Mexico, Washington sprint toward bilateral trade deal before US elections

By Emily Green, David Shepardson, Nora Eckert and Kalea Hall

MEXICO CITY/WASHINGTON, Sept 11 (Reuters) - Mexico and the United States are racing to reach a bilateral trade deal before the U.S. midterm elections in less than eight weeks, according to six sources in both countries familiar with the talks, an effort made more urgent by the collapse of Canadian negotiations with Washington.

"We both want to reach a deal before the midterms," said one Mexico-based source, who spoke on condition of anonymity to discuss private talks.

The negotiations are aimed at striking an interim bilateral bargain under which Mexico could win relief from some U.S. tariffs while addressing U.S. demands on areas including automotive content and Chinese investment.

While no formal deadline exists, officials in both countries see political benefits in reaching a deal before the November 3 elections when U.S. President Donald Trump's Republican Party risks losing control of Congress. An accord would enable both leaders to tout a win as they face domestic political challenges.

"Time is of the essence for the Mexican government," said the Mexican source, citing concerns over a weak economy and falling credit ratings on its debt. The source added that Mexican President Claudia Sheinbaum's administration, which this week presented its 2027 budget, views a U.S. trade deal as critical to reassuring markets and investors.

A spokesperson for Mexico's economy ministry said, "There are no specific deadlines at this time," stressing the government's ongoing commitment to dialogue with Washington.

The U.S. Trade Representative and White House did not immediately respond to a request for comment.

MEXICO CONCILIATORY

Mexico's push to reach a deal comes after trade talks between the United States and Canada collapsed last month, plunging the longtime allies into a bitter tariff dispute.

Washington on Tuesday banned imports of a broad swath of Canadian alcohol, motorcycles and dairy products, and Ottawa has vowed to match U.S. tariffs dollar for dollar.

The collapse of Canada's talks has reinforced Mexico's strategy of avoiding direct confrontation with Washington, betting that cooperation will yield tariff relief.

The Mexican source described the country's approach as "play nice and continue to cooperate." Mexico sends more than 80% of its exports to its northern neighbor.

Reflecting the intensified pace, U.S. Commerce Secretary Howard Lutnick met virtually with Sheinbaum on Thursday about trade.

The meeting, originally scheduled in person, came less than two weeks after Sheinbaum proposed legislation giving the government new powers to review and block foreign acquisitions of Mexican companies.

The measure, which would create an investment-screening regime similar to those in the United States and Canada, is widely seen as a response to U.S. pressure for closer scrutiny of Chinese investment.

The U.S.-Mexico talks are being framed as an effort to reach an interim bilateral deal while issues with the three-country USMCA pact including Canada are negotiated.

That agreement was thrown into uncertainty in July when the U.S. did not agree to renew it for another 16 years. The accord remains in effect, subject to annual review, but the Trump administration has used the process to seek additional concessions from Canada and Mexico.

BEST FRENEMIES

Officials in both Mexico and Canada, which have long been uneasy allies, have publicly stressed their commitment to preserving a trilateral agreement. But some Mexican officials privately argue Mexico should not sacrifice its own interests to secure a deal for Canada.

The race for a U.S.-Mexico deal may have additional strategic dimensions. One auto industry source said the Trump administration aims to isolate Ottawa by reaching a deal with Mexico before major new Canadian tariffs take effect on January 1.

A U.S.-Mexico deal could also bring down consumer prices in the United States and deliver a "political win" for the Trump administration, said Diego Marroquin Bitar, an expert on North American trade who also works as a consultant. "They could argue it was Canada's fault they didn't reach an agreement."

OBSTACLES REMAIN

A major hurdle in any interim trade deal is the so-called Section 232 tariffs on steel, aluminum, automobiles and auto parts. Under those national security tariffs, Mexican and Canadian steel exported to the U.S. face tariffs of 50%, while vehicles are subject to a 25% duty.

Trump has since negotiated lower auto tariffs for other trading partners, including 15% for Japan, the European Union and South Korea, and 10% for Britain, leaving some vehicles from those countries facing lower duties than cars shipped from Mexico and Canada.

Before negotiations collapsed last month, Canada appeared close to a breakthrough with Washington on Section 232 tariffs and other trade issues, raising hopes Mexico could quickly secure similar terms.

Several automakers believe Washington could ultimately offer Mexico the same framework discussed with Canada: a 15% tariff on vehicle imports, plus an additional reduction for U.S. content, bringing the effective tariff rate to around 7%.

In return, Mexico is expected to give ground on U.S. demands for greater American content in vehicles, particularly engines, electronics and software, a second Mexico-based source said.

While Mexico opposes explicit U.S. content requirements, "that doesn't mean it won't be working on something to help increase the U.S. content," the source said, adding that the final shape of such a compromise is "the big question."

(Reporting by Emily Green in Mexico City; David Shepardson in Washington, and Nora Eckert and Kalea Hall in Detroit; Additional reporting from Andrea Shalal in Washington; Editing by Brad Haynes and Cynthia Osterman)

((Emily.Green@thomsonreuters.com;))