MEXICO CITY (Reuters) - NAFTA negotiators discussed rules of origin on Monday as the Trump administration’s expected demand for U.S.-specific automotive content requirements was emerging as a major obstacle to a deal, auto industry lobbyists said.

Canada's Minister of Foreign Affairs Chrystia Freeland arrives to where the second round of NAFTA talks involving the United States, Mexico and Canada is taking place in Mexico City, Mexico, September 4, 2017. REUTERS/Edgard Garrido

U.S. Trade Representative Robert Lighthizer and Canadian Foreign Minister Chrystia Freeland arrived in Mexico City to close out the second round of talks to modernize the North American Free trade agreement on Tuesday along with Mexican Economy Minister Ildefonso Guajardo.

U.S. President Donald Trump has repeatedly threatened to abandon the 23-year-old pact unless it can be rewritten to reduce U.S. goods trade deficits of about $64 billion with Mexico and $11 billion with Canada.

“Addressing the U.S. trade deficit is a top priority in renegotiating #NAFTA,” the U.S. Trade Representative’s office said in a tweet on Monday, breaking its silence since the talks began last Friday.

Auto industry lobbyists and government officials said they did not expect the USTR negotiators to reveal specific targets on Lighthizer’s demand that a minimum percentage of North American vehicles be produced in the United States.

One lobbyist, speaking on condition of anonymity because the proposal is still under discussion, said he believed that U.S.-sourced proposal would have to be at least 35 percent to satisfy Trump, who railed against automakers for moving jobs to Mexico throughout his election campaign last year.

“Anything less would not be a political victory” for Trump, the lobbyist said.

The demand may prove a bigger problem than potentially increasing the overall North American automotive value content from the current level of 62.5 percent for tariff-free shipments of vehicles within the region, which officials say Trump’s administration also wants to raise.

Autos are expected to be one of the most contentious parts of the talks because the sector accounts for the lion’s share of the U.S. trade deficit with Mexico.

Juan Pablo Castanon, head of Mexico’s powerful CCE business lobby, which is representing the private sector, told reporters the automotive and labor issues were among the areas least advanced in the negotiations so far.

A U.S.-specific content requirement would cause major headaches for both Detroit and international automakers producing cars and trucks in North America.

It could also slow progress in the talks much more than some of the other issues, said Flavio Volpe, president of Canada’s Auto Parts Manufacturers Association.

“That could prove problematic, because it won’t deliver the benefits to the American interests that politically they might hope for,” he added.

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Volpe acknowledged that Canada and Mexico will likely have to make some concessions on autos rules of origin to meet U.S. political demands, but these could be creatively structured.

For example, content requirements could be tailored to capture billions of dollars in research and development investments primarily made in the United States, protecting high-paying engineering jobs from moving offshore, he said.

TABLING SOME TEXTS

The talks so far have largely focused on the three countries proposing their preferred language for less controversial areas, such as digital and cross-border services trade, according to government officials and industry representatives briefed.

But negotiators have not started consolidating the language, and wording for more controversial subjects, including rules of origin and dispute resolution mechanisms, is not expected to be revealed until the next round later this month in Canada.

“The horse trading on all of this has yet to begin. That’s for future rounds,” said a government official familiar with the negotiating process. Talks were proceeding in a “workmanlike and constructive manner”, the official added.

Guajardo, Lighthizer and Freeland are scheduled to hold a joint news conference on Tuesday afternoon after talks conclude.