By Sara Schaefer Muñoz and Bob Davis 

WASHINGTON -- Opening-round talks to remake the North American Free Trade Agreement revealed early fissures dividing the U.S. from Mexico and Canada, including a Trump administration proposal to require a "substantial" portion of autos and auto parts produced under the pact be made in the U.S.

The renegotiation of the trade deal, which was one of President Donald Trump's main campaign promises and a key pillar of his "America First" agenda aiming to revive U.S. manufacturing and reduce the country's trade deficit, is likely to face many hurdles. Auto makers in all three nations generally oppose the stricter rules floated by the U.S. negotiator, and pro-business lawmakers in Congress don't want to see the pact significantly altered.

In the first-round talks, which concluded Sunday, the three countries said in a trilateral statement they had made "detailed conceptual presentations" of their positions and were working toward "an ambitious outcome" through a fast-paced schedule of negotiations.

Early tensions over areas such as the so-called rules of origin -- a major issue for the automotive industry -- signaled the tough bargaining that lies ahead as the three nations try to wrap up a deal by early next year.

The chief U.S. negotiator, Robert Lighthizer, came into the talks Wednesday saying the U.S. would insist on tightening the rules of origin, and adding a provision covering U.S. production, an idea quickly dismissed as unworkable by Mexican and Canadian officials.

At this early stage of the talks, it is difficult to measure the depth of the disagreement. Opening rounds generally set the tone and schedule for negotiations. The U.S. has yet to release specifics on some of its most controversial positions, including measures to reduce the U.S. trade deficit, prevent currency manipulation, favor U.S. companies in government contracts, known colloquially as Buy America, and rework rules governing arbitration panels.

Discussions continue within the administration about how to accomplish those goals without harming U.S. companies, U.S. and industry officials said.

"The lack of U.S. clarity represents a risk [for Canada and Mexico], and they are trying to prepare for any eventuality," said Eric Miller, a global fellow at the Woodrow Wilson Center's Canada Institute.

Mr. Lighthizer focused early on what are known as rules of origin requirements, which govern what portion of a product must come from within the bloc to qualify as tariff-free. In his opening remarks last week, Mr. Lighthizer noted that in the auto sector alone, the U.S. has a $68 billion deficit with Mexico and thousands of American factories workers have lost their jobs.

To create more U.S. manufacturing jobs, he suggested that the pact should set a standard not only for higher content from the three Nafta countries, but also for U.S.-specific content, a demand that drew early resistance from the trading partners Mexico and Canada. They fear that the changes would raise costs and put their auto industry at a disadvantage.

"National content is not used in any commercial agreement in the world, because it puts too much rigidities to the companies," Mexico's Economy Minister Ildefonso Guajardo told Mexican radio after returning home Saturday from the talks.

Canada's Foreign Minister Chrystia Freeland has also voiced opposition to the idea of national content, though she and Mexican officials have noted the U.S.'s tough stance was expected heading into negotiations.

As with other proposals, the U.S. hasn't yet provided a brief or text with details on how it would change the rules of origin. The U.S. is expected to provide details on all of its Nafta positions by the third round of talks next month in Canada. The second round will take place in Mexico City from Sept. 1 to 5. Currently 62.5% of autos and major auto parts shipped within the three Nafta countries must be produced in Mexico, Canada or the U.S. to qualify for duty-free shipment.

The U.S. proposal could amount to an opening bid, and it could also generate opposition in Congress, which would have to approve a final pact, especially if significant parts of U.S. industry bring their lobbying firepower to the issue.

"These sorts of country specific requirements would just add to the cumbersome nature of rules of origin compliance," said Matt Blunt, head of the American Automotive Policy Council, which represents the Detroit auto makers.

Mr. Blunt said that Mr. Lighthizer is a "a very smart person, and he may be laying out some negotiating parameters."

One way to tackle the rules of origin, said trade experts, would be to include in the calculations the advanced electronics used in vehicles. For instance, regional or U.S. content could be revised to include research and development of vehicle software conducted by companies in the U.S. or North America, even though the electronics are manufactured in Asia.

But it is far from clear that the U.S. would be satisfied with cosmetic changes to the content calculations. Mr. Lighthizer on Wednesday said Mr. Trump "is not interested in a mere tweaking of a few provisions and a couple of updated chapters."

The U.S. feels that its most significant leverage in the talks is Mr. Trump's threat to withdraw from Nafta if the U.S. doesn't get the changes it wants. North American trade is far more significant to the Canadian and Mexican economies than it is for the U.S.

Mexican negotiators say they are prepared to scrap Nafta rather than accede to demands they consider harmful to their economy.

On auto trade, while labor groups have long called for stricter rules on which products qualify for duty-free treatment, auto makers in all three nations oppose tighter rules of origin. The companies warn that stricter rules could affect their supply chains in unpredictable ways, perhaps even driving production overseas.

Meanwhile, a group that represents U.S. manufacturing businesses and supports Mr. Trump's trade policy praised Mr. Lighthizer's plan.

"The administration should reject fears of supply-chain disruption asserted by the import lobby," said Michael Stumo, chief executive of the Coalition for a Prosperous America. "Successful trading nations like China and Germany 'disrupt supply chains' intentionally, working to increase their domestic supply chains at the expense of foreign suppliers."

--William Mauldin and Santiago Perez contributed to this article.

Write to Sara Schaefer Muñoz at Sara.Munoz@wsj.com and Bob Davis at bob.davis@wsj.com

(END) Dow Jones Newswires

August 20, 2017 20:25 ET (00:25 GMT)

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