Canada, Mexico show more flexibility as key NAFTA round opens

By Dave Graham and David Ljunggren

MEXICO CITY (Reuters) - A key round of talks to update the NAFTA trade pact formally opened on Friday with Canada and Mexico showing more flexibility about addressing hardline U.S. demands that they had previously dismissed as unworkable.

U.S. President Donald Trump, who says the North American Free Trade Agreement is a "disaster," has frequently threatened to ditch the pact unless big changes are made.

There is relatively little time left to thrash out a deal under the current schedule. Negotiators met in Mexico City for the fifth of seven planned rounds that are due to wrap up by the end of March to avoid affecting Mexico's presidential election.

Canadian and Mexican officials initially indicated they would simply not discuss contentious U.S. proposals such as a five-year sunset clause, and boosting the North American content of autos to 85 percent from the current 62.5 percent.

The focus in Mexico City would be on making arguments to the U.S. side as to why their proposals as written would not work, a Canadian government source said.

Canada, the source added, was happy to discuss so-called rules of origin governing auto content but insisted the 85 percent figure was impossible.

Canadian sources said on Monday they were open to a Mexican proposal to review NAFTA every five years rather than the U.S. plan to bring in a sunset clause that would automatically terminate the deal if it was not renegotiated.

Canada and Mexico both send a large majority of their goods to the United States and prefer that the treaty continued than deal with the economic disruption caused by a U.S. withdrawal.

A Mexican official said the United States needed to make clear what they hoped to achieve with tougher rules of origin, given the difficulty of raising the threshold.

Noting that 85 percent was not feasible, the official said Mexico did not want "a rupture" to occur in the talks.

However, the official added that the North American auto industry has previously argued in favour of lowering the figure to improve its competitiveness with foreign rivals.

Washington also wants NAFTA to set a 50 percent minimum U.S. content requirement for autos, which Canada and Mexico say cannot work.

"Once (the Americans) have explained all that, we can see about finding common ground," the Mexican official said.

A schedule for the fifth round seen by Reuters showed that rules of origin would be discussed beginning Saturday during the four final days of the talks.

(Writing by David Ljunggren; Editing by Jeffrey Benkoe)