Juan Carlos Baker. Picture: REUTERS
Juan Carlos Baker. Picture: REUTERS

Mexico City — A US proposal that vehicles should be built in high-wage areas in the North American Free Trade Agreement (Nafta) region is partly aimed at increasing engine production in the US, Mexican officials said.

More details on the plan are expected this week.

In an idea aimed at breaking a deadlock in talks, Washington last month suggested some automotive production should take place in areas of North America that pay higher salaries. US negotiators discussing changes to Nafta floated the idea that 40% of automotive production must happen in areas paying wages of between $16 and $19 per hour, Fausto Cuevas, the director general of industry group AMIA, said on Tuesday.

The negotiators also indicated a preference that motors be built in the US, Mexican Deputy Economy Minister Juan Carlos Baker said.

"The US proposed baskets of products that they are more interested in. They prefer engines, the most profitable part of cars, to be made in the US," he said late on Monday.

Mexico wants to see a firmer US proposal before responding.

"The US has been changing its proposals, it’s better to wait ... and then later present a counterproposal," said Economy Secretary Ildefonso Guajardo. He said more details could come from the US this week.

Setting wage requirements for the automotive industry could benefit the US and Canada, whose trade unions say lower Mexican pay has caused a drift in manufacturing capacity south of the Rio Grande.

Negotiations to rework Nafta, which underpins $1.2-trillion in annual trade between Canada, the US and Mexico, began last year after President Donald Trump took office promising to abandon the 1994 agreement if it could not be reworked to better serve US interests. Talks continue this week in Washington.

The latest US proposal covers "the whole value chain" for vehicles, said Juan Pablo Castanon, president of the Consejo Co-ordinador Empresarial, the umbrella group representing Mexican private sector interests at the Nafta talks.

"What is missing is to clarify a series of points to evaluate the proposal as a whole, which we assume will be happening this week," Cuevas said.

Trump’s negotiating team wants the overall regional content requirement — which allows cars to be sold in North America tariff free — to be increased to 85% from 62.5%. Additionally, it is looking to establish five categories for automotive parts and components with differing requirements, AMIA’s Cuevas said.

In the first category, seven core components, including the transmission, motor and axles, would need to comply with the 85% rule, said Cuevas.

If negotiators iron out differences and reach an agreement, Cuevas said a "transition period" of five to 15 years will be needed to comply with the new rules.

Negotiators are eyeing a new deal to be done by May to give US Congress members time to discuss a reworked Nafta, given that the make-up of both chambers will change after US midterm elections in November.