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UPDATE 1-Canada, Mexico to question U.S. auto content demands at NAFTA talks

(Adds quotes from officials)

MEXICO CITY, Nov 20 (Reuters) - Canada and Mexico will not make counterproposals to U.S. demands for tougher NAFTA automotive content rules but instead will question and rebut them on Monday, people familiar with the talks said.

The move underlines how little progress negotiators have made in the fifth of seven planned rounds of talks to update the 23-year-old North American Free Trade Agreement between the United States, Canada and Mexico.

Sources with knowledge of the talks said on Sunday that they ran the risk of grinding into a stalemate because of Canada and Mexico's unhappiness about U.S. proposals.

The Trump administration last month stunned its NAFTA partners by demanding that half of the content of all North American-built autos be produced in the United States and that the regional vehicle content requirement be sharply increased to 85 percent from the current 62.5 percent.

Canada will say that would cause serious damage to the United States as well as North American automotive manufacturing, a Canadian source with knowledge of the negotiations said.

An official from one NAFTA nation said the United States was frustrated that Canadians had not responded to the main proposals laid down by the Trump administration.

In response, the Canadian source said: "We're not going to provide a counterproposal on something we think is a non-starter."

U.S. President Donald Trump wants to stem the flow of U.S. car making jobs to low-wage Mexico and reverse a $64 billion U.S. trade deficit with its southern neighbor.

Hanging over the talks are increasing fears that he will follow through on a promise to pull out of NAFTA and that economic damage would follow.

The Canadian dollar edged lower against its U.S. counterpart on Monday, in part because of concerns about the negotiations.

In San Antonio, Texas, a senior U.S. official told a Senate panel that the administration wanted to rebalance the large automotive trade deficit with Mexico.

Stephen Vaughn, general counsel for the U.S. Trade Representative's office, said since autos produced in North America qualified for duty-free status under NAFTA, "are we making sure that the U.S. is getting enough benefits from that production to justify those privileges?"

Canada and Mexico say the content proposal would not work.

"In terms of the automotive sector, the United States` proposal is insane," a Mexican auto industry representative with knowledge of the talks said on Sunday. "You cannot counterpropose such madness."

A spokeswoman for the U.S. Trade Representative's office declined to comment on Monday.

Flavio Volpe, president of Canada's Automotive Parts Manufacturers Association, said the proposals would damage North American competitiveness and lead to fewer auto assembly and parts jobs on the continent.

Volpe told Reuters that even if some assembly operations return to the United States, moving parts production to Asia and other low-cost areas would more than offset those job gains.

Many car manufacturers and parts makers will simply forego NAFTA free-trade benefits and pay the 2.5 percent U.S. tariff on many components, he added. Raising those tariffs would violate commitments the United States has made to the World Trade Organization.

His organization's U.S. counterpart, the Motor and Equipment Manufacturers Association, last month unveiled a study showing that the United States would lose up to 24,000 auto parts manufacturing jobs from higher NAFTA content requirements and up to 50,000 if NAFTA is terminated.

The Mexican auto industry representative said the country's negotiators would probably ask more technical questions about the U.S. automotive content demands during discussions on Monday and Tuesday. (Additional reporting by David Ljunggren and Anthony Esposito in Mexico City and Fergal Smith in Toronto; Writing by David Lawder and David Ljunggren; Editing by Cynthia Osterman and Lisa Von Ahn)