WASHINGTON, Sept 7, 2018 (Reuters) - Canada is increasingly optimistic it can reach a deal with the United States to salvage the North American Free Trade Agreement, although it may take until the end of September, a source with direct knowledge of the talks said on Friday. US and Canadian officials resumed their negotiations this week to modernize the 1994 pact, which governs $1.2 trillion a year in trade between the United States, Canada and Mexico and supports hundreds of thousands of jobs. President Donald Trump has struck a trade deal with Mexico and threatened to push ahead without Canada, a move that would kill NAFTA. The talks in Washington are focused on Canada's dairy supply system, which the United States says hurts its exports, Ottawa's desire to keep NAFTA's Chapter 19 dispute resolution mechanism and Canadian media laws that favor domestically produced content. The Canadian source, who declined to be named given the sensitivity of the situation, said Canadian negotiators thought it was quite possible the talks would continue until the end of this month. A US official told Reuters on Thursday that Canada needed to move further on dairy. In its recent trade deal with the European Union, Canada made concessions on dairy imports. "We're down to three issues: Chapter 19, the cultural issues and dairy. We've created leverage and driven Canada to the table," the US official said. "Part of our problem is that Canada has been backsliding on its commitments (on dairy)." Trump has targeted what he sees as "unfair" trade as part of his "America First" agenda to boost US manufacturing and jobs, imposing tariffs on trading partners, including Canada, China, the EU and Mexico. That has prompted retaliation. Tens of billions of dollars in Chinese imports have been slapped with US tariffs and a new round of duties are due to be triggered soon. Both Canada and Mexico want Trump to agree to permanently exempt them from US tariffs on steel and aluminum imports. Washington has used those tariffs as leverage in the NAFTA talks. Canada has used the provisions of NAFTA's dispute resolution mechanism to defend its lumber exports to the United States. Washington charges that Canadian lumber unfairly undercuts prices on US lumber. Trump appeared to set a deadline for a deal this week, prompting aides to US Trade Representative Robert Lighthizer and Canadian Foreign Minister Chrystia Freeland to work well into the evening on Thursday to find ways to move forward. The Republican chairman of the US House of Representatives Ways and Means Committee, Kevin Brady, a powerful voice in Congress on trade, told reporters differences remained between the two sides over Canada's dairy quota regime, a trade dispute resolution settlement procedure and "other longstanding issues."
