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Trump's steel shock drives wedge into sluggish NAFTA talks

By David Ljunggren and Dave Graham

MEXICO CITY (Reuters) - Negotiators trying to rework the NAFTA trade deal on Thursday were hit by the prospect of conflict over U.S. steel tariffs that could complicate carmaking in North America, one of the most sensitive issues at the talks.

U.S. President Donald Trump said he would impose the tariffs beginning next week, raising the risk of exacerbating tensions at negotiations already facing serious challenges.

Officials were unable to say immediately whether the tariffs would include imports from Canada and Mexico, the other two partners in the 24-year-old North American Free Trade Agreement.

The lack of clarity created uncertainty as some countries might be exempt or taxed at a lower rate, analysts said. Automakers and other users of the metals are also worried about retaliatory tariffs that might affect their finished products.

For months, the United States, Canada and Mexico have been mired in disagreement over a U.S. demand to require a greater portion of North American auto parts and components under NAFTA, which Trump has threatened to ditch if it is not recast to his liking.

Moises Kalach, head of the international negotiating arm of Mexico's CCE business lobby, said Trump's call for a 25 percent tariff on imported steel appeared intended to increase U.S. content in industrial goods but would have unintended consequences.

"Who is the priority here? Workers? Consumers? Somebody will end up paying for this," Kalach told Reuters on the sidelines of the latest NAFTA talks in Mexico City. "What's going to happen to the competitiveness of North America?"

Canada is the largest exporter of steel by far to the United States, and Trump's proposed tariff would raise the cost of building vehicles, experts said.

"This would be very bad news for the auto industry," said one person close to the negotiations.

Canada's chief negotiator, Steve Verheul, said his team was "keeping an eye on what's going on outside" when asked how the talks were progressing late on Thursday.

"It's a bit of a distraction," he added, without elaborating.

Although it differs by company, for their vehicles made in North America, Fiat Chrysler <FCHA.MI>, Ford Motor Co <F.N> and General Motors Co <GM.N> source the vast majority of their steel from North America, according to the auto industry.

GM said in a statement on Thursday that 90 percent of the steel in its U.S.-built vehicles came from U.S. suppliers.

AUTO TALKS

The United States, Mexico and Canada had already been planning to schedule extra discussions on trade rules for auto production, two people familiar with the matter said.

The proposed talks, at the level of technical experts, would take place in March before the next formal NAFTA session, which is due to be held in Washington in late March or early April.

Talks on the issue during the seventh round were suspended this week when the U.S. negotiator overseeing auto rules of origin, Jason Bernstein, unexpectedly returned to Washington for consultations with industry.

Officials have made little progress on the most contentious files since the talks started in August, and the talks look set to drag on well beyond March, when negotiators had hoped to finish.

Under NAFTA, 62.5 percent of the net cost of a passenger car or light truck must originate in the NAFTA region to avoid tariffs. Trump wants the threshold raised to 85 percent and is also seeking to ensure that half the total content is U.S.-made.

The auto industry has opposed those demands, arguing it would disrupt supply chains and raise costs.

Negotiators have struggled to advance on the auto proposal since it was submitted in October. Automakers are evaluating ideas put forward by Canada last month to include newer technology in the calculation of a vehicle's value.

The current round of negotiations is set to end on Monday, when Mexican Economy Minster Ildefonso Guajardo, U.S. Trade Representative Robert Lighthizer and Canadian Foreign Minister Chrystia Freeland are scheduled to meet in the Mexican capital.

Separately, Mexico's chief NAFTA negotiator, Kenneth Smith, said on Twitter the three sides had completed talks on good regulatory practices.

Sources close to the talks said negotiators had also paved the way for closing the telecommunications portion of the trade deal this weekend, as the United States had dropped a proposal that Mexico opposed.

Canada's Verheul noted that the three sides were close to completing the section relating to technical barriers to trade but needed more time on the environment, two of the areas that some officials say are close to being concluded.

(Additional reporting by Anthony Esposito, Lesley Wroughton and Sharay Angulo in Mexico City; Editing by Leslie Adler and Peter Cooney)