Newfoundland is threatening to withdraw support for the Canada-European Union trade agreement, a move that could create havoc for Prime Minister Stephen Harper.

Paul Davis, Premier of Newfoundland and Labrador, warns he's ready to pull backing for the agreement because, he says, Ottawa is reneging on the terms of a separate deal that secured his province's support for the accord, formally known as the Comprehensive Economic and Trade Agreement (CETA).

"Our support for CETA is on the line here," Mr. Davis said in an interview.

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He said Ottawa and St. John's need to reach a deal on compensation and he hopes to meet with Mr. Harper to resolve this.

For Canada to meet the terms of the recently signed trade pact with the 28-country European Union, Newfoundland must jettison what are called minimum processing requirements (MPRs), aimed at protecting local fish plant jobs. The regulations in question stipulate how much of the fish brought ashore in the province must be processed there.

Ottawa promised funds to help the province adjust to the deal. This compensatory arrangement, unveiled by former premier Kathy Dunderdale last year, was for Ottawa to pour $280-million into a $400-million fund that would be available for the Newfoundland fishery.

But Mr. Davis said Monday that Ottawa has introduced a new condition and will only pay up if it can be proven that Newfoundland processing jobs are affected. That's not what International Trade Minister Ed Fast told the province last year, he said. "That wasn't part of the discussion."

Mr. Davis said Newfoundland never believed relinquishing the processing requirement would cost jobs and instead always considered the $280-million compensation for the province forgoing a long-standing policy. St. John's wants to use the money to build "a fishery for the future" and spend it on things such as research and development, marketing and infrastructure.

He said Newfoundland will not scrap the processing requirements if Ottawa doesn't remedy this impasse.

"We'll keep our MPRs in place if we don't reach an agreement," Mr. Davis said.

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Rob Moore, the Conservative minister responsible for Newfoundland and Labrador, who has been involved in negotiating this matter with St. John's, said Tuesday the Conservatives aren't willing to give the province the right to spend the adjustment money any way it sees fit.

He denied Ottawa has changed its policy on how the cash should be used.

"The MPR fund was created to compensate for anticipated losses from the removal of minimum processing requirements. The fund was never intended as a blank cheque that would give the industry in Newfoundland and Labrador an unfair advantage over other Atlantic provinces," Mr. Moore said in a statement.

"We have been clear from the start that the MPR fund was to compensate for demonstrable losses."

Newfoundland can't stop the Canada-EU deal from coming into force, but it can create trade friction between Ottawa and Brussels.

The deal, already signed by both sides, is still expected to take effect in 2016 after ratification in the European Union.

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In Canada, however, Ottawa has the final say on the deal.

"On a practical basis the federal government can go ahead and sign the agreement and ratify the agreement, and it would be binding on Canada," said Riyaz Dattu, a partner and trade and investment specialist at the Osler law firm in Toronto.

But Canada is also on the hook if Newfoundland fails to remove minimum processing requirements. The EU could demand compensation or some other form of remedy for this.

"Canada as a federal nation has to ensure all of the provinces are in line with all of the obligations we take on," Mr. Dattu said.

Ottawa is "responsible for Canada's compliance with free trade agreements … but if a province does not do so, then Canada has an issue."