WASHINGTON—The U.S. and Mexico have reached a preliminary trade deal that does not include Canada — and both countries say they are willing to finalize a two-country accord to replace NAFTA if Canada refuses to sign on.

Ratcheting up the pressure on Prime Minister Justin Trudeau, U.S. President Donald Trump said Monday that he will proceed with a “United States-Mexico Trade Agreement” to replace the three-country North American Free Trade Agreement unless Canada starts negotiating “fairly.”

Trump also threatened to impose tariffs on imports of Canadian-made automobiles if Trudeau does not relent, saying “the easiest thing we can do is to tariff their cars coming in.”

Despite the president’s threats, the breakthrough between the U.S. and Mexico appears to increase the chances of a three-country deal. The U.S. and Mexico resolved issues that had slowed the NAFTA negotiations for months.

Perhaps most significantly, the two countries agreed on changes to the rules on how much of a car must be made in North America to qualify for tariff-free treatment. No issue had taken up more time at the top-level bargaining table.

The U.S. also agreed to back off its contentious demand for a “sunset clause” that would terminate the trade agreement in five years if all three countries did not agree to re-endorse it. Instead, the deal between the U.S. and Mexico is scheduled to last for 16 years, with a review in six years that would allow the countries to sign a 16-year extension.

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The Trudeau government, which had called the five-year sunset clause a deal-breaker, did not immediately say how it feels about the proposed 16-year expiry, and several other significant issues between the U.S. and Canada remain unresolved.

“We will only sign a new NAFTA that is good for Canada and good for the middle class. Canada’s signature is required,” Adam Austen, a spokesperson for Foreign Affairs Minister Chrystia Freeland, said in a statement.

Trump has demanded changes to Canada’s protectionist dairy system, which Trudeau has vowed to defend. Canada and the U.S. have additional disagreements over government procurement, intellectual property, cross-border shopping and how to resolve trade disputes.

The U.S. deal with Mexico appears to eliminate or substantially weaken a part of NAFTA that Canada has fought to keep, the “Chapter 19” provision that allows companies to challenge certain tariffs at a special tribunal rather than in the domestic courts of the tariff-imposing countries.

Trump also said he plans to abandon the name NAFTA, which he said has “bad connotations.” Criticizing Canada’s dairy tariffs once more, he said he would be happy to go in any of three directions: make a three-country deal, make two separate two-country deals, or move on without Canada.

“Canada will start negotiations shortly. I’ll be calling the prime minister very soon. And we’ll start negotiation, and if they’d like to negotiate fairly, we’ll do that. You know, they have tariffs of almost 300 per cent on some of our dairy products, and we can’t have that. We’re not going to stand for that,” he said in the Oval Office.

“I think with Canada, frankly, the easiest thing we can do is to tariff their cars coming in. It’s a tremendous amount of money and it’s a very simple negotiation. It could end in one day and we take in a lot of money the following day. But I think we’ll give them a chance to probably have a separate deal. We can have a separate deal or we can put it into this deal.”

Trump added a ticking clock to his threats.

Although his administration’s website called the agreement a “preliminary agreement in principle,” a senior official said they would issue a formal deal notification to Congress by Friday, whether or not Canada was involved. The notification would be intended to start a 90-day countdown to the official signing of the new agreement.

“Ideally, Canada will be in it and we’ll be able to notify that,” the official said. “If Canada’s not in, we’ll notify that we have an agreement with Mexico and we’re open to Canada joining us.”

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Trade experts said it was unclear, at best, whether the administration has the legal authority to submit a deal with Mexico alone after initially telling Congress that it was renegotiating a deal involving Canada.

“At this point I don’t think they can just notify their intention to sign a bilateral deal,” said Bruce Hirsh, a trade consultant and former senior U.S. trade official. “They really would have to renotify and start over.”

But congressional rules are enforced by Congress, and the Republicans who control this Congress have been reluctant to push back against Trump. Simon Lester, associate director of trade policy at the libertarian Cato Institute, said the rules “are vague enough that the Trump administration could try it and see how Congress reacted.”

“If Congress and the president agreed to go ahead, it’s hard to see how it would be challenged, although someone could try,” he said. He added: “I don’t think Congress would go along with a deal that excludes Canada. More likely, the administration is not really expecting a U.S.-Mexico bilateral (deal), and this is just to put pressure on Canada, who I suspect will see through this strategy.”

Sen. Orrin Hatch, chairman of the powerful Senate finance committee, said “a final agreement should include Canada.” Other senior Republicans said the same.

“I think we’re now entering a period of very high-stakes poker that nobody really knows how the game will turn out,” said Robert Fisher, a U.S. negotiator in the original NAFTA talks.

The U.S. and Mexico had been pushing to reach a final agreement fast enough that it could be signed by Mexican President Enrique Pena Nieto, not the incoming left-wing Andres Manuel Lopez Obrador, who takes office in December. That would appear to be impossible if the three countries do not finalize a complete deal this week.

Freeland planned to rejoin the talks Tuesday, cutting short a diplomatic mission to Europe. A senior Canadian government source with direct knowledge of the negotiations said Monday afternoon that the government was still trying to figure out the details of the U.S.-Mexico deal.

“We have to figure out how far, if at all, Mexico has caved on core issues. And if they have, then we’ll understand why the Americans wanted to get them alone in a room for a while,” said the source, who spoke on condition of anonymity. “(That) will go a long way to deciding (Canada’s) reaction. Because this is about the substance of the deal. We’ve said all along, and we will continue to say this, that we would rather have no deal than a bad deal.”

Mexico sent mixed signals about Canada’s inclusion. Pena Nieto emphasized to Trump, in a call Trump broadcast over speakerphone, that he wants a three-way agreement, but Economy Minister Ildefonso Guajardo later said the Mexicans were willing to do a deal with the U.S. alone if necessary.

The deal includes changes designed to wrest some auto manufacturing back to the U.S. from Mexico and overseas. One is an increase in the minimum percentage of a car or light truck’s content that would have to be made in North America to qualify for tariff-free sales. The minimum is 62.5 per cent content from North America in the existing NAFTA. In the new deal, it is 75 per cent content from the U.S. and Mexico alone.

The U.S. said the deal also includes a new requirement that at least 40 per cent of a car’s content would have to be made by workers earning at least $16 (U.S.) per hour, which is much higher than the wage earned by Mexican autoworkers.

The U.S. said the deal would toughen “rules of origin” in other industries, too. And Mexico agreed to increase its threshold for applying duties to goods shipped from outside the country, from the current $50 to $100. Canada is facing U.S. pressure to raise its own threshold from $20.

Trump’s enthusiastic announcement of a trade deal with one country in a three-country negotiation was unusual, though in keeping with his practice of heralding accomplishments that are not yet final.

The president, whose administration also announced a $4.7-billion aid package to farmers hurt by his trade policies, has been eager to demonstrate that his hard-line stands are achieving results. He has come under increasing pressure from Republican lawmakers and from Republican-leaning farmers and business groups to resolve at least some of the trade fights he has started.

Trump has repeatedly expressed irritation with Trudeau in the months since Trump’s decision to impose tariffs on imports of Canadian steel and aluminum. The president suggested this month that he was intentionally keeping Canada away from the bargaining table.

Canadian officials had previously said they were pleased by the U.S. negotiations with Mexico, saying a NAFTA deal could only be finalized if those two countries patched up their differences. It is not clear whether Trudeau’s government knew that Mexico and the U.S. were planning to announce their own trade agreement.

With files from Alex Boutilier

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