U.S. proposes NAFTA sunset clause, raising tensions in talks

By David Lawder and Dave Graham

ARLINGTON, Va. (Reuters) - Washington has increased tensions in talks to renew the North American Free Trade Agreement by insisting that any new deal be allowed to expire after five years, two officials familiar with the negotiations said on Thursday.

Canada and Mexico both strongly oppose the concept of a so-called sunset clause, a provision that had been floated earlier.

But the officials, who asked not to be identified because the talks are confidential, said the U.S. side formally proposed it late on Wednesday during the fourth of seven scheduled rounds to update the rules governing one of the world's biggest trade blocs.

The Trump administration says the clause, causing NAFTA to expire every five years unless all three countries agree it should continue, is to ensure the pact stays up to date.

But Mexico and Canada insist there is no point updating the pact with such a threat hanging over it, arguing the clause would stunt investment by sowing too much uncertainty about the future of the agreement.

"It's a source of total uncertainty," said one of the NAFTA government officials familiar with details of the negotiations.

U.S. President Donald Trump says NAFTA, originally signed in 1994, has been a disaster for the United States and has frequently threatened to scrap it unless major changes are made.

Business and farm groups say abandoning the 23-year-old pact would wreak economic havoc, disrupting cross-border manufacturing supply chains and slapping high tariffs on agricultural products. Trade between the United States, Canada and Mexico has quadrupled under NAFTA, now topping $1.2 trillion a year.

As well as the sunset clause, the United States wants to boost how much North American content autos must contain to qualify for tax-free status and eliminate a dispute settlement mechanisms that Canada insists must stay.

Some trade observers said it is difficult to see how negotiators could reach an agreement given U.S. demands that many see as nonstarters.

The head of Unifor, Canada's largest private sector labour union, said it was clear the United States did not want a deal.

"NAFTA is not going anywhere. This thing is going into the toilet," Jerry Dias told reporters on Thursday.

Despite clear signs of impatience from Canada in particular, U.S. negotiators have yet to submit their proposal on rules of origin for the auto sector. That looked unlikely to come before Friday, another official familiar with the talks said.

Trump on Wednesday repeated his warnings that he might terminate the pact and said he was open to doing a bilateral deal with either Canada or Mexico if three-way negotiations fail..

He was speaking at the White House with Canadian Prime Minister Justin Trudeau, who said Canada was "braced" for Trump's unpredictability but taking a serious approach to the NAFTA talks.

Negotiators were also set to cover the difficult issue of government procurement on Thursday.

Canada and Mexico want their companies to be able to bid on more U.S. federal and state government contracts, but this is at odds with Trump's "Buy American" agenda. U.S. negotiators have countered with a proposal that would effectively grant the other countries less access, people familiar with the talks say.

On automotive rules of origin, NAFTA negotiators face tough new U.S. demands to increase regional vehicle content to 85 percent from 62.5 percent, with 50 percent required from the United States, according to people briefed on the plan.

The rules of origin demands are among several conditions that the U.S. Chamber of Commerce has labelled "poison pill proposals" that threaten to torpedo the talks.

U.S. Commerce Secretary Wilbur Ross said on Wednesday that he believed higher percentages for automotive content would be achieved, and "car companies will adapt themselves to it."

However, a study released on Thursday by the Motor Equipment Manufacturers Association, which represents U.S. auto parts makers, showed the higher content requirements would lead to the loss of up to 24,000 U.S. jobs, as some companies would forgo NAFTA's tariff-free benefits and ship in more components from other countries.

(Additional reporting by David Ljunggren and Anthony Esposito; Editing by Lisa Von Ahn and Tom Brown)