President Donald Trump on Monday trumpeted an agreement with Mexico on trade that he believes rights some of the wrongs of the North American Free Trade Agreement, or NAFTA, which Mr. Trump has called the worst deal in history. The agreement, which excludes Canada, is part of Mr. Trump’s plan to scrap the North American trade pact in favor of what he considers a better deal.Noticeably absent was NAFTA’s third party, Canada, without whose participation the bi-lateral trade back with Mexico may crumble.

Hurdles still await a final deal, including a skeptical Congress, which must approve the new deal; opposition from Mexico’s newly elected President; and, the question of whether the Trump Administration can cajole Ottawa into joining the new pact.

The agreement on Monday was not final, only an agreement to resolve some of the issues in NAFTA negotiations between the U.S. and Mexico. The U.S. Trade Representative’s Office called it “a preliminary agreement in principle … to update … NAFTA with modern provisions representing a 21st century.”

On Friday, President Trump will formally transmit to Congress his intention to sign a new trade pact, which he says he will rename the U.S. Mexico Trade Agreement. That will start a 90-day clock before Congress can act. The new agreement struck with outgoing Mexican President Enrique Peña Nieto is focused substantially on auto imports, modifications to textile rules, and updates to the agreement to reflect the digital economy.

The Question of Canada

Trade talks with Canada have stalled for months. U.S. trade negotiators hope to persuade Canada to join the agreement. U.S. trade negotiators said that their strategy was to strike a deal with Mexico first and pressure Canada to follow suit. But, it’s unclear whether Canada will accept the deal under the proposed terms and political pressure on Prime Minister Justin Trudeau to take a tough line on trade with make a breakthrough challenging.

“We will only sign a new Nafta that is good for Canada and good for the middle class,” Adam Austen, spokesman for Canadian Foreign Minister Chrystia Freeland said, according to the New York Times. “Canada’s signature is required.” Ms. Freedland plans to travel to Washington on Tuesday to continue negotiations.

Mr. Peña Nieto‘s successor, Andres Manuel Lopez Obrador, is considerably less enthusiastic about the agreement and campaigned against Mr. Trump. Meaning that the deal could face headwinds in Mexico if an agreement isn’t approved by the time Mr. Peña Nieto leaves office Dec. 1. That effectively gives the Trump administration five days to bring Canada on board before transmitting a deal to Congress that can be approved by the end of Mr.Peña Nieto’s term.

Mr. Trump said on Monday that he is considering levying tariffs on Canadian auto imports in a bid to encourage America’s northern neighbor to join the pact with Mexico. However, if that doesn’t work, Mr. Trump’s has signaled a willingness to move forward without Canada, scrapping NAFTA for a bi-lateral trade back with just Mexico.

“Ideally we’ll have the Canadians involved,” Robert Lighthizer, the United States trade representative said Monday. “If we don’t have Canada involved, we will notify that we have a bilateral agreement that Canada is welcome to join.” But, an agreement without Canada could face legal challenges as well as opposition from Congress and industry groups.

“A final agreement should include Canada” in order to ensure that NAFTA continues to benefit American businesses and families, said Senate Finance Committee Chairman Orrin G. Hatch (R-Utah). Other key lawmakers have also expressed opposition to any agreement without Canada and stressed that any revised deal must be approved by Congress.

“Nafta is a trilateral agreement. It requires legislation and a change to Nafta requires legislation,” said Senator Patrick Toomey, a Republican from Pennsylvania. “I’ve told them any change has to go through Congress. There is not necessarily complete agreement about that.”

Excluding Canada would mean substantial disruptions to manufacturing supply chains that rely on the free-movement of component parts and goods between all three countries, says the nation’s leading manufacturing trade group.

“Because of the massive amount of movement of goods between the three countries and the integration of operations which make manufacturing in our country more competitive, it is imperative that a trilateral agreement be inked,” Jay Timmons, Head of the National Association of Manufacturers, said in a statement.

NAFTA Tweaked

The deal with Mexico basically keeps the existing NAFTA deal with some modifications. The agreement will sunset after 16 years, and will be reviewed every six years.

It will require 75% of automobile content to be manufactured in the U.S., up from 62.5% currently and also require that 40% to 45% of autos be manufactured with higher-wage labor making $16 or more per hour, a key concession to organized labor, which has been among NAFTA’s loudest critics. That could encourage additional auto manufacturing jobs in the U.S.

The deal will also restrict the use of textiles outside the trade agreement zone, in a bid to disincentivize the use of Chinese textiles in favor of those sourced from North America.

However, no agreement was reached to resolve the steel and aluminum tariffs Trump imposed earlier this year. “That’s the issue we still have to deal with. It’s not dealt with,” Lighthizer said.

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