The Trump administration and Mexico have reached a preliminary accord to “terminate” the North American Free Trade Agreement (Nafta).
Mr Trump said he would replace it with a deal more favourable to the United States called “the United States-Mexico Trade Agreement”.
But the Trump administration still needs to negotiate with the third partner in Nafta, Canada, to become part of any new trade accord.
Mexican President Enrique Pena Nieto was on speakerphone as Mr Trump made the announcement in the Oval Office and said he hopes Canada will eventually be incorporated into the deal.
Without Canada, America’s second biggest trading partner, it is unclear whether any new US trade agreement with Mexico would be possible.
Mr Trump said that he will be calling Canadian Prime Minister Justin Trudeau.
“If they’d like to negotiate fairly, we’ll do that,” Mr Trump said.
Mr Trump put pressure on Canada by threatening to tax Canadian auto imports and to leave Canada out of a new regional trade bloc.
Nafta reduced most trade barriers between the three countries. But Mr Trump and other critics say it encouraged US manufacturers to move south of the border to exploit low-wage Mexican labour.
Talks to overhaul the agreement began a year ago and have proved contentious.
US and Mexican negotiators worked over the weekend to narrow their differences. The Office of the US Trade Representative said that Mexico had agreed to ensure that 75% of automotive content would be produced within the trade bloc (up from a current 62.5%) to receive duty-free benefits and that 40% to 45% be made by workers earning at least 16 US dollars an hour.
Adam Austen, a spokesman for Canadian foreign minister Chrystia Freeland, said: “Canada is encouraged by the continued optimism shown by our negotiating partners. Progress between Mexico and the United States is a necessary requirement for any renewed Nafta agreement.”
Mr Austen said the Canadians had been in regular contact with the Nafta negotiators.
“We will only sign a new Nafta that is good for Canada and good for the middle class,” he said, adding that “Canada’s signature is required”.
Republican senator John Cornyn of Texas, hailed the “positive step” but said Canada needs to be party to a final deal.
“A trilateral agreement is the best path forward,” he said, adding that millions of jobs are at stake.