Mr Trump said the new deal will get rid of the NAFTA name and be called the ‘United States-Mexico Trade Agreement’.
A senior US trade official told Reuters that this requires 75 percent of car parts to be made in the countries, up from 62.5 percent, and would require 40-45 percent of this to be made by workers earning at least £12.40 ($16) per hour.
Mexican President Enrique Pena Nieto told Mr Trump in a phone call on Monday that he wants to incorporate Canada into the new trade deal.
Mr Trump told reporters: “They used to call it NAFTA. We’re going to call it the United States-Mexico trade agreement. We’ll get rid of the name NAFTA.”
It is the first major breakthrough in talks that have been ongoing for more than a year.
The new agreement potentially opens the door for Canada to return to negotiations and rework the US-Canada-Mexico trade deal from 1994.
Mr Trump has repeated threats that he would ditch the accord, putting sustained pressure on the Mexican peso and Canadian dollar.
He will talk to Canadian Prime Minister Justin Trudeau on this, but has warned that instead of including Canada in the new agreement, he could impose tariffs on its cars.
The US President added: “I think with Canada, frankly, the easiest we can do is to tariff their cars coming in.
“It’s a tremendous amount of money and it’s a very simple negotiation.
“It could end in one day and we take in a lot of money the following day.”
Another senior US trade official told Reuters: “We are now inviting the Canadians in as well and hope that we can reach a fair and successful conclusion with them as well.
“There are still issues with Canada but I think they could be resolved very quickly.”
Adam Austen. a spokesman for Canadian foreign minister Chrystia Freeland, said it was encouraged by the optimism shown towards the renewed trade deal.
But he warned it will only sign a new deal “that is good for Canada and good for the middle class”.
Mr Austen said: “Progress between Mexico and the United States is a necessary requirement for any renewed NAFTA agreement.
“We are in regular contact with our negotiating partners, and we will continue to work toward a modernized NAFTA.
“We will only sign a new NAFTA that is good for Canada and good for the middle class. Canada’s signature is required.”
Marcelo Ebrard, the new finance minister set to take up his post when Andres Manuel Lopez Obrador assumes the presidency on December 1, welcomed the new deal and said Canada’s participation in talks was vital.
He added: “We see the agreement announced today as positive progress.
“In the coming days we will continue in trilateral negotiations with Canada, which is vital to be able to renew the trade pact.”
Some Republicans backed the new deal but insisted Canada must be part of it in order to avoid have a detremental effect on US jobs.
Senator John Cornyn said: “Millions of jobs in Texas depend on an updated NAFTA, and it’s important that we get this right.”
Mr Trump is expected to send formal notice to the US Congress by Friday about his plans to sign a new trade agreemet within 90 day, which would give Mexican President Mr Pena Nieto time to also sign the deal befor ehe leaves office.