ATLANTA A U.S.-Japan agreement on autos trade as part of a sweeping Pacific Rim trade deal would have its own dispute settlement mechanism, including penalties, if Japan does not open its market enough to U.S. vehicles, a source close to the negotiations said on Friday.
Negotiators are working to finalize a trade deal which would stretch from Japan to Peru and autos trade has been one of a few remaining and politically charged sticking points.
A broader deal on autos trade between Japan, the United States, Mexico and Canada was nearly complete, two people close to the closed door talks said, requesting anonymity because of the sensitivity of the negotiations.
"We are very close on cars," one of the people said near the end of the third day of ministerial level talks.
Remaining differences centered on "local content" thresholds for specific auto parts, a second person said.
The outline of the auto-related element of the Trans Pacific Partnership taking shape in negotiations in Atlanta would give Japan's automakers led by Toyota Motor Corp (7203.T) a freer hand to buy parts for vehicles sold in the United States from Asia.
But the deal would also contain a side agreement between the United States and Japan intended to open the Japanese market to American-made cars. It would also cut tariffs on Japanese vehicles exported to the United States, but over a period of time expected to be 20 years or more.
Although Japan does not impose tariffs on U.S.-made vehicles, U.S. automakers have complained for decades that the market is essentially shut to them because of barriers of other kinds, including difficulty in securing distribution networks and the need to meet separate safety certification.
The bilateral deal between the United States and Japan would include a first-of-its-kind dispute resolution mechanism that would impose penalties if Japan were judged to have fallen short of its commitments, the second person said.
At the same time, Japan's auto manufacturers would be given clearance to buy more parts for cars manufactured in North America without paying trade tariffs under the terms of the deal being discussed.
The North American Free Trade Agreement between Canada, the United States and Mexico mandates that vehicles have a local content of 62.5 percent. The way that rule is implemented means that just over half of a vehicle needs to be manufactured locally.
The set of rules under discussion in Atlanta would bring that to 45 percent, or about 55 percent under a separate calculation used by Japan's auto industry and regulators, people with knowledge of discussions have told Reuters.
Mexico is keen to maintain high thresholds to protect its booming auto and auto parts industry. Since 2009, seven auto production plants have been announced for North America and all of them are in Mexico.
Bolstered by its relatively cheap labor and proximity to the U.S. market, Mexico is on track to overtake South Korea as the sixth-largest auto producer by 2020, according to IHS Automotive.
By accepting a lower local content threshold for autos, Mexican officials would be betting that it would be able to sustain its post NAFTA-boom and attract new investment even if some cheap and lower-margin parts are imported for assembly, people involved have said.
A Pacific trade deal would be a legacy-defining achievement for U.S. President Barack Obama, who has said it should also open export markets to Detroit automakers.
The United States has been pushing for expanded access to Japan's car market since the 1980s. Japanese auto manufactures have said the lack of sales for American brands reflects a lack of effort, citing strong demand for German luxury brands like BMW (BMWG.DE) and Daimler's (DAIGn.DE) Mercedes.
(Additional reporting by Kevin Krolicki; Editing by Meredith Mazzilli)