issued and NAFTA still survive.

“The U.S. has been very clear since before the talks started that invoking Article 2205 was a possibility, and I think we need to take our neighbors at their word, take them seriously,” Freeland said. “So Canada is prepared for every eventuality.”

Finance Minister Bill Morneau, speaking at the same event, said Canada has “made preparations and considered every scenario” when it comes to NAFTA. “What we are trying to achieve is an improvement in NAFTA. We know that’s better for Canada and we will continue down that path.”