Mexico City, Ottawa: The Trump administration has softened a key Nafta (North American Free Trade Agreement) demand for more North American content in car manufacturing — a potential olive branch on arguably the biggest sticking point as the US pushes to reach a stopgap deal this month, according to three people familiar with the talks.

The US proposal would distinguish between different Nafta car parts by grouping them into five categories, some of which would have a lower requirement for North American content or none at all, said the people, who spoke on condition of anonymity because they’re not authorised to discuss the negotiations publicly.

While the US had been pushing for 85 per cent of a vehicle’s content to be sourced from the three Nafta countries to be traded tariff-free, its latest proposal would apply that threshold to major components such as transmissions and engines but not to the simplest inputs like nuts and bolts, the people said.

Although it’s less arduous than the original demand, automakers would still be hard-pressed to hit the 85 per cent threshold on critical parts, and no agreement has been reached. Nafta currently requires a typical vehicle to have 62.5 per cent North American content in order to benefit from tariff exemptions.

The new US proposal comes as President Donald Trump — facing a mounting tariff spat with China — takes a sunnier approach to Nafta talks and pushes to announce a deal in principle next week.

The Mexican peso and Canadian dollar both appreciated as the news boosted expectations for a Nafta agreement. The peso gained 0.7 per cent to 18.0993 per dollar on Wednesday and touched the strongest level since September. The loonie was 0.3 per cent higher at C$1.2770. Shares of General Motors Co jumped on the news, closing at $38.03, up 3 per cent.

Lots of issues

The three nations, however, remain far apart on several issues and time is running out quickly, or may already have, to pass a deal before Mexican and US elections.

“I don’t know what an agreement in principle looks like, really,” David MacNaughton, Canada’s ambassador to the US, told reporters Wednesday in Toronto. “There’s still lots of issues. There’s differences of opinion and we’re going to work hard to try and narrow down the gaps and get to as much of an agreement as we possibly can.”

US. Trade Representative Robert Lighthizer’s office declined to immediately comment, as did the press office for Mexican Economy Minister Ildefonso Guajardo and a spokesman for Canadian Foreign Minister Chrystia Freeland.

Freeland said Wednesday during a speech in Winnipeg there’s been “promising” progress on the auto issue. “We’re making good progress” in Nafta talks overall, she said. “Having said that, we’re not there yet.”

One problem with the new plan is that no cars currently made in North America would meet the proposed requirement for 85 per cent of major components to come from the region, according to one of the people. Some automakers would have particular trouble meeting the threshold because they typically build major components overseas and assemble them in North America, the person said.

Talks over autos have shifted to whether higher wages, research and development could be included in the calculation of a vehicle’s value, to encourage more of that work to be done in higher-wage economies like the US and Canada.

Kelly Craft, the US ambassador to Canada, was the latest official to strike an upbeat tone during a speech in Toronto on Wednesday. “There’s no reason to tear Nafta down,” she said. “I’ve got every confidence that together, we will fix Nafta.”

Flavio Volpe, who represents Canadian auto parts manufacturers, said any sort of tiered system would potentially work but that details would be essential.

“It’s good because it recognises the difference in complexity and difference in added value in different component classes,” he said in an interview. However, if proposals remain too tight, companies will simply pay tariffs rather than comply with Nafta demands, he said. “What’s important is to make sure the content value isn’t so high that it’s restrictive.”

Dose of realism

The initial US auto proposal was “a distinctly minority approach” that did not have broad support among auto manufacturers and parts makers, said Robert Holleyman, a partner at Crowell & Moring who served as deputy US. Trade Representative under Barack Obama. Auto industry feedback has probably influenced the US position, he said.

“My guess is it’s added a healthy dose of realism,” Holleyman said in an interview. “This is something where the administration should be able to be flexible without losing critical allies they need to get a renegotiated Nafta through the US congress.”

The notion of an 85 per cent content requirement for all parts has been “driving everybody nuts in the industry,” said Jerry Dias, the president of Unifor, a Canadian labour union representing autoworkers and other sectors. He said that higher Mexican labour standards are the key to stopping the flow of manufacturing jobs from the US and Canada, and said he’s worried that overly creative math that gives credit for research and development won’t actually bring back auto jobs to the US and Canada.

The Trump administration is pushing for a preliminary Nafta deal to announce at a summit in Peru next week, according to three people familiar with the talks, and is hosting cabinet ministers in Washington this week to try to achieve a breakthrough. The three nations face a challenge to meet the US’ goal because major divisions have persisted, including on automobiles.

Getting a comprehensive agreement by next week looks like “a real long-shot,” Carlos Gutierrez, US commerce secretary under former President George W. Bush and co-chair of global business strategy firm Albright Stonebridge Group, said in an interview Tuesday.

“They could announce an agreement in principle and without details, just for the purpose of the photo op and the handshake and to give President Trump something positive to say about Latin America,” Gutierrez said. “I could see them going through the motions, having a celebration and then fine tuning everything else later on.”

Dias downplayed the significance of any announcement made this month.

“There’s no such thing as a framework of a tentative agreement,” he said. “Announcing an agreement first and working out the details later is foolish.”

Factbox: Ford concerned Nafta rule changes wouldn’t preserve US jobs

Ford Motor Co, the largest producer of cars and trucks in the US, remains concerned about major modifications to the North American Free Trade Agreement, even after President Donald Trump’s negotiators were said to have softened demands.

After having pushed for 85 per cent of all vehicle content to be sourced from the US, Canada and Mexico, the Trump administration’s latest proposal would only apply that requirement to major components such as transmissions and engines, according to three people familiar with the talks. While that’s less arduous than earlier US demands, automakers would still be hard-pressed to hit the 85 per cent threshold on critical parts.

“We appreciate US negotiators’ goal to support American jobs,” Christin Baker, a Ford spokeswoman, said in an email. “However, there is a concern that significant changes to the rules of origin would not achieve that shared goal. We look forward to seeing the official details, and we continue to urge negotiators to include enforceable rules prohibiting currency manipulation in a revised Nafta.”

— Bloomberg