UPDATE 3-NAFTA talks contentious as Canada's Trudeau fights for trade pact

(Adds Trudeau quote, talks schedule)

WASHINGTON, Oct 11 (Reuters) - U.S. demands for more favorable treatment under the NAFTA trade deal threatened to bring talks with partners Canada and Mexico close to collapse as the latest round of negotiations began on Wednesday.

Canadian Prime Minister Justin Trudeau will again try to convince U.S. President Donald Trump of the trade pact's merits while hundreds of negotiators, government officials and lobbyists from the three countries gather at a hotel in Arlington, Virginia for a fourth round of talks.

"In terms of trade, the U.S. sells more to Canada than it does to China, Japan and the United Kingdom combined. So we are your biggest customer, Trudeau told members of the U.S. House of Representatives Ways and Means Committee on Wednesday.

There will always be challenges that come up that we can thoughtfully work through," he told the lawmakers.

The Canadian leader visits Washington amid increasing acrimony over renegotiations of the North American Free Trade Agreement, with Trump making fresh threats to terminate the 23-year-old deal.

The U.S. Chamber of Commerce on Tuesday accused Trump's administration of trying to sabotage the talks with "poison pill proposals," including demands on car production and a "sunset clause" to force regular negotiations.

Mexican Foreign Minister Luis Videgaray warned that an end to NAFTA would mark a breaking point in U.S.-Mexican relations and affect bilateral cooperation in non-trade areas.

The NAFTA talks are likely to stall in the face of aggressive U.S. attempts to sharply increase content requirements for autos and auto parts, trade experts say.


U.S. Commerce Secretary Wilbur Ross has long advocated strengthening the rules of origin for the auto industry as a way to bring back automotive production from Asia and other non-NAFTA countries. Mexico strongly opposes such a move, which would damage its own car industry.

The difficult issue of rules of origin will be addressed mostly at the end of the current talks, according to a schedule obtained by Reuters. The negotiations were extended on Wednesday by two days to Oct 17.

During his meeting with the U.S. House committee, Trudeau planned to raise the U.S. proposals about the sunset clause and scrapping the so-called Chapter 19 dispute settlement mechanism, a Canadian government source said.

Trudeau also planned to note the closeness of economic ties between Canada and many U.S. states, saying these could be jeopardized if the administration took a more protectionist tone, said the source.

U.S. Trade Representative Robert Lighthizer said on Wednesday the three nations have completed their negotiations on company competition policy, reaching agreement on a chapter that goes beyond previous U.S. trade deals to ensure "certain rights and transparency under each nation's competition laws."

People briefed on the new U.S. proposals to be presented this week said that USTR is seeking to sharply lift North American content threshold for autos and auto parts.

The proposals call for North American content overall to rise to 85 percent from the current 62.5 percent. In addition, the United States wants to add a new 50-percent U.S.-specific content requirement, something that was not in the earlier agreements.

"These will be met with widespread opposition from Canada and Mexico. I think it's just a bridge too far," said Wendy Cutler, the Asia Society's Washington policy director and former chief U.S. negotiator for the Trans-Pacific Partnership trade deal canceled by Trump.

Other contentious U.S. proposals opposed by Canada, Mexico and U.S. business interests include the five-year sunset provision, radical changes to NAFTA's dispute arbitration systems, changes to intellectual property provisions and new protections for U.S. seasonal produce growers.

In his meeting with Trump, Trudeau is expected to remind the president that Canada is the United States' biggest export customer, with largely balanced two-way goods and services trade, and is not the cause of U.S. manufacturing jobs lost under NAFTA, Canadian officials said.

Mexico has that distinction, with far lower wages that have lured U.S. auto plants and other manufacturers across its northern border, resulting in a $64 billion trade surplus with the United States last year that Trump administration officials have vowed to slash.

(Additional reporting by Ana Isabel Martinez and Dave Graham, Makini Brice, Susan Heavey; Writing by Alistair Bell; Editing by David Chance, Chizu Nomiyama and Nick Zieminski)