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UPDATE 2-Key U.S. lawmaker wants exemptions for 'fairly traded' steel, aluminum

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MEXICO CITY, March 4 (Reuters) - Kevin Brady, chairman of the U.S. House Ways and Means Committee, said on Sunday all fairly traded steel and aluminum, especially from Canada and Mexico, should be excluded from President Donald Trump's proposed tariffs.

Brady, whose committee has jurisdiction over U.S. trade policy, was speaking on the sidelines of the latest round of NAFTA talks between the United States, Canada and Mexico where he said there had been progress in renegotiating the 24-year-old trade deal.

Imposition of the tariffs could spark a global trade war. Mexico and Canada have threatened retaliation, and the European Union said it will apply 25 percent tariffs on around $3.5 billion of imports from the United States if Trump carries out his plan.

U.S. Commerce Secretary Wilbur Ross said earlier on Sunday that he could not rule out that Trump might include exemptions from the tariffs for some countries.

Asked whether the two NAFTA allies should be exempted, Brady told reporters: "Yes, and going further, excluding all fairly traded steel and aluminum, not just from these two countries."

Trump says the tariffs are needed to protect domestic industries against unfair competition from China and other nations.

"I think we can make a very strong case for other countries as well," said Brady, adding he hoped Trump could be convinced to step back.

"We're going to continue to make the case to the White House," said Brady, who will meet Canadian Foreign Minister Chrystia Freeland later in the day.

He acknowledged that the tariffs would likely be "front and center" during a ministerial meeting on Monday between Freeland, U.S. Trade Representative Robert Lighthizer and Mexico's Economy Minister Ildefonso Guajardo.

Trump's shock announcement on Thursday overshadowed the NAFTA talks as automakers worried it could push up the cost of manufacturing in North America and U.S. farm groups fretted over retaliatory measures.

The NAFTA talks have moved slowly since they began in August, in part because of U.S. demands ranging from changes to automotive content origin rules and dispute resolution mechanisms to imposing a clause that could automatically kill NAFTA after five years.

Trump has repeatedly said he is prepared to walk away from the $1.2 trillion treaty.

Meanwhile, Peter Navarro, director of the White House National Trade Council, said on Sunday there would be a mechanism to exempt some businesses from the tariffs.

"There will be an exemption procedure for particular cases where we need to have exemptions, so that business can move forward," Navarro said on CNN's "State of the Union" program.

In order to remove uncertainty, Brady emphasized that the administration should move quickly to exempt current steel and aluminum contracts.

"I believe there should be a quick and timely inclusion process for existing contracts as well as for existing businesses, he added.

Canada, the single largest supplier of both steel and aluminum to the United States, says any tariffs would be totally unacceptable.

Brady said he hoped all parties would remain focused on concluding NAFTA. "I'm hopeful that as this process unwinds everyone stays at the table and ... stays focused on delivering a modern NAFTA," he added.

U.S. Representative Bill Pascrell, the ranking Democrat on the Ways and Means trade subcommittee, said he was skeptical about the merits of imposing tariffs.

"We don't have a major trade deficit with Canada. What are we doing?" he told reporters. "If you look at all the products that are coming into the United States from Canada and Mexico, this is an ally. If we can't make an exception there, then how are we going to get a NAFTA deal?" (Additional reporting by Dave Graham; Editing by Phil Berlowitz)