Opening-round talks Aug. 16-20 to remodify the North American Free Trade Agreement (NAFTA) revealed early fissures dividing the United States from Mexico and Canada. The round table discussions included an administration proposal to require a “substantial” portion of autos and auto parts produced under the pact to be manufactured in the U.S.

The second round of NAFTA talks will be Sept. 1-5 in Mexico City. One of the key points in NAFTA talks is Rules of Origin (RO)--meaning a certain percentage of parts in a product, such as a car, have to originate from North America.

For example, 62 percent of the parts in a car sold in Mexico, Canada or the U.S. must come from there. The new administration has hinted it could raise that percentage and that it plans to enforce any new standards for RO.

Strengthening the rules is something the U.S. thinks would help to make its manufacturing sector more competitive, though doing so could be very disruptive for existing value chains. Canada, Mexico and U.S. auto industry leaders are urging a cautious approach to Rules of Origin to avoid disruptions for a complex North American supply chain built up over the 23 years that NAFTA has been in force.

Trade experts also caution that forcing more parts to be made in America could mean increases in car prices.

Other items on the agenda include:

  • Chapter 19 dispute settlement mechanisms: The new U.S. administration wants to eliminate them, but both the Mexican and Canadian governments want to preserve them. When a U.S. industry believes that a Canadian or Mexican competitor is challenging the rules of trade by receiving unfair government subsidies or selling its products in other countries at ultra-low prices, it can appeal to a U.S. international trade court to put extra taxes, called anti-dumping or countervailing duties, on those products. Chapter 19 allows a foreign country, such as Canada, to appeal this decision before a panel made up of officials from both countries. In practice, having Chapter 19 has meant there are a lot fewer trade cases among the U.S., Canada and Mexico, because there's also a chance they will be referred to this panel and dismissed.
  •  Trade deficit reduction targets: Mexican negotiators may not accept overly ambitious targets. 
  • Labor standards: The Mexican government is willing to make changes to its labor laws and to raise the minimum wage to satisfy U.S. demands, but change may be limited after approving a labor reform at the beginning of President Enrique Pena Nieto’s term.

The third round of NAFTA renegotiations is set for late September in Ottawa, while the fourth set of talks will be held in Washington, D.C. in October. In total, seven rounds are expected through December, although U.S. trade officials have noted that talks could stretch into early 2018.

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Additional source: Wall Street Journal