UPDATE 1-Pacific trade partners make progress on autos hurdle

(Adds details of new positions, background)
By Ana Isabel Martinez and Krista Hughes
ATLANTA, Sept 30 (Reuters) - Negotiators trying to clinch a
Pacific Rim free trade deal made progress toward resolving a key
issue on Wednesday when Canada and Mexico signaled a willingness
to open the North American auto market to more parts made in
Asia, people briefed on the closed-door talks said.
The Trans Pacific Partnership, or TPP, which seeks to cut
trade barriers and set common standards among a dozen nations
reaching from Japan to Chile, has become snared over a small set
of issues, including trade in autos and auto parts, since July.
The auto issue is crucial for Japan, whose automakers, led
by Toyota Motor Corp 7203.T , depend on sales to the U.S.
market and want flexibility in how and where they source auto
parts.
The stakes are also high for Mexico, which has seen a boom
in auto-related investment because of its proximity to the
United States, relatively low labor costs and participation in
the North America Free Trade Agreement.
Over the past two years, eight automakers, including Honda
Motor 7267.T , Mazda 7261.T and Nissan 7201.T , have opened
or announced new auto plants or expansions of existing
facilities in Mexico.
A previous round of TPP negotiations failed in July after
Mexican officials objected to a proposal by Japan and the United
States on autos concerning the "rules of origin" that determine
whether a vehicle can be exported without tariffs.
Officials from Mexico and Canada were aiming for a
45-percent threshold for local content on vehicles, two people
briefed on the talks said.
If part of a final trade deal, that would mean the majority
of the vehicle could be sourced from outside the 12 countries
participating in the TPP and still be sold in the United States
- the bloc's largest market - without tariffs.
Japanese trade negotiators separately pushed for a 32.5
percent local origin threshold for auto parts separate from the
rule covering vehicles, the people briefed on the talks said.
It was not clear whether those two proposals were being
taken up together or how any trade deal would calculate local
content. Rules for such calculations under the NAFTA accord are
complex.
NAFTA sets a 60-percent local origin threshold for auto
parts and a 62.5 percent threshold for finished vehicles for
tariff purposes. Those rules have been credited with driving the
auto industry's investment-driven boom in Mexico since 1990 and
Mexican officials had earlier wanted a similar standard in the
TPP.
A more liberal set of rules, like those under consideration
by trade negotiators in Atlanta, could allow automakers more
flexibility in buying cheap and low-margin parts like interior
plastics from producers in Asia who could undercut suppliers in
Mexico on price, Mexican industry officials have said.
It would also invite criticism from U.S. union groups and
Democrats in the U.S. Congress who have urged that the TPP hold
to the standards for auto tariffs contained in NAFTA.
A TPP deal would also mean the United States scraps the
tariff of 2.5 percent on Japanese car imports and the punitive
25 percent tariff on trucks.
Auto parts makers in Canada and Mexico, for their part, had
pushed for a minimum threshold of at least 50 percent of local
content in any TPP agreement.
A Pacific trade deal would be a legacy-defining achievement
for U.S. President Barack Obama, who has said the deal would
open key markets to a range of U.S. exports.
U.S. officials have also promoted the trade deal as a
counterweight to China's rising influence in the region.