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UPDATE 3-U.S. bid to protect auto industry sparks new doubts about NAFTA

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ARLINGTON, Va., Oct 13 (Reuters) - The Trump administration on Friday demanded that U.S.-made content account for half the value of the cars and trucks sold under the North American Free Trade Agreement, raising further doubts about any potential deal to renew the pact.

Three sources briefed on the protectionist U.S. proposal, which is in line with U.S. President Donald Trump's goal of shrinking a trade deficit with Mexico and stemming the loss of U.S. manufacturing jobs, said it also seeks sharply higher North American automotive content overall.

The proposal was made during contentious talks in Washington, in the fourth of seven planned rounds of negotiations to overhaul the treaty. Mexican sources denounced it as "absurd" and unacceptable, underlining the gaps between NAFTA's three members as they try to wrap up a deal by a year-end deadline.

Trump, who complains that the original 1994 pact has been a disaster for the United States, is threatening to walk away from the agreement unless major changes are made.

Washington's auto industry gambit came hot on the heels of its demand that NAFTA also contain a so-called sunset clause. That could mean any new deal expires in five years, an idea that Canada and Mexico also strongly oppose.

Although sources briefed on the talks describe the mood as sour, Mexican and Canadian politicians say there is no question of leaving the table for now.

A collapse of NAFTA would wreak havoc throughout the North American economy, disrupting highly integrated manufacturing supply chains and agricultural exports with steep tariffs that would snap back into place. Trade among the three countries has more than quadrupled since 1994 to over $1.2 trillion annually.

One of the sources close to the talks said Washington wants to increase the North American content requirement for trucks, autos and large engines to 85 percent from 62.5 percent over a period of years. That is in addition to its insistence that 50 percent of content be U.S.-made within the first year of a signed deal.

PROPOSAL SEEN UNWORKABLE

A Canadian official noted that senior government figures in Ottawa had already rejected both ideas as unworkable.

Trump has made no secret that he prefers bilateral trade deals, and skeptics wonder whether the U.S. demands are part of an "America First" strategy designed to ensure the current talks fail.

The U.S. Chamber of Commerce has listed the U.S. auto industry demand among a number of "poison pill" proposals that it said would torpedo the talks to renew NAFTA. 1/2nL4N1ML4JW 3/8

The chamber, the most powerful U.S. business lobby, has also warned that the proposal would cost jobs, since automakers and parts suppliers would likely forgo NAFTA benefits and simply pay the 2.5 percent U.S. tariff for imported cars and many parts.

Trump aides say current content rules are too lax and have allowed auto companies to bring in too many cheap parts from China and other low-wage Asian countries. They are also seeking to halt the shift of vehicle production and jobs to Mexico from the United States.

Mexico is heavily dependent on the United States and NAFTA for its economic viability, and uncertainty over the outcome of the talks helped push the Mexican peso to near five-month lows this week.

Mexican Finance Minister Jose Antonio Meade, seeking to downplay any setbacks in the latest round of negotiations, said on Friday that tension in the talks was only natural.

"There is scope in the negotiation of the agreement for a consensus that benefits the three countries," he said.

Canadian officials also said it was too soon to write off the deal-making process. They noted that U.S. Trade Representative Robert Lighthizer, Canadian Foreign Minister Chrystia Freeland and Mexican Economy Minister Ildefonso Guajardo were due to meet in Washington on Tuesday to take stock of the negotiations. (Additional reporting by David Lawder and Ana Isabel Martinez; Editing by Jonathan Oatis and Tom Brown)