Investors are betting President Donald Trump’s trade threats against Canada will fizzle out. There’s a few reasons why they might.

Canadian stocks and the dollar, known as the loonie, extended gains Monday on news of the U.S.-Mexican agreement, shrugging off Trump’s threats that Canada might be frozen out and instead face auto tariffs. Shares of Canadian auto parts makers like Magna International Inc. and Linamar Corp. were among those to surge.

The U.S.-Mexico partial deal puts new pressure on Canada, but the country is not without leverage. One reason is U.S. trade law, which likely lays out an easier path for approving a three-nation trade deal. Another is Congress, with key figures saying Monday that Canada — the top buyer of U.S. exports — should be included. Another is urgency: Mexico and the U.S. are in more of a rush, analysts say.

All told, Canada undeniably is under pressure to make concessions and get a deal — but Trump’s path to barge ahead with just Mexico is not a clear one, either. Some analysts said Monday’s deal was, on balance, good for Canada. Canadian Foreign Minister Chrystia Freeland will be in Washington for talks Tuesday.

“A lot of this is optics versus procedure — this administration could probably pull off something on the optics, but I don’t think they’re going to get into congressional buy-in on the procedure” of freezing out Canada, said Welles Orr, an assistant U.S. Trade Representative under George H. W. Bush who is now a senior trade adviser at law firm Miller & Chevalier. “Congress, I can assure you, has been making it very clear to the administration to not frankly screw up” the process for reaching trade deals.


Within the U.S., NAFTA talks have proceeded under what’s known as Trade Promotion Authority, which grants trade powers to the president. Under it, to sign something before Dec. 1, when Mexico’s president-elect is due to take office, U.S. Trade Representative Robert Lighthizer said he hopes to give notice of a deal by the end of this week.

But, critically, there’s disagreement on whether he can do that without Canada. Lighthizer argued he could — either give notice “that leaves open the possibility of Canada joining,” or proceed without Canada if the country “elects not to join,” he said.

Others weren’t so sure. Pat Toomey, a Republican senator from Pennsylvania, said it was his understanding that a deal without Canada couldn’t proceed under TPA rules; instead, it would need more votes to pass. John Cornyn, a Republican senator from Texas, said “a trilateral agreement is the best path forward” and that “we need to ensure the final agreement brings Canada in to the fold and has bipartisan support.” Senate Finance Committee Chairman Orrin Hatch, a Republican from Utah, said “a final agreement should include Canada.”

Analysts said it won’t be easy to simply shut the door on the Canadians.

“There will be elements of this understanding which I think Congress will seriously question, as will the Canadians, so I think we’re still a fair distance away from a new NAFTA 2.0,” said Gary Hufbauer, senior fellow and trade specialist at the Peterson Institute for International Economics. Rona Ambrose, a former federal Conservative leader in Canada, told BNN Bloomberg television that the U.S.-Mexico deal “is quite positive for the Canadian negotiation with the United States as we move forward.”

That doesn’t leave Canada off the hook. The window for a deal is “now, it’s this week, so we’ll see if Canada wants to come in and finish the deal,” Maryscott Greenwood, chief executive officer of the Canadian American Business Council, told the network.

A deal is possible this week if both sides make concessions, a Canadian government official said Monday, speaking on condition of anonymity. Progress between the U.S. and Mexico is a good thing but several issues still need to be worked out, the official said, declining to specify them.

The outstanding issues, however, are well-known. One are the anti-dumping panels allowed under the current NAFTA, known as Chapter 19 panels. Canada wants to keep them and Lighthizer wants to kill them. “That provision will not exist,” he said Monday, but it was historically a dealbreaker for Canada.

Another issue is dairy — not part of NAFTA right now, but Trump has fixated on destroying Canada’s system of production quotas and tariffs. Canadian Prime Minister Justin Trudeau has not ruled out giving up a sliver of the market, as Canada has done in previous trade deals.

Trudeau spoke with Trump Monday, with the prime minister’s office describing it as a “constructive” call. Trudeau looks forward to talks this week “with a view to a successful conclusion of negotiations.”

All told, the deal is not necessarily fatal for the country’s prospects of remaining in the trade pact, whatever its new name.

“Our base-case scenario remains that Canada will ultimately be included in any new deal,” Eric Lascelles, chief economist at RBC Global Asset Management, said in a note to clients. Concessions are needed, but Canada “can more likely than not find a way to get a deal done.”

With assistance from Eric Martin, Greg Quinn and Steven T. Dennis.

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