U.S. President Donald Trump announced a new trade agreement with Mexico Monday that he says will replace the North American Free Trade Agreement.

Will Canada can be part of it? "We will see," Trump said, suggesting that if Canada is prepared to negotiate fairly it should be simple. He said the U.S. would put automotive tariffs on Canadian imports if talks don't succeed.

Foreign Affairs Minister Chrystia Freeland is now on her way to Washington to join the talks.

Prime Minister Justin Trudeau and Trump had a "constructive conversation" about the talks Monday, according to a readout of the call issued by the Prime Minister's Office.

"The leaders welcomed the progress that has been made in discussions with Mexico and look forward to having their teams engage this week with a view to a successful conclusion of negotiations," the PMO said in a statement.

"They want a negotiated deal very badly," Trump said of the Trudeau government earlier Monday, adding that applying car tariffs would be easier to do than working out an agreement with the third NAFTA partner.

"Perhaps the other [a deal] would be much better for Canada," he said.

Was that a threat?

"Absolutely not," Transport Minister Marc Garneau, speaking on behalf of the government, told CBC News Network's Power & Politics.

"Now we're going to be back at the table to negotiate a deal trilaterally."

U.S. President Donald Trump had Mexican President Enrique Pena Nieto on the phone as he told reporters the two countries had made a breakthrough in their trade negotiations. (Kevin Lamarque/Reuters)

Trump said the name NAFTA has a "lot of bad connotations to a lot of people" and suggested renaming the agreement the U.S.-Mexico free trade agreement.

While he was speaking to reporters in the Oval Office, Trump had Mexican President Enrique Pena Nieto on speakerphone. After a few technical difficulties establishing the call, Pena Nieto emphasized repeatedly that Canada now needed to join the talks so it could be incorporated into the agreement.

The Mexican president said that negotiations are now required on "sensitive" bilateral matters between the U.S. and Canada.

Currently, NAFTA's agriculture provisions are composed of a series of three bilateral deals, so changes must be renegotiated separately for this chapter, for example.

U.S. trade representative Robert Lighthizer, who was congratulated by Trump for reaching the deal with Mexico, said they hoped to conclude talks with Canada by Friday in order to comply with the 90-day window required by Congress before a deal could be signed with the outgoing Mexican administration. Pena Nieto leaves office on Dec. 1.

High-stakes talks now with Canada

Trump again mentioned Canada's "300 per cent" dairy tariffs as an issue between the two countries.

The U.S. president said American farmers "are going to be so happy" with this deal.

"Farmers have stuck with me," Trump said, adding that "Mexico has promised to immediately start purchasing as much farm products as they can."

However, it's unclear if the U.S. will withdraw its tariffs on Mexican steel and aluminum imports. Earlier this summer, Mexico retaliated with high tariffs on some U.S. farm exports.

Earlier Monday, Mexico's economy minister, Ildefonso Guajardo, told reporters on his way into his fifth week of bilateral meetings with the Americans that he still had to conclude a "very important" issue. It's unclear whether this issue is now resolved.

Mexico's economy minister, Ildefonso Guajardo, seen here last Thursday, is in his fifth week of talks in Washington with United States trade representative Robert Lighthizer. (Chris Wattie/Reuters)

The U.S.-Mexico negotiators have been trying to make a breakthrough on the deal's automotive chapter, after talks to redefine what should constitute a tariff-free North American vehicle broke down prior to the Mexican presidential election in July.

The revised rules will require 75 per cent of auto content to be made in the United States and Mexico, up from 62.5 per cent, and 40-45 per cent of auto content to be made by workers earning at least $16 per hour.

It's unclear, however, what will happen to automotive imports from Mexico that do not comply with these new rules. The U.S. tariff for non-NAFTA car imports is currently 2.5 per cent, a rate that does not provide a significant incentive to make costly changes to comply with the new rules.

U.S. officials briefing reporters later said the U.S.-Mexico deal wasn't designed to put pressure on anyone, and it wasn't a negotiating strategy meant to isolate Canada. It's hard to get three people to agree at the same time, the official said, characterizing the sequencing as a normal, ordinary way to come to an agreement.

Canada has been part of the talks over the last year, the official said — it's not like the Canadians are just coming in at the last minute.

Compromise reached on sunset clause

Rather than a five-year sunset clause, as originally proposed by the U.S., this new deal would set a 16-year term for the trade agreement, with a review process after six years to consider whether the deal would be renewed for another 16-year term. Officials briefing reporters said this longer period of time would protect the interests of investors.

Reporters were also told that the new deal represents an improvement for every sector over the previous NAFTA.

Lighthizer has spoken repeatedly of wanting a deal that can receive bi-partisan support in Congress, and strict labour requirements for Mexico were thought to be key to securing votes from Democrats in Congress.

White House senior adviser Jared Kushner, left, and Vice President Mike Pence, right, listen as United States Trade Representative Robert Lighthizer talks with President Donald Trump about a trade "understanding" between the United States and Mexico (Evan Vucci/Associated Press)

Investor-state dispute settlement (ISDS) provisions, contained in the current NAFTA's Chapter 11, are also dialed back, but not removed entirely.

Industries that sign direct contracts with governments — oil and gas, infrastructure, other energy providers and telecommunications — will continue to have protection under what an official called "old-fashioned" ISDS.

It also includes new measures on digital trade, financial services and intellectual property — all improvements the U.S. had sought in the Trans-Pacific Partnership — and officials suggested the new provisions exceed those the U.S. negotiated in the TPP, to which both Canada and Mexico were signatories.

The new agreement also includes a textiles chapter, to limit the use of inputs that don't originate in North America in the apparel trade, and stronger environmental provisions than the original NAFTA.

The Mexicans have agreed to increase the value of their "de minimis" shipment level to $100 US from $50 — shipments under this dollar amount enter Mexico without customs duties or taxes, and with minimal formal entry procedures.

Right now Canada's de minimis level is only $20 Cdn, raising the question of whether Canada now needs to increase its own level to be part of this deal. Such an increase might be welcomed by cross-border shoppers in Canada, but hurt Canadian retailers.

Mexico has also agreed to increase intellectual property protection for biologics drugs. The TPP would have offered eight years of protection, but this deal offers up to 10 years.

Canada has not been part of the marathon talks, now in their fifth week in Washington. But an official suggested Canada would join them Monday afternoon.

Freeland returning from Europe

Foreign Affairs Minister Chrystia Freeland is on government business in Germany, but received updates from both the Americans and the Mexicans throughout the weekend.

"Given the encouraging announcement today of further bilateral progress between the U.S. and Mexico, Minister Freeland will travel to Washington, D.C., tomorrow to continue negotiations," said a spokesperson for her office. "We will only sign a new NAFTA that is good for Canada and good for the middle class."

"Canada's signature is required," Freeland's office emphasized.

Guajardo said Sunday that once Canada returns to the table the three parties would need at least another week of negotiations.

In a tweet prior to Trump's announcement, Pena Nieto said he had spoken to Trudeau to express the importance of Canada rejoining the trilateral talks this week.

Hablé con el Primer Ministro de Canadá, <a href="https://twitter.com/JustinTrudeau?ref_src=twsrc%5Etfw">@JustinTrudeau</a>, sobre el estado de las negociaciones del TLCAN y el avance entre México y EUA. Le expresé la importancia de su reincorporación al proceso, con la finalidad de concluir una negociación trilateral esta misma semana. —@EPN

A release from Trudeau's office Monday confirmed the pair spoke on Sunday and discussed the ongoing negotiations.

U.S. officials downplayed talk of tension between Trudeau and Trump during their briefing.

Officials said that ideally Canada will be included in the agreement notified to Congress by the end of the week. Otherwise, the Trump administration will notify Congress that it has reached an agreement with Mexico, and it is open to Canada joining it in the future.

They said it would be a better agreement with all three countries.