By David Lawder and Dave Graham
ARLINGTON, Va. (Reuters) - Washington has dramatically increased tensions in talks to renew the North American Free Trade Agreement by proposing that the lifespan of any new deal be limited to five years, people familiar with the negotiations said on Thursday.
The proposal for a so-called sunset clause - just one of a series of U.S. initiatives that are opposed by NAFTA partners Canada and Mexico - only served to increase uncertainty about the future of the deal.
Two sources with direct knowledge of the talks described the atmosphere as "horrible" and highly charged.
The U.S. side proposed the sunset clause late on Wednesday during the fourth of seven scheduled rounds to update the rules governing one of the world's biggest trade blocs, said two officials, who asked not to be identified because the talks are confidential.
The Trump administration says the clause, causing NAFTA to expire every five years unless all three countries agree it should continue, is to ensure the pact stays up to date.
But Mexico and Canada insist there is no point updating the pact with such a threat hanging over it, arguing the clause would stunt investment by sowing too much uncertainty about the future of the agreement.
"It's a source of total uncertainty," said one of the NAFTA government officials.
Speaking in Mexico City, Finance Minister Jose Antonio Meade said the government was working on plans to alter tariffs and identify substitute markets in case the NAFTA talks failed.
His remarks and the tension around NAFTA helped push the peso down 1 percent against the U.S. dollar to a five-month low.
U.S. President Donald Trump says NAFTA, originally signed in 1994, has been a disaster for the United States and has frequently threatened to scrap it unless major changes are made.
Business and farm groups say abandoning the 23-year-old pact would wreak economic havoc, disrupting cross-border manufacturing supply chains and slapping high tariffs on agricultural products. Trade between the United States, Canada and Mexico has quadrupled under NAFTA, now topping $1.2 trillion a year.
In addition to the sunset clause, the United States wants to boost how much North American content autos must contain to qualify for tax-free status and eliminate a dispute settlement mechanisms that Canada insists must stay.
Some trade observers said it is difficult to see how negotiators could reach an agreement given U.S. demands that many see as non-starters.
The head of Unifor, Canada's largest private sector labour union, said it was clear the United States did not want a deal.
"NAFTA is not going anywhere. This thing is going into the toilet," Jerry Dias told reporters on Thursday.
Despite clear signs of impatience from Canada in particular, U.S. negotiators have yet to submit their proposal on rules of origin for the auto sector. That looked unlikely to come before Friday, another official familiar with the talks said.
Trump on Wednesday repeated his warnings that he might terminate the pact and said he was open to doing a bilateral deal with either Canada or Mexico..
He was speaking alongside Canadian Prime Minister Justin Trudeau, who later said Canada was "braced" for Trump's unpredictability.
Negotiators were also set to cover the difficult issue of government procurement on Thursday.
Canada and Mexico want their companies to be able to bid on more U.S. federal and state government contracts, but this is at odds with Trump's "Buy American" agenda. U.S. negotiators have countered with a proposal that would effectively grant the other countries less access, people familiar with the talks say.
On automotive rules of origin, NAFTA negotiators face tough new U.S. demands to increase regional vehicle content to 85 percent from 62.5 percent, with 50 percent required from the United States, according to people briefed on the plan.
The rules of origin demands are among several conditions that the U.S. Chamber of Commerce has labelled "poison pill proposals" that threaten to torpedo the talks.
(Additional reporting by David Ljunggren, Anthony Esposito, Ana Isabel Martinez and Frank Jack Daniel; Editing by Lisa Von Ahn and Tom Brown)