By Promit Mukherjee, Emily Green and David Lawder
OTTAWA/MEXICO CITY, July 22 (Reuters) – Separate U.S. negotiating tracks for Canada and Mexico are testing a trilateral free trade zone that has defined North America’s economy for 32 years, with the U.S. potentially forcing concessions on Canada that Mexico agrees to in its more advanced talks.
U.S. President Donald Trump’s decision not to extend the United States-Mexico-Canada Agreement for another 16 years on July 1 leaves the trade deal in force, but requires annual reviews until all three countries either agree on its renewal, or it expires in 2036.
Trump ratcheted up pressure on Canada on Monday by imposing 50% tariffs on a wide range of goods, with his administration saying it was responding to Canadian policies on autos and dairy as well as provincial alcohol bans. The tariffs take effect August 19.
The nations will continue to engage with each other bilaterally, according to people from all three countries familiar with the talks. They expressed hope that agreements struck between two countries could be brought together within a trilateral framework.
The economic stakes are high for Canada and Mexico, which send most of their exports to the U.S., and for automakers and other companies whose production networks cross North American borders several times.
DIFFERENT TRADE REALITIES
The difficulty will be keeping the separate processes aligned to each country’s priorities when Canada and Mexico have different trade realities and political constraints, and given strained relations between Trump and Canadian Prime Minister Mark Carney, trade experts noted.
Carney said on Tuesday he and Trump had agreed to intensify talks.
“The challenge is to keep those two processes moving in the same direction so that they feed into the trilateral mindset that Canada and Mexico have – and that the U.S. has expressed doubts about,” said Juan Carlos Baker, a former senior Mexican trade negotiator.
Mexico and Canada had wanted to extend the trilateral pact, but agreed to bilateral talks with Washington.
The three economies conduct about $1.6 trillion in annual goods trade under the agreement, which has also shielded both Canada and Mexico from many of Trump’s global tariffs. Trump negotiated the agreement known as USMCA during his first term, replacing the 1994 North American Free Trade Agreement.
Mexico is starting its third round of formal bilateral talks this week. Canada has had no formal talks, but its minister in charge of U.S. trade, Dominic LeBlanc, has phone calls and occasional meetings in Washington with U.S. Trade Representative Jamieson Greer.
Canada hopes the U.S. will remove steel and aluminum tariffs in any agreement and avoid the new tariffs taking effect in August.
A Mexican official familiar with the negotiations said U.S.-Mexico talks were about six months more advanced than informal U.S.-Canada discussions and could give Mexico greater investment certainty and potentially better terms in areas such as steel tariffs.
Mexican and U.S. officials broadly agree on several problems they want to address, the official said, including declining U.S. manufacturing employment, growing use of Asian components in North American vehicles and transshipment of goods from outside the region.
“Mexico and the U.S. are in agreement about the goals,” the official said. “What we are discussing is how to reach them.”
Mexico has already taken steps to address some U.S. complaints, including imposing tariffs on non-free-trade partners, tightening customs rules and addressing intellectual property concerns.
POLITICS SHAPE STRATEGY
Mexico has been more accommodating than Canada, people familiar with both countries’ strategies said. Carney on Tuesday suggested Canadian provinces wait to put U.S. alcohol back on shelves until a broader trade agreement is reached.
Mexican President Claudia Sheinbaum has made concessions that she can frame as advancing Mexico’s priorities, including tighter border security, reduced fentanyl trafficking and greater scrutiny of Chinese investment.
Carney faces a different calculus. He won the election last year promising to stand up to Trump.
“She has more degrees of freedom to operate than Prime Minister Carney does,” Baker said of Sheinbaum.
Canadian officials dispute the idea that Canada is behind.
Gabriel Brunet, spokesperson for LeBlanc, said Canada is ready to expedite talks on the trade pact.
“To that end, Canada has put forward proposals that are fair, balanced, and good for the broader North American economy,” he added.
Mexico’s Economy Ministry declined to comment. The USTR did not respond to a request for comment.
WASHINGTON’S LEVERAGE
The core risk for Canada and Mexico is that bilateral talks could become the blueprint that one country must either accept or challenge and delay a trilateral deal.
Neither government is expected to ask the other to hold back from reaching an advantageous bilateral deal.
Mexico “will do what’s best for Mexico,” but it also wants to keep the USMCA trilateral and would resist proposals that explicitly broke apart the agreement, Baker said.
Carney has also sought to improve relations with Mexico.
The Mexican official said attacking the trade pact could remain politically useful to Trump among voters who blame trade agreements for manufacturing job losses, ahead of U.S. midterm elections in November.
Canadian negotiators must use the 30-day window before the new tariffs take effect to make rapid progress, said Matthew Holmes, executive vice president at the Canadian Chamber of Commerce, a lobby group that advises the government on U.S. trade relations.
Canada has signaled it will not accept unfavorable terms merely to close the talks quickly — and the 10-year review timeframe could allow Carney to negotiate with a different U.S. president.
“What I’ve heard from the prime minister and other members of the negotiation team is, ‘We want a good deal for Canada, not a fast deal for Canada’,” Holmes said.
(Reporting by Promit Mukherjee, Emily Green and David Lawder; Editing by Caroline Stauffer and Rod Nickel)
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