RPT-UPDATE 2-Trump sours NAFTA talks with steel trade war threats

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MEXICO CITY, March 2 (Reuters) - U.S. President Donald Trump's threats to unleash a trade war over steel crushed hopes of substantial progress in the latest talks to rework NAFTA, pitching negotiators into a political maelstrom and heightening fears for the trade deal's future.

Trump said on Thursday that a plan for protectionist tariffs of 25 percent on steel imports and 10 percent on aluminum goods would be announced next week, following up on Twitter on Friday by calling trade wars "good, and easy to win."

Trump's statements have cast a pall over the efforts to renegotiate the 1990s-era North American Free Trade Agreement, which had already been disrupted by the early departure of a U.S. official handling one of the most divisive subjects, content rules for autos.

Jerry Dias, head of Canadian private-sector union Unifor, said after meeting with Canada's chief negotiator, Steve Verheul, early on Friday that Trump's latest gambit to push his "America First" strategy immediately soured the negotiations.

"The Canadian team is absolutely furious," Dias told Reuters, adding that the steel announcement had killed off any hopes of advancing on the major sticking points at the talks, including setting new rules for auto content in the region.

"It is crystal clear to us that if Canada is not exempted from the U.S. tariffs on Tuesday, then Canada should walk away from the NAFTA table," Dias noted earlier, likening the Trump administration to a "schoolyard bully."

"Ultimately Canada's going to have to start fighting fire with fire," he told reporters.

Verheul said late on Thursday that his team was "keeping an eye on what's going on outside", noting that it was a "bit of a distraction", without referring directly to steel.

One Mexican official familiar with the process gave a terse appraisal of how Trump's announcement went down at the talks.

"Very bad news, very bad timing, very dangerous to go down this road," the official said.

Trade officials have become used to tensions sparked by Trump during the negotiations, and Mexico's chief NAFTA negotiator Kenneth Smith told reporters that the talks had not been affected by the steel announcement.

However, he said Mexico and Canada should be exempted from the measures as NAFTA allies of the United States.

Officials say a handful of less contentious chapters could still be concluded during the round, and three people at the talks said the technical teams remained focused on their tasks, despite the uncertainty the steel tariff plan had caused.

The prospect of negotiators being able to close several chapters in recent NAFTA rounds has been mooted for months at earlier rounds, only for the outcome to fall short.

It remains unclear whether the metals tariffs would apply to the United States' partners under NAFTA, which together account for more than $1 trillion worth of annual trilateral trade.

Canada, the biggest foreign supplier of steel and aluminum to the United States, quickly pledged to retaliate if necessary.

Mexican officials said the government would likely wait for clarity on the matter before responding, but one said earlier this week that Mexico would hit back if subject to U.S. tariffs.


Expectations of progress at the seventh round in Mexico City had already been tempered by the conviction that major bones of contention were unlikely to be removed without the mediation of senior political figures involved in the sluggish process.

The risk of a tariff war between the NAFTA partners threw up new roadblocks.

Mexican steel industry association Canacero said it expected the government to take "immediate reciprocal actions" if the United States slapped the tariffs on Mexico, and agricultural lobbyists at the NAFTA talks also condemned the tariff plan.

"These tariffs are very likely to accelerate a tit-for-tat approach on trade, putting U.S. agricultural exports in the crosshairs," said Brian Kuehl, executive director of Farmers for Free Trade, a group defending NAFTA at the talks.

Trump has repeatedly threatened to pull out of NAFTA if the deal is not recast to his liking, arguing that it has caused an exodus of U.S. manufacturing jobs to lower-cost Mexico.

Negotiators from the three countries have been meeting for six months and made few concrete announcements of progress, with major disagreements over auto content, dispute resolution mechanisms and agricultural access hanging over the talks.

Blindsided by Trump's steel announcement, participants at the talks are looking ahead to Monday's scheduled meeting between U.S. Trade Representative Robert Lighthizer, Canada's Foreign Minister Chrystia Freeland and Mexico's Economy Minister Ildefonso Guajardo for clarity on the path forward.

"It's not a question of what's achievable. Of course it's achievable," said one industry executive in Mexico close to the negotiations. "It's a question of political will." (Additional reporting by Sharay Angulo, Lesley Wroughton, David Alire Garcia, and Frank Jack Daniel; Editing by Jonathan Oatis and Grant McCool)