Canada, U.S. resume NAFTA talks amid growing optimism

By Julie Gordon and Sharay Angulo

WASHINGTON (Reuters) - Canada has three days to tackle contentious issues when it resumes talks with the United States on Wednesday to salvage the trilateral North American Free Trade Agreement amid signs Ottawa was open to taking a more conciliatory approach.

After more than a year of talks, Mexico and the United States announced a bilateral deal on Monday, clearing the way for Canada to rejoin talks to update 24-year-old NAFTA which accounts for over $1 trillion in annual trade between the three nations.

But despite obstacles, Canada and the United States could reach an in-principle deal by the Friday deadline.

"We are optimistic about having some very good, productive conversations this week," Canadian Foreign Minister Chrystia Freeland said on Wednesday told reporters as she entered the U.S. Trade Representative's Office.

Freeland said on Tuesday that Mexico's concessions on auto rules of origin and labor rights was a breakthrough.

Ottawa is also ready to make concessions on Canada's protected dairy market in a bid to save a dispute-settlement system, The Globe and Mail reported late on Tuesday.

"We're hearing that there's a lot of progress being made and that it's possible that ... we'll be able to see something sometime soon," Kevin Hassett, Chairman of the White House Council of Economics Advisers, told Fox Business Network on Wednesday.

"Absolutely, the Friday deadline is a real thing ... and we hope that Canada will be part of that," Hassett said.

The three countries are aiming to seal a trade pact by Friday to allow Mexican President Enrique Pena Nieto to sign it before he leaves office at the end of November. The timeline accommodates a 90-day waiting period under U.S. trade law before President Donald Trump can sign the pact.

Republicans also face mid-term elections in November and Prime Minister Justin Trudeau a national one expected by October 2019.

After being sidelined from the talks for more than two months, Freeland will be under pressure to accept terms the United States and Mexico worked out. The U.S. Congress also wants a deal that includes Canada.

"The fact that agreement on those difficult issues for Mexico was able to be reached definitely clears the way for us to have significant, substantive, and I hope productive, conversations with the U.S. this week," Freeland said after a brief meeting with U.S. Trade Representative Robert Lighthizer.

STICKING POINTS

Freeland dodged questions on Tuesday on what points Canada would be willing to concede on, noting that Ottawa's key issues are well known.

U.S. President Donald Trump warned he could proceed with a deal with Mexico alone and levy tariffs on Canada if it does not come on board with the revised trade terms.

One of the issues for Canada in the revised deal is the U.S. effort to dump the Chapter 19 dispute resolution mechanism that hinders the United States from pursuing anti-dumping and anti-subsidy cases. Lighthizer said on Monday that Mexico had agreed to eliminate the mechanism.

To save that mechanism, Ottawa plans to change one rule that effectively blocked American farmers from exporting ultrafiltered milk, an ingredient in cheesemaking, to Canada, the Globe and Mail reported, citing sources.

Canadian government officials were not available for an immediate comment on Wednesday. On Tuesday, Trudeau said he would defend Canada's dairy farmers.

Other hurdles include intellectual property rights and extensions of copyright protections to 75 years from 50, higher threshold than Canada has previously supported.

"I think that what they probably need by Friday is some indication from Canada to the Americans that it's ready to play ball, that they're ready to negotiate in good faith," said Mark Warner, a trade lawyer with MAAW Law, which specializes in Canadian and U.S. law.

"If Chrystia Freeland goes down there and she starts going on and on about red lines again, then I think it's all over," he added.

(Reporting by Julie Gordon and Sharay Angulo; Additional reporting by Susan Harvey, Donia Chiacu, David Lawder and Makini Brice; Writing by Denny Thomas; Editing by Lisa Shumaker and Susan Thomas)