The trade pact that binds North America is quietly under the most strain since its inception, risking a break in one of the world's most integrated manufacturing economies.

Why it matters: A joint review of the signature Trump 1.0 trade agreement — the U.S.-Mexico-Canada Agreement, itself an update of the North American Free Trade Agreement — was expected to be a technical exercise. Instead, a war of words between U.S. and Canadian officials is pushing the deal to a potential breaking point.

State of play: Trade experts and lawyers can't rule out the possibility that the trilateral agreement implodes.

• That would have far-ranging economic effects: Companies have spent decades investing in the North American supply chains that help produce more affordable cars, supply crude oil to Midwest refineries and equip West Coast homes with natural gas.
• A major reason the trade war has caused less damage than some economists forecast is that much of the U.S. trade is protected under USMCA.

Driving the news: The mandatory joint review of the USMCA — which requires the three countries to decide by July 1 whether to extend the agreement for another 16 years — has taken an adversarial turn, exposing a deepening rift between Washington, D.C., and Ottawa.

• One core dispute: Washington wants to prevent China from using Mexico or Canada as a back door into the North American market — a particular flashpoint for Canada, which recently struck a limited tariff truce with Beijing.
• That's on top of other tensions brewing in the background, including how most Canadian provinces have banned U.S. wine and liquor from their shelves in response to President Trump's earlier tariffs.

What they're saying: "There are two countries that have retaliated economically against the United States in the past year: the People's Republic of China and Canada," Trump's top trade official, Jamieson Greer, told lawmakers last week.

The intrigue: So far, negotiations are happening on a bilateral basis. U.S. officials have met with Mexico's top economic officials, leaving Canada to the side as tensions flare — raising the prospect of separate trade deals with America's neighbors to the north and south.

• "We have issues with Mexico we're still working through, but Mexico intends on coming to an agreement with us," Deputy U.S. Trade Representative Rick Switzer said last week at an event organized by the Council on Foreign Relations.
• "The grown-ups are in the room talking because there's a grown-up in leadership there. And I would argue there's not a grown-up in Canada in charge," Switzer said, referring to Mark Carney, a widely respected former central banker who became the nation's prime minister last year.

The big picture: USMCA has shielded the U.S. from tariff pain by exempting a bulk of Mexican and Canadian goods from the Trump administration's high levies.

• NAFTA stitched the three economies into a single production system in the early 1990s. Trump replaced NAFTA with USMCA in 2020, though the architecture stayed largely intact. The question is whether it survives his second term.
• In a note earlier this month, Jefferies put the odds of a renewal at just 10%, with a 75% probability that the agreement slides into a decade of annual reviews — a prolonged limbo that "lowers conviction of businesses and investors," the firm's analysts noted.
• Jefferies says that the odds of a full withdrawal sit at 15%, a risk that "should not be discounted simply because of its severity."

Friction point: Foreign automakers have warned the Trump administration that they could pull their cheapest models from the U.S. market if USMCA is not renewed, the Wall Street Journal reported Monday.

The other side: Carney is pushing back, signaling that he won't make further concessions just to get to the table.

• "A lot of countries rushed into [trade] deals with the U.S. They weren't really worth the paper they were written on," Carney told the Canadian Broadcasting Corp. on Monday.
• Last week, Carney said that Trump tariffs — on steel, aluminum, autos and more — were "more than irritants. Those are violations of our trade deal."

Homebuilders ramped up construction activity in March, a good sign for overall growth, with the first read on Q1 GDP growth due out tomorrow at 8:30am ET.

Driving the news: Builders started work on new housing units at an annual pace of 1.502 million homes last month, up 10.8% from February. Single-family housing starts rose 9.7%.

• The number of building permits issued fell 10.8%, implying some softness in construction activity later this year, however.
• "This means that March's surge will likely be a one-time blip," Nationwide senior economist Ben Ayers said in a note. March's surge in starts might reflect an uncommonly cold winter that delayed some building activity.

What's next: Analysts expect tomorrow's first-quarter GDP read to show a solid 2.2% growth rate.

• The Atlanta Fed's GDPNow tool puts GDP at 1.2% for Q1.
• Also due out tomorrow: Personal consumption expenditure and income data for March, as well as the Fed's go-to inflation measure.
• Analysts are anticipating a surge in the Personal Consumption Expenditures Price Index to 3.5% over the preceding 12 months, or 3.2% excluding food and energy.

Between the lines: The March data released today and tomorrow reflect the early impacts of the Iran war and resulting surge in energy prices.

• So far, the impact has been confined to energy prices, as broader measures of consumer activity, the job market and now homebuilding have remained solid.
• As April data starts being released in the coming weeks, it will be a test of U.S. economic resilience in the face of the latest shock.