By David Ljunggren
OTTAWA (Reuters) - Canada and the United States on Saturday narrowed their differences in last-ditch talks to save NAFTA but there is no guarantee an agreement will be forged, two Ottawa sources said.
The two nations are trying to find a way to update the North American Free Trade Agreement and prevent it from flying apart. The 1994 pact underpins $1.2 trillion in annual trade and its demise would be enormously damaging, say economists.
The administration of U.S. President Donald Trump is threatening to impose auto tariffs on Canada unless it signs a text of an updated agreement by the end of Sunday. Washington already has a deal with Mexico, the third member of NAFTA.
In a sign of the mounting pressure, Canadian Foreign Minister Chrystia Freeland postponed her country's annual address to the U.N. General Assembly on Saturday to return to Ottawa. Freeland, who has spent many days in Washington over the last month, has no plans to fly back immediately, officials say.
The two sides are talking continuously by phone and a Canadian government source said the tone of the negotiations was positive and intense.
"It's unwise to put the horse before the cart -- the fact talks are still going on shows there are issues to be settled. A deal is not necessarily going to happen," said the source, who requested anonymity given the sensitivity of the situation.
Trump blames NAFTA for causing U.S. manufacturing jobs to move to low-wage Mexico and is demanding major changes.
A second Ottawa source - who also asked to remain anonymous - said the two sides were still trying to work out disagreements over a dispute resolution mechanism that Canada says is vital and the United States wants to scrap.
In exchange for a compromise on the mechanism, the government of Prime Minister Justin Trudeau is set to bow to a U.S. demand to offer significantly more access to Canada's protected dairy market, said the source.
This could cause problems for Trudeau, since the politically influential Canadian farming lobby says it opposes any concessions. Government insiders say it is likely Ottawa would have to offer significant compensation.
A deal had looked unlikely on Wednesday when, after a month of slow-moving discussions, Trump indicated he was fed up with Trudeau, who has insisted he will not sign a bad deal. [L2N1WC0VA]
But late on Thursday, U.S. officials reached out to Canada to ask for details of Ottawa's negotiating demands and where it might be able to make compromises, Reuters reported.
Trump is under increasing pressure from U.S. business groups and some members of the U.S. Congress, who say excluding Canada from NAFTA would play havoc with the three member nations' increasingly integrated economies.
(Reporting by David Ljunggren; Editing by Alistair Bell)