Key sectors for Canada, Mexico as White House ties tariffs to NAFTA

OTTAWA/MEXICO CITY (Reuters) - The White House has tied U.S. President Donald Trump's planned tariffs on steel and aluminum imports to a better NAFTA trade deal, offering a potential 30-day exemption for Mexico and Canada.

The United States' two NAFTA partners have both resisted linking the tariffs to the North American Free Trade Agreement. Here are the main issues at stake for Canada and Mexico.

CANADA

Ottawa said on Wednesday linking the tariffs and NAFTA will not improve the tri-country trade agreement. Canadian Prime Minister Justin Trudeau said on Thursday there is a "level of confidence" that his country's close relationship with the United States will protect it from the tariffs.

SOFTWOOD LUMBER - Given the strenuous efforts Canada has taken so far to defend the industry, a climb down seems very unlikely. The lumber industry is based largely in the provinces of British Columbia and Quebec, where the Liberals need to maintain support to stand a chance of retaining power in an election set for October 2019. Official government statistics show the lumber industry as a whole generated around C$22 billion in GDP in 2015 and accounted for 201,645 jobs.

DAIRY PROTECTIONS - Canada’s dairy sector, which includes C$6 billion in annual farmer milk sales, is protected by high tariffs on imports and controls on domestic production as a means of supporting prices. It includes about 11,000 farmers who are concentrated in the vote-rich provinces of Quebec and Ontario and who have outsized political influence. Successive Canadian governments have made clear over decades they will not touch the system and the Liberals have consistently ruled out changes.

AUTOS RULE OF ORIGIN - Canada may have more room for maneuver on U.S. demands for higher North American content for autos produced in NAFTA nations. The United States wants vehicles produced in the three countries to have 85 percent regional content, up from 62.5 percent now. Canada initially rejected the idea outright but has since come up with proposals to change the way content is calculated. Canada and Mexico have refused to address a separate demand from Washington that 50 percent of all autos content must come from the United States.

STEEL - Canada is the No. 1 steel exporter in the United States, with 84 percent of its steel exports, worth C$9.0 billion, sent south last year, according to Statistics Canada. The country exported some 5.8 million tonnes of steel to the United States in 2017, according to the U.S. Department of Commerce. But the industry is a relatively small part of the Canadian economy. Steel represented only 2 percent of total exports last year. It accounts for about 22,000 direct jobs and supports 100,000 jobs indirectly, said the Canadian Steel Producers Association.

   

ALUMINUM - Quebec is home to much of the country's aluminum industry, thanks to cheap hydroelectrical power. Aluminum accounted for 1.9 percent of Canada's total exports in 2017 in nominal terms, with 88.6 percent, worth C$9.1 billion, sent to the United States, according to Statistics Canada. The aluminum industry employs about 10,000 people in Canada and indirectly supports another 20,000 jobs, according to the Aluminum Association of Canada.

MEXICO

The Mexican government has not yet reacted to the suggestion that it could be given a 30-day exemption on the tariffs, with further exemptions linked to the NAFTA talks, but on Monday, Guajardo rejected making concessions in the wider trade deal to avoid steel tariffs.

"It is totally ruled out," that we would cede on issues in the talks or in other sectors to get an exemption, Guajardo told reporters.

STEEL - Mexico’s $7.1 billion steel trade with the United States is a fraction of the total $557 billion in goods traded with its northern neighbor, much of that underpinned by NAFTA. The Mexican government has left the door open to retaliation to steel and aluminum tariffs.

One option suggested by Economy Minister Ildefonso Guajardo and backed by Mexico’s steel industry is to respond with tariffs on the same products, which could favor Mexico, given that the United States exports $1.8 billion more steel to Mexico than it imports. Another option, also floated by Guajardo, is to target politically sensitive products, a strategy that Mexico has used successfully in trade disputes with the United States in the past.

AUTOS - Mexico’s auto industry exports to the United States last year were $97.5 billion, according to Mexican official data. The United States imported $44.6 billion in auto parts, and exported $20.48 billion in parts in 2017, U.S. Census bureau data shows.

AGRICULTURE - Mexico and the United States traded $42.5 billion in agricultural products last year, of which $18.7 billion were U.S. exports south. Mexico is the United States' third largest agricultural trading partner. 

(Reporting by David Ljunggren in Ottawa, Allison Martell in Toronto, Allison Lampert in Montreal, Dave Graham, Sharay Angulo and Frank Jack Daniel in Mexico City; Editing by Frances Kerry)