<html><head><meta http-equiv="Content-Type" content="text/html charset=utf-8"></head><body style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space;" class=""><div style="margin: 0in 0in 0.0001pt; font-size: 11pt; font-family: Calibri, sans-serif;" class="">NSIDE US TRADE<o:p class=""></o:p></div><div style="margin: 0in 0in 0.0001pt; font-size: 11pt; font-family: Calibri, sans-serif;" class=""><o:p class=""> </o:p></div><h1 style="margin-right: 0in; margin-left: 0in; font-size: 24pt; font-family: 'Times New Roman', serif;" class="">Sources: Canada’s ideas on autos gaining traction with U.S. ahead of formal presentation<o:p class=""></o:p></h1><div style="margin: 0in 0in 0.0001pt; font-size: 11pt; font-family: Calibri, sans-serif;" class="">January 25, 2018 <o:p class=""></o:p></div><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">MONTREAL -- The U.S. negotiating team showed interest in the Canadian government’s ideas for a new NAFTA automotive rule of origin during a preliminary discussion on Wednesday, potentially breaking a deadlock on the issue during a sixth renegotiation round here, sources close to the talks tell <em class="">Inside U.S. Trade</em>.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">Canadian negotiators presented “broad ideas” they believe would amount to an approach that would achieve the United States’ stated goals of incentivizing investment in the U.S. and boosting its steel and aluminum industries, these sources said.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">Canada was expected to formally present its ideas at Friday’s rules-of-origin session, a source said.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">The presentation on Wednesday, however, did not address the U.S. demand for a domestic content requirement and did not include proposed numbers for a higher regional value content, or a list of products that would be traced.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">Instead, the Canadian team discussed broadly how the countries could arrive at an increased regional value content number, these sources said. Canada floated the idea of providing “credit” to companies that invest in North America, including in research and development, and manufacture vehicles with North American steel and aluminum.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">That credit would count toward the regional value content, although details on how the concept would be employed have yet to be worked out, sources said.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">Canada also suggested what sources described as a “flexible” tracing scheme, with the goal of finding middle ground between what is covered under NAFTA’s existing tracing list and the U.S. demand to trace all materials. Canada’s approach to what one industry source called “tracing 2.0” would focus only on those products the U.S. cares most about.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">Industry sources this week said that while full tracing or more onerous tracing requirements were not popular within the industry, it would evaluate the rule-of-origin outcome as a “package” in deciding whether to support the overall deal.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">Sources close to the discussion told<em class=""> Inside U.S. Trade</em> the Canadian ideas generated interest among the U.S. negotiators, who said they saw some commonality between Canada’s goals and the Trump administration’s -- except as they relate to a domestic content requirement.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">The Office of the U.S. Trade Representative, in its updated negotiating objectives issued last November, said it was looking to “update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.” USTR also said it wanted to “ensure that the rules of origin incentivize production in North America as well as specifically in the United States.”<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">The U.S. team here said it could not know yet how much common ground could be found based on the Canadian ideas without spelling out specific numbers, but sources involved in the discussions said the U.S. was willing to consider Canada’s concepts and get a better understanding of them in Thursday and Friday sessions on the issue.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">These sources said the new ideas would allow the countries to negotiate on exact numbers once a broad direction on certain issues has been decided. A source noted that approach would give the teams more flexibility in deciding what areas to prioritize as they move toward a final number.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">Chief negotiators met after Wednesday’s rules-of-origin session and afterwards discussed Canada’s suggestions, as well as the U.S. reaction to them, with their respective industries.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">Sources said Mexico’s team was “in listening mode” and letting the conversation between the United States and Canada play out -- for now. They added that Mexico, for political reasons, likely would hold out on weighing in or making a formal proposal but eventually would agree to whatever Canada and the U.S. could decide on because it would likely be feasible to the three countries’ industries.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class=""><strong class="">USTR also emphasized that a formal counter-proposal would be acceptable to the Trump administration only if it would increase North American value content.</strong><o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">A source close to the talks said the U.S. likely would ask the Canadian team to put its ideas in writing to give the Trump administration assurances it would not change its mind on what was being presented in Montreal, allowing the countries to build on those concepts going forward.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">An industry source argued that if the countries can figure out a path forward based on Canada’s broad concepts USTR likely would not feel it was losing face by withdrawing its demand for a U.S. domestic content requirement because the new ideas put into practice would lead to increased U.S. content.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">But another industry source cautioned that “translating ideas into rules is really where the rubber will meet the road.”<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">Auto industry sources said formal industry positions on Canada’s proposal could not be established until further details on the proposal -- including how it would be translated into rules -- were revealed.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">One industry source who did not know the specifics behind the proposal said the fact that Canada was offering new ideas on autos has led the industry to be “more hopeful than we’ve been for quite some time.”<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">Another auto industry source said Canada’s intervention “marks a shift” in the talks that could “start a dialogue and put us in the right direction.”<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">The Motor & Equipment Manufacturers Association earlier this week <a href="https://insidetrade.com/sites/insidetrade.com/files/documents/2018/jan/wto2018_0029.pdf" style="color: rgb(149, 79, 114);" class="">recommended to USTR</a> Robert Lighthizer that new auto rules of origin should “recognize” research and development, engineering, design and software development. An industry source told Inside U.S. Trade that those recommendations should not be considered a formal proposal, or an endorsement of Canada’s approach.<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">The source said that including R&D in the calculation of regional value content, as Canada’s new ideas point toward, “fits well with where the president's objectives have been because a lot of these jobs would be U.S. jobs, and if you recognize research and development, software development, they’re U.S. jobs.”<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">At a World Economic Forum panel in Davos, Switzerland, this week, Canadian Foreign Affairs Minister Chrystia Freeland called the Montreal round “an interesting one because we have put forward some new creative ideas in some of the more contentious areas, in particular rules of origin. So it’s going to be a fun and I hope really useful and productive discussion.”<o:p class=""></o:p></p><p style="margin-right: 0in; margin-left: 0in; font-size: 12pt; font-family: 'Times New Roman', serif;" class="">Mexican Economy Secretary Ildefonso Guajardo, who joined Freeland on the panel, said “rules of origin have to be strengthened to the level it is possible for companies to adopt it and with a timeframe that will help them to accommodate to the new requirements.” -- <em class="">Jenny Leonard</em>(<a href="mailto:jleonard@iwpnews.com" style="color: rgb(149, 79, 114);" class="">jleonard@iwpnews.com</a>) <em class="">and Jack Caporal</em> (<a href="mailto:jcaporal@iwpnews.com" style="color: rgb(149, 79, 114);" class="">jcaporal@iwpnews.com</a>)</p></body></html>