U.S. pitch to increase Canada's duty-free online shopping limit a sticking point in NAFTA talks

A U.S. proposal for Mexico and Canada to vastly raise the value of online purchases that can be imported duty-free from stores like Amazon.com and eBay is emerging as a flashpoint in an upcoming renegotiation of the NAFTA trade deal.

Vulnerable industries like footwear, textiles and bricks and mortar retail in Mexico and Canada are pushing back hard against the proposal by the U.S. trade representative to raise Mexican and Canadian duty-free import limits for e-commerce to the U.S. level of $800 US, from current thresholds of $50 US and $20 Canadian, respectively.

• U.S. duty free online limit is 40 times more than Canada's

For the Mexicans, the main worry is that such a move could open a back door for cheap imports from Asia and beyond. For Canadian retailers, the fear is that e-commerce companies will undercut their prices.

The U.S. plan was unveiled in July as part of the Trump administration's goals to renegotiate the 25-year-old treaty. While Mexico and Canada are still formulating their responses, Mexico City is leaning strongly against the proposal in its current form, and Ottawa may not be far behind.

The proposed $800 level "opens a completely unnecessary door" to imports from outside the NAFTA trading bloc, Mexican Economy Minister Ildefonso Guajardo said on Thursday on the sidelines of a NAFTA-related event, calling it "a very sensitive topic."

The growing controversy over how to account for a burgeoning regional e-commerce sector dominated by the United States highlights a rare area where the Trump administration is pushing to liberalize trade rules rather than tightening them.

Much of Trump's criticism of NAFTA stems from his belief it has decimated U.S. manufacturing as companies shifted production to Mexican factories with cheaper labor, creating a U.S. trade deficit with Mexico worth more than $60 billion.

But Mexican and Canadian business leaders fear the rule change could make their industries vulnerable, arguing that unless online retailers can show products are made in North America, they should not be exempted from duties levied on other imports.

"We cannotopen the door to inputs from outside the region coming in tax-free when we're talking about the need to reduce the deficit and create jobs,"said Moises Kalach, who fronts the international negotiating arm of Mexico's CCE business lobby.

"It goes completely against that."

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Guajardo said Mexico's retail group, the National Self-service and Department Store Association, which includes powerful members such as Wal-Mart de Mexico , had visited him last week to express concerns about the proposal.

He said the group's representative brought to the meeting a $250 jacket bought on the internet as evidence that violations to the existing limit were already threatening membersbusinesses.

"Suppose there was an $800 free limit. Can you imagine how many shirts Vietnam could send to Mexico in a packet below that price? They could easily flood us with packets of $100,"he said, while recognizing the need to smooth customs processes.

Complicating efforts to agree on a common set of rules is a tangle of diverging regulations on tax and how the restrictions on imports differ in the region depending on whether they enter by air, sea or land.

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Amazon.com Inc and eBay Inc declined to comment for this story. eBay has previously said it supports an increase to Canada's low-value customs de minimisthreshold for ecommerce to promote seamless access to the global marketplace.

Increasing the threshold "absolutely" is eBay's top priority in the NAFTA renegotiation, a person familiar with the matter said.

Canadian opposition is being led by retailers, whose industry association said it was concerned about "the behavioural shift that would inevitably result if shoppers can buy a far wider range and higher value of goods tax-free and duty-free."

The Retail Council of Canada said in a submission to the government that clothes, books, toys, sporting goods and consumer electronics would be among the items most affected, and expressed confidence Ottawa would fend off such requests

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"EBay in particular has lead this charge to three different finance ministers in a row Jim Flaherty, Joe Oliver, and Bill Morneau and in each case they have failed," said Karl Littler, a spokesman for the Retail Council of Canada.

"The U.S. raised this quite frequently in the TPP (Trans-Pacific-Partnership trade) round and they also failed to secure this concession," he added.

There have been hints from Canada's government about a compromise under which a higher limit would exempt products ordered from e-commerce from duties but not sales taxes. "When it comes to waiving duties and taxes, we need to carefully consider the impact that would have on Canadians and on Canadian businesses," said Chloe Luciani-Girouard, a spokeswoman for Morneau.

"Mexican firms could accept a higher import limit for goods produced in the NAFTA region,but not from other nations," said Alejandro Gomez Tamez, executive president of the Chamber of Commerce for the footwear industry in the central Mexican state of Guanajuato, a hub of textile manufacturing.

"When a product comes in, even if it's packaged and sent from the United States, if it's from a third country, it should pay duties," he said.