U.S. and Mexico strike preliminary accord on NAFTA, but will Canada agree?

, Kate Linthicum and Patrick J. McDonnell

Aug. 27, 2018 5:30 PM PT

Reporting from Washington — President Trump is within reach of notching his first significant win on trade, announcing Monday that his administration has agreed with Mexico on a revamped North American Free Trade Agreement. But a major obstacle stands in the way.

Canada, the third party in Trump’s bid to overhaul the far-reaching, 24-year-old pact, has not been at the bargaining table in recent weeks. And while Canadian officials are expected to rejoin the negotiations Tuesday in Washington, the United States and Canada have significant issues still to resolve.

On Monday, Trump ratcheted up the pressure on Canada by essentially issuing an ultimatum: If Ottawa doesn’t accede to his demands — Trump mentioned Canada’s protected dairy market in particular — the president said he would go ahead and seal a bilateral agreement with Mexico, excluding Canada.

For extra measure, the president added that if Canada didn’t play ball with him, he would hit the country with taxes on auto imports. “It will either be a tariff on cars, or it will be a negotiated deal,” Trump said. “And frankly, a tariff on cars is a much easier way to go. But perhaps the other would be much better for Canada.”

It wasn’t entirely clear that Mexico would agree to a new trade deal solely with the United States. And the prospect of a U.S.-Mexico trade pact without Canada is fraught with legal, political and economic risks, and uncertainties for all three countries.

In Ottawa, Canadian officials sought to put their best face on the situation. Adam Austen, a spokesman for Canada’s minister of foreign affairs, Chrystia Freeland, said in a statement: “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.” But he added: “We will only sign a new NAFTA that is good for Canada and good for the middle class. Canada’s signature is required.”

U.S.-Canada relations have been strained since Trump refused to exempt Canada, one of the United States’ oldest and closest allies, from hefty tariffs on steel and aluminum. Trump levied the duties on the grounds that those imports threatened U.S. national security, which Canada considered an affront.

The pressure on Canada is all the more intense because the Trump administration and Mexico want to notify the U.S. Congress of a three-way deal by the end of this week — to satisfy a 90-day procedural requirement that would allow for Mexico’s parliament to ratify a revamped NAFTA before its new president takes office Dec. 1.

Given that tight time frame and the extent of the outstanding issues, it will be “very, very difficult” to come to an understanding in a few days, said Eric Miller, a former Canadian government official and committee member advising Canadian Prime Minister Justin Trudeau’s administration on trade.

“I don’t see how the Trudeau government just bends over to the will of the Trump administration and survives politically,” said Miller, who is president of Rideau Potomac Strategy Group. “They may be willing to call Trump’s bluff when he says, ‘Take it or leave it.’ ”

Canada and Mexico began renegotiating NAFTA in August of last year at the behest of Trump, who throughout his 2016 presidential campaign blasted the pact as a disaster for American manufacturing and jobs.

Trump’s top trade official, U.S. Trade Representative Robert Lighthizer, on Monday called the agreement with Mexico “absolutely terrific.”

In a conference call with reporters, he said, “I think it is fair to say we’ll do a rebalancing. I think it’s going to lead to more jobs for American workers and farmers, but also more jobs for workers and farmers from Mexico.”

One of the most significant changes in the deal would raise the percentage of a car’s content that must be produced in North America — to 75% from 62.5% — and adopt a new rule that would link auto production to wages. The aim of the new auto rules is to boost investment and production in North America and the United States. But without disclosure of the details, Rep. Sandy Levin (D-Mich.) said, “We don’t know how it would work out and whether it would have an impact on jobs or wages in the U.S.”

The U.S. initially wanted an automatic expiration of NAFTA after five years unless all three wanted to renew. Canada and Mexico opposed, saying it would create uncertainty and hamper investments. The U.S.-Mexico deal specifies a 16-year term for the agreement with a review every six years that could trigger renegotiations.

Lighthizer said he hoped that Canada would join in now, but a senior administration official on the call said that “if Canada is not in, then we’ll notify that we have an agreement with Mexico and that we’re open to Canada joining it.”

Many lawmakers and business groups are demanding all three nations remain in the pact. “It is imperative that a trilateral agreement be inked,” said Jay Timmons, president of the National Assn. of Manufacturers, noting the integration and the massive amounts of goods moving between the three nations.

The preliminary agreement with Mexico was struck after several weeks of talks and a marathon session over the weekend in Washington.

Trump announced the deal in the White House. In front of reporters, he called Mexico’s outgoing president, Enrique Peña Nieto, to congratulate him on the agreement. Trump, putting Peña Nieto on a speaker phone in the Oval Office, said the deal “makes it a much more fair bill.” He suggested renaming NAFTA as the U.S.-Mexico Trade Agreement, notably excluding Canada.

Though Trump characterized the accord as a bilateral deal that will proceed with or without Canada, Peña Nieto said repeatedly he hoped and expected Canada would come on board. Peña Nieto said on Twitter that he had spoken with Trudeau and had “expressed the importance of [Canada] re-joining the process, with the goal of concluding a trilateral negotiation this week.”

Luis Videgaray, Mexico’s foreign minister, said at a news conference at the Mexican Embassy in Washington that although Mexico wants Canada incorporated into the talks, the terms of the U.S.-Mexico agreement would stand if for some reason Canada and the U.S. can’t come to terms.

At the same time, he said: “We want a trilateral agreement, we want Canada to be part of this agreement. We will put all our effort 24/7 for Canada to be part of the agreement.” Videgaray said that if Canada has not joined by Friday, it still would be allowed to do so later, suggesting that there may be some wiggle room in meeting the procedural requirements before the Dec. 1 signing deadline.

Experts said Mexico might be reluctant to move ahead without Canada. “There definitely seems to be a little bit of a gap in terms of how the two countries are talking about this,” said Christopher Wilson, an economist at the Washington-based Wilson Center think tank.

Still, Wilson described the preliminary accord as “important progress.”

He said both countries appeared to have made significant concessions. Most notable was Mexico’s agreement that vehicles made by carmakers benefiting from NAFTA include a higher percentage of raw materials originating in North America. “The auto rules of origin was a stumbling block, and they’ve found a way to agree on that,” Wilson said.

Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, said the preliminary agreement is more a victory for Trump because it allows him to declare a win on trade ahead of the November midterm elections. “It gives Trump the headlines he wants,” Hufbauer said.

The United States still has significant unresolved issues with Canada, including Trump’s insistence that Canada open up its dairy market. Complaining about Canada’s big tariffs on dairy imports, Trump said, “We’re not going to stand for that.”

Canadian officials, however, have pointed to similarly strong U.S. protections for its sugar market. Overall, the U.S. had a trade surplus with Canada in 2017, including goods and services. With Mexico, the U.S. posted a trade deficit of $64 billion last year.

“It will be difficult, but not impossible, to clear all of these hurdles in a week’s time,” said Daniel Ujczo, a trade lawyer at Dickinson Wright who has been closely monitoring the talks. “It is likely that the three NAFTA parties will reach a ‘handshake’ this week that will start the 90-day procedural countdown required before signing the deal.”

With various procedural requirements, analysts said the earliest U.S. lawmakers could vote on the deal would be next year, when a new Congress is seated.

U.S. lawmakers reacted cautiously. Sen. Sherrod Brown (D-Ohio), whom Lighthizer has consulted regularly, said that he needed to review the text of the agreement with Mexico. “We still have a lot of work to do to bring Canada on board and write the legislation needed to make any deal a reality,” Brown said in a statement.

But the agreement with Mexico was a welcome development after a year of difficult negotiations and repeated threats from Trump to withdraw from the pact. Stocks rose on news of the agreement.

Lee reported from Washington; Linthicum and McDonnell reported from Mexico City. Cecilia Sanchez of The Times’ Mexico City bureau contributed to this report.

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UPDATES:

5:30 p.m.: This article was updated with more reaction and analysis.

11:45 a.m.: This article was updated with comments from Mexican and Canadian officials.

10:10 a.m.: This article was updated with Trump’s comments.

This article was originally published at 7 a.m.