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(L-R) Mexican Secretary of Economy Ildefonso Guajardo Villarreal, U.S. Trade Rep Robert Lighthizer and Canadian Foreign Affairs Minister Chrystia Freeland leave after a NAFTA event in Washington, U.S., Oct.17, 2017.YURI GRIPAS/Reuters

Canada will give no ground on the Trump administration's protectionist demands when the renegotiation of the North American free-trade agreement resumes this week in Mexico City, but will try to quickly reach deals on easier issues in hopes of showing goodwill, sources familiar with Ottawa's strategy said.

The Trudeau government is well aware that taking a hard line on Washington's "poison pill" proposals risks blowing up the talks, said the sources, who spoke on condition of anonymity to describe confidential discussions. But Ottawa believes failing to reach a deal on NAFTA is better than agreeing to a bad one.

Mexico is in a similar place. One source characterized Enrique Pena Nieto's administration as being in the fifth stage of grief: acceptance that there may be no avoiding the end of the deal.

NAFTA, Trump and Canada: A guide to the trade file and what it could mean for you

Outside the talks, Canadian officials will continue their long-running outreach campaign to NAFTA-friendly U.S. businesses and politicians, in hopes of both cranking up domestic pressure on the White House to back off its toughest demands and mobilize Congress to oppose President Donald Trump if he tries to pull the United States out of the pact, the sources said.

No matter how badly talks go, the sources said, Canada is determined to stay at the table and force the Trump administration to decide whether it will pull the plug. One person said that if negotiations become permanently deadlocked – or Mr. Trump ends up in a standoff with Congress on whether he has the unilateral power to pull the United States out of the pact – this would not be the worst outcome for Canada as the current deal would simply remain in place.

Now, a pact governing $1.3-trillion in annual trade hangs in the balance as Canada braces for a bargaining table showdown with the world's most powerful country and sets a collision course with its volatile President.

"The Canadian government has shown that it is tough at the negotiating table, at the same time showing a willingness to continue with the process. But it's been faced with aggressive and unyielding U.S. demands," said Lawrence Herman, a veteran Toronto-based trade lawyer. "We'll know what the likelihood is of these negotiations going further in the Mexican round. The prognosis is not good."

In Ottawa's view, Washington's main protectionist demands are so far beyond the pale of any modern free-trade agreement that – at least for now – negotiators must continue to hold a hard line against them all, according to sources with knowledge of the Canadian thinking. These include proposals to require that vehicles made in Canada and Mexico contain 50-per-cent U.S. content; gut or eliminate the dispute-resolution mechanisms in Chapters 11, 19 and 20; severely limit the amount of U.S. public procurement Canadian and Mexican firms can bid on; and add a sunset clause that would kill NAFTA in five years unless all three countries agreed to keep it.

Canada does, however, believe it can build negotiating momentum by swiftly reaching agreement on less contentious issues, such as slashing red tape at the border and facilitating international e-commerce, the sources said. Some negotiators see a third category in between the non-negotiable proposals and the easy ones: matters that will be tough but that Ottawa might be willing to deal on.

These include raising Canada's $20 cap on duty-free online purchases, tightening intellectual-property protections and granting more access to Canada's protected dairy market. It will, however, be tough for the Canadians to make any compromises on such matters while the first set of protectionist U.S. demands remains on the table, sources said.

The Trudeau government has for weeks been fully prepared for the United States to tear up NAFTA. Sources with knowledge of Ottawa's thinking said some officials were bracing for the Trump administration to trigger the Article 2205 withdrawal procedure during the fourth round of talks last month near Washington. Instead Robert Lighthizer, Mr. Trump's trade czar, surprised Canada when he opened an Oct. 17 meeting with Foreign Minister Chrystia Freeland at his office by announcing he wanted to scrap the U.S.-imposed year-end deadline for a deal, extend talks to March and take more time between negotiating rounds.

Meanwhile, Ottawa is continuing its push to get free-trade-friendly American business and politicians to knock the Trump administration off its hardline positions. The idea is to use this pressure strategically, said people with knowledge of Canada's plans. Rather than have U.S. companies bombard the White House all at once, the plan is to line up American allies and keep them on standby, ready to jump in at the right moment. When negotiators are discussing procurement at the bargaining table, for instance, that would be the time for American firms with Canadian government contracts to launch a lobbying blitz.

The U.S. business community has been making a full-court press, trying to show the White House that its protectionist ambitions would hurt American industry. But the administration does not seem to be getting this message.

"I don't know that we've heard any particular acknowledgment of the arguments that we've made at a political level," said Christine Bliss, president of the Coalition of Services Industries, which represents companies from high-tech to insurance to finance. "Where is this going and what's the strategy? We honestly don't know."

Ms. Bliss said a vast swath of the U.S. service industry would be hurt if markets between the three countries closed up. American firms, for instance, provide insurance for three-quarters of Mexican government employees, she said. But she said the administration's consistent response in meetings is that the White House is mostly focused on the manufacturing sector, which it believes has suffered because of NAFTA.

Even in manufacturing, however, American firms are alarmed at what Mr. Trump is trying to do. Several U.S. auto-industry trade associations last month joined together for what they said was the first time in their history to defend NAFTA. Groups representing the Detroit Three auto makers and their global rivals said seven million auto jobs are at risk if the deal is terminated. The group has formed a coalition called Driving American Jobs, with a website that provided a form letter for members to download and send to members of Congress.

"When you examine the data, there's no question that NAFTA has helped advance the global competitiveness of the U.S. auto industry," Matt Blunt, president of the American Automotive Policy Council, said in a statement. In a presentation in Washington last week he warned that, without NAFTA, tariff and other costs would be equivalent to "a $10-billion tax" on U.S. consumers buying cars.

The President's own congressional caucus could also prove a counterweight to the White House. Unlike Mr. Trump, most of the Republican Party hews to a traditional pro-business line on free trade.

During Prime Minister Justin Trudeau's meeting last month with the House ways and means committee, not a single member advocated tearing up NAFTA, said one person who was in the room. Members of the committee, which has jurisdiction over trade, suggested various ways to improve the deal, but all were supportive of largely keeping the open market in place, the source said.

Republican Senator Pat Roberts of Kansas last month said he has personally lobbied Mr. Trump on the benefits of free trade on three occasions. "We are fighting a pervasive view that our economy has not benefited from NAFTA and that is simply not right. We are coming to a crossroads," Mr. Roberts said in a speech at the U.S. Chamber of Commerce. "Saddle up."

Mr. Roberts said "it might be an option" for Congress to craft legislation that would restrain Mr. Trump from pulling the United States out of NAFTA, but he still hoped U.S. business could talk him down from the ledge: "Let's hope we don't get to that."

Given the chasm between the Trump administration's demands on one side and the Canadian, Mexican and U.S. industry position on the other, some observers said it was hard to imagine how the talks could come back from the brink.

Flavio Volpe, president of the Automotive Parts Manufacturers Association of Canada, said the U.S. desire to extend the talks is at odds with its stringent demands. "If you put that many poison pills on the table, it says to me that you wanted the result of that to be people leaving the table," Mr. Volpe said. "When they don't leave the table, you've got a major rethink."

Robert Holleyman, a high-ranking trade official in the Obama administration, said Mr. Lighthizer seems to be serious about getting a deal, but it's an open question whether he can find an agreement everyone – from Canada and Mexico to Mr. Trump – can get behind.

"How the United States squares its differences is difficult to see," he said. "We are in a time of significant uncertainty and potential peril if we cannot find a way through."

Follow Adrian Morrow on Twitter: @adrianmorrowOpens in a new window
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