A major Ford Motor Co. engine investment that the federal and Ontario governments were trying to land in Windsor, Ont., will instead go to Mexico, underscoring the difficulty Canada is having competing for auto investment against its partner in the North American free trade agreement.

The auto maker was seeking about $700-million in government financial help to build a new, 1.5-litre engine to power small vehicles, sources familiar with the negotiations said.

But the two levels of government and Unifor, which represents workers at Ford's two engine plants in Windsor, said Friday that negotiations have ended. The investment is slated to go to Mexico, Unifor president Jerry Dias said.

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Mexico has won billions of dollars worth of new investments in auto assembly plants in recent years, but the proposal for Windsor, known as the Dragon project, appeared to represent a chance for Canada to chalk up a victory that would have produced about 1,000 jobs, some of which would go to some of the 483 workers now on layoff.

Canada's decline and Mexico's rise are evident in vehicle production figures for 2014. Factories in Mexico cranked out 2.396 million vehicles as of the end of September, up 7.5 per cent from a year earlier, while Canadian production fell 0.6 per cent in the same period to 1.745 million vehicles.

The jump in Mexican production and drop in Canadian output come amid a robust recovery in U.S. sales – the destination for many of the vehicles produced in both Canada and Mexico – and a record-setting sales pace in Canada.

The investments in Mexico, which include assembly plants announced this year by BMW AG, Kia Motors, Honda Motor Co. Ltd. and Mazda Motor Corp. factories that have begun production this year, highlight how essential it is for Canada to retain the existing Detroit Three and Japanese plants located in Ontario, industry officials said.

"The environment for these types of investments is extremely competitive and we would be interested to learn what Mexico may be offering," said Flavio Volpe, president of the Automotive Parts Manufacturers Association of Canada, which represents Canadian auto suppliers.

The original Ford proposal to build a 1.5-litre engine that also had a hybrid version, called for an investment of about $2-billion, but fell significantly by the time negotiations broke off.

What's disheartening about the decision is that workers have won accolades from Ford for working safely and producing high-quality engines and yet the investment goes elsewhere, said Chris Taylor, president of Unifor local 200, which represents workers at the Essex Engine and Windsor Engine plants. The number of active workers is down to about 1,400 at the two plants, Mr. Taylor said, from 6,300 at six engine and engine parts plants in 2000.

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The federal and Ontario governments hinted in statements Friday that the financial request was too high in relation to the commitments Ford was prepared to make.

"Our government is committed to partnering with business in a fiscally responsible way, but we will not invest taxpayer dollars in any partnership that doesn't provide a strong return for Ontarians," Ontario Economic Development Minister Brad Duguid said in a statement. "This includes creating good jobs, anchoring key facilities, building an industry supply chain, fostering research and development, and leveraging a larger investment from the private sector."

Jake Enright, a spokesman for federal Industry Minister James Moore, said the Ford proposal was "unprecedented" and any investment the two governments make in the auto industry must "be in the best interests of Canadian taxpayers."

Mr. Taylor said the union needs to talk to the governments again about what level of investment they're prepared to make when other governments are willing to pay for 60 per cent to 70 per cent of projects in order to win the jobs.

The governments became aware of the engine investment late in the game, when talks with Mexico were well advanced, Unifor's Mr. Dias said.

Although he would not comment on the $700-million figure, he noted that "the ask was high and when the ask is high, the commitments have to be high as well."

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Comments by Bob Shanks, Ford's chief financial officer, appeared to support a theory among some industry officials that the auto maker did not seriously consider Windsor for the investment.

"We can't pull out something that was never going," he told Bloomberg Television.