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By David Ljunggren
LONDON, Ontario (Reuters) - Canada is increasingly convinced that President Donald Trump will soon announce the United States intends to pull out of NAFTA, two government sources said on Wednesday, sending the Canadian and Mexican currencies lower and hurting stocks.
The comments cast further doubt on prospects for talks to modernize the trilateral North American Free Trade Agreement (NAFTA), which Trump has repeatedly threatened to abandon unless major changes are made.
Negotiators are due to meet in Montreal this month for the sixth of seven planned rounds of talks with major differences remaining between the United States on one side and Mexico and Canada on the other. The talks are scheduled to wrap up by the end of March.
"The government is increasingly sure about this ... it is now planning for Trump to announce a withdrawal," said one of the sources, who asked to remain anonymous because of the sensitivity of the situation.
Trump has long called the 1994 treaty a bad deal that hurts American workers. His negotiating team has set proposals that have alarmed their Canadian and Mexican counterparts.
Among the most divisive are plans to establish rules of origin for NAFTA goods that would set minimum levels of U.S. content for autos, a sunset clause that would terminate the trade deal if it is not renegotiated every five years, and ending the so-called Chapter 19 dispute mechanism.
The source said Canadian ministers felt a withdrawal could be designed to show Trump's base that he was keeping his promises and also to put pressure on the negotiators.
Separately, a U.S. source close to the White House quoted Trump as saying "I want out" as the talks drag on with little sign of progress.
The Canadian dollar fell to its lowest this year against the greenback as worries about the outlook for NAFTA tempered bets for a Canadian interest rate hike next week. Canadian government bond prices rose across the yield curve and railway, pipeline and other trade-sensitive stocks weighed on the country's main index.
Mexico's currency also weakened, before trimming losses, while the S&P/BM IPC stock index <.MXX> was down about 1.85 percent.
Canadian officials say if Trump does announce a U.S. withdrawal, it could be a negotiating tactic designed to win concessions. They also express doubt whether the U.S. Congress would approve such a move.
Given the highly integrated nature of the North American economy, NAFTA's collapse would have major economic implications for all three countries.
"Withdrawing from NAFTA would be a grave mistake," Tom Donohue said in his annual address on the state of American business. "The American economy has taken several big steps forward with regulatory relief and tax reform, and the administration deserves lots of credit. But a wrong move on NAFTA would send us five steps back."
Wall Street's major stock indexes ended lower on Wednesday, partly due to worries about the U.S. exiting NAFTA. [.N]
General Motors Co
"We have always said that this is a possibility," a Mexican government source with knowledge of the talks told Reuters, referring to the prospect of a U.S. withdrawal.
The news broke as the cabinet of Prime Minister Justin Trudeau began gathering in the southwestern Ontario town of London ahead of a scheduled two-day meeting where NAFTA is one of the items on the agenda.
Canada launched a wide-ranging trade complaint against the United States, the World Trade Organization said on Wednesday, in a dispute that Washington said would damage Canada's own interests and play into China's hands.