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FILE PHOTO - Canada's Prime Minister Justin Trudeau speaks during a meeting with representatives of the Congress of Aboriginal Peoples on Parliament Hill in Ottawa, Ontario, Canada on January 10, 2017. REUTERS/Chris Wattie/File Photo


By David Ljunggren

CALGARY, Alberta (Reuters) - Canada's Prime Minister Justin Trudeau will begin a two-day retreat with his cabinet on Monday, focussed mainly on the best approach to take with new U.S. President Donald Trump, whose vow to renegotiate NAFTA could damage Canada's economy.

Trump said on Sunday he plans talks soon on the three-nation North American Free Trade Agreement, under which Canada and Mexico send the majority of their exports to the United States.

Canadian officials -- trying to persuade the new administration that focussing on Canada makes no sense, given how closely the economies are linked - say the Trump team is most concerned about large U.S. deficits with China and Mexico.

"They haven't said anything specific about any real problems that they have with us," said David MacNaughton, Canada's ambassador to Washington and a key player on the NAFTA file.

The danger, he told reporters late on Sunday, is that Canada could suffer collateral damage from U.S. measures designed to cut the trade deficit with Mexico.

The two-day meeting in Calgary, in western Canada, starts at 9 am Mountain Time (1600 GMT) and is the first chance for cabinet to discuss U.S. relations since Trump was sworn in.

As part of the Canadian bid to reach out to Trump's team, Stephen Schwarzman, chief executive officer of major investment firm Blackstone Group LP, has been invited to address the retreat on Monday. Schwarzman chairs ‎a panel of business leaders who give Trump advice.

The challenge of dealing with Washington comes at a sensitive time for Trudeau, who is facing separate probes into a luxury vacation he took with the Aga Khan as well as his centrist Liberal Party's fund raising activities.

He is also under fire from Kevin O'Leary, a brash television personality running for the leadership of the opposition right-leaning Conservative Party, who says Trudeau is too weak to stand up to Trump.

O'Leary complains that Trudeau, who came to power in late 2015 promising to run a few years of modest budget deficits on infrastructure projects, has ramped up spending so much that finance ministry officials predict there will be shortfalls for decades to come.

While polls currently show the Liberals well ahead of their rivals in the run-up to the 2019 election, pollster Nik Nanos of Nanos Research says O'Leary could eat away at Liberal support by positioning himself as a fiscal hawk.

"Canadians were okay with a modest deficit for a specific purpose but I think there's a difference between that and a perpetual deficit," said Nanos.

(Editing by Simon Cameron-Moore)

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