Canada and U.S. make progress on NAFTA in last-ditch talks: Sources

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 collapsing. The 1994 pact underpins $1.2 trillion in annual trade and its demise would be enormously damaging, say economists.

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.

WATCH: U.S. President Donald Trump held a rally in Wheeling, West Virginia on Saturday and spoke about reaching a deal with Mexico to replace NAFTA while adding they’ll “see what happens with Canada.” 

0:36 ‘Reached a deal to replace NAFTA – see what happens with Canada’: Trump

The two sides are talking continuously by phone and a Canadian government source said the tone of the negotiations was positive and intense.

“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.

WATCH: We are not working towards a deadline on NAFTA: Garneau

2:05 We are not working towards a deadline on NAFTA: Garneau

The office of Canadian Prime Minister Justin Trudeau declined to comment on Saturday’s talks.

A second Ottawa source said the two sides were still trying to resolve 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, Ottawa is set to bow to a U.S. demand to offer significantly more access to Canada’s protected dairy market, said the source.

WATCH: NAFTA question leads to Liberal slip: ‘No deal is better than a good deal’

1:14 NAFTA question leads to Liberal slip: ‘No deal is better than a good deal’

A third source familiar with the negotiations said the idea of a link between dispute resolution and dairy access was not currently being discussed.

Opening up the dairy market could cause problems for Trudeau, since the influential farming industry opposes the idea. The Dairy Farmers of Canada lobby group did not respond to a request for comment.

Sources familiar with the talks told Reuters on Sept. 11 that Canada was ready to give the United States limited dairy access. Ottawa has offered farmers compensation to make up for conceding market share in two earlier trade agreements.

A NAFTA 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.

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.