The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Pranav Kiran

TORONTO, Jan 27 (Reuters Breakingviews) - The academic theory of negotiation holds that rational actors come to the table once they understand each other. Theory has a habit of crumbling upon contact with Donald Trump, however. The U.S. president threatened 100% tariffs on Canada over its northern neighbor’s rapprochement with China. He also has called a trade pact binding the two countries, and Mexico, "irrelevant," but all three would suffer real pain from a blowup. Kludges make more sense.

Aumann’s agreement theorem rests on two counterparties aligning on previous beliefs. In this case, the importance of North American commerce is a reasonable point of consensus. The USMCA signed into law in 2020 governs $1.9 trillion of trade among economies that account for almost a third of worldwide GDP. Its design, which enables annual review from 2026 or extension for 16 years, keeps forcing the question. The logic of repeated games applies: incentives, punishment and cooperation earned each cycle.

It's a perilous dynamic with Trump. He blasted Canada’s recent agreement to allow limited imports of Chinese electric vehicles. This would not even be a full free trade deal, where Ottawa is bound by USMCA procedures. Nevertheless, Prime Minister Mark Carney’s blistering indictment of the American-led order at the World Economic Forum last week probably soured Washington’s mood.

If each participant in negotiations expects long-run gains, they should eventually reach a deal, at least based on the textbook. It's clearly the case for Canada and Mexico, whose exports to the United States account for about 28% and 18% of their respective economies.

Such flows are hardly existential for Uncle Sam, though. Dependence is rife in politically and economically significant oil and autos. Walking away from the USMCA risks increasing effective tariff rates beyond 20%, according to RBC Economics. It would be a difficult pill to swallow with midterm U.S. elections approaching.

A cynical U.S. posture could target long-term onshoring of jobs in steel, aluminum and cars with tariffs. Indeed, RBC analysts foresee such a “zombie USMCA.” For now, though, less painful concessions would be welcome.

Mexico has already offered extraordinary cooperation on drug‑crime issues and Canada can offer tokens, too. U.S. agricultural interests were paramount in the first round of talks; further dairy-market tweaks seem feasible. Similarly, Carney could participate in the “golden dome” missile defense program, Trump’s latest national-security fixation. Combined, they would help turn theory into practice.

CONTEXT NEWS

U.S. President Donald Trump said on January 24 that he would impose a 100% tariff on Canada if it follows through on a trade deal with China and warned Canadian Prime Minister Mark Carney that a deal would endanger his country.

Trump on January 13 said the United States-Mexico-Canada trade agreement is not relevant for the U.S. but Canada wants it, as he pushed for companies to bring manufacturing back to American soil.

(Editing by Jonathan Guilford and Jeffrey Goldfarb; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on KIRAN/pranavkiran.t@thomsonreuters.com))