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UPDATE 1-U.S. talks tough as NAFTA negotiations get under way

(Recasts with start of meetings)

WASHINGTON, Aug 16 (Reuters) - The United States on Wednesday laid down a tough line for modernizing the North American Free Trade Agreement, demanding major changes to the pact that would reduce U.S. trade deficits with Mexico and Canada and increase U.S. content for autos.

Speaking at the start of the talks in Washington, U.S. President Donald Trump's top trade adviser, Robert Lighthizer, said NAFTA had "failed many, many Americans" and Trump was not interested in "a mere tweaking" of the 23-year-old pact.

"We feel that NAFTA has fundamentally failed many, many Americans and needs major improvement," Lighthizer, the U.S. Trade Representative, said in an opening statement.

Lighthizer said repeated U.S. demands for increased regional and U.S. content in autos produced in the region, the largest source of a $64-billion U.S. goods trade deficit with Mexico last year. He also said the United States would insist on strong provisions governing labor and currency practices.

"We need to ensure that the huge trade deficits do not continue and we have balance and reciprocity. This should be periodically reviewed," said Lighthizer. "The rules of origin, particularly on autos and auto parts, must require higher NAFTA content and substantial U.S. content."

Canada's Foreign Minister and lead NAFTA negotiator, Chrystia Freeland, took a swipe at the U.S. position on the need to shrink the U.S. trade deficit.

"Canada does not view trade surpluses or deficits as a primary measure of whether a trading relationship works," she said in her opening statement. "Nonetheless, it's worth noting that our trade with the U.S. is balanced and mutually beneficial."

Mexican Economy Minister Ildefonso Guajardo said the aim of the talks should be to tear up NAFTA, but to forge a stronger deal. "The issue is not tearing apart what has worked, but rather, how we make our agreement better," he said. "For a deal to be successful, it has to work for all parties involved. Otherwise, it is not a deal."

Analysts said the biggest uncertainty is whether a deal can pass President Donald Trump's "America First" test.

Trump has blamed NAFTA for shuttering U.S. factories and sending U.S. jobs to low-wage Mexico, a point that Lighthizer also emphasized in his opening remarks. The test will be whether negotiators can prove that a new NAFTA agreement can alter that course.

The call from the U.S. business community in the run-up to the talks has been "do no harm" amid concerns that a new agreement will unravel a complex North American network of manufacturing suppliers built around NAFTA.

Trump, who made trade a centerpiece of his presidential campaign as he promised to reinvigorate the manufacturing sector, pulled the United States out of the Trans Pacific Partnership trade pact shortly after taking office in January.

But he has since backed off other trade threats, including declaring China a currency manipulator and tearing up NAFTA, which he regularly calls a disaster.

U.S.-Canada-Mexico trade has quadrupled since NAFTA took effect in 1994, surpassing $1 trillion in 2015.

Derek Burney, a former Canadian ambassador to Washington who was involved in the first NAFTA negotiations, said that in the previous NAFTA talks there was a political commitment from all sides to reach a deal. That is not the case now, he said.

"The question ... is, What will Trump accept as a success in these negotiations?" said Burney. "To me, that is the biggest wild card of all."

Robert Holleyman, a former deputy U.S. trade representative during the Obama administration, said the "toughest nut to crack" in the talks will be whether changes meet Trump's goal of reducing the trade deficit.

"We know where he wants to make changes to NAFTA. Whether those changes lead up to something that actually reduces the trade deficit with Mexico is wholly unclear," Holleyman said.

NAFTA renegotiation will be a major test of Trump's ability to meet his campaign promises to restore U.S. manufacturing jobs. Although he has inherited a strong economy that has added 1.29 million jobs this year, his promises of an ambitious legislative agenda have been derailed by the failure of a healthcare bill and the lack of a detailed plan for tax reform.

Also weighing heavily over the talks is the upcoming 2018 Mexico presidential election. Mexico has urged all sides to complete the negotiations before the campaign ramps up in February to avoid it becoming a political punching bag.

One of the most contentious issues in the talks is likely to be over the "Chapter 19" mechanism requiring the use of bi-national panels to settle anti-dumping and anti-subsidy disputes, which the Trump administration wants to eliminate because the rulings often go against the United States.

Mexico has said its NAFTA goals are free access for goods and services, greater labor market integration and a strengthening of energy security.

(Additional reporting by David Ljunggren, Anthony Esposito and Ginger Gibson; Editing by Leslie Adler and Nick Zieminski)