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The United States is stepping up pressure on Canada to scrap protections for its dairy industry in exchange for striking a new North American free-trade deal.

A trio of senior U.S. officials zeroed in on Ottawa's supply managed milk sector and its restricted market to U.S. dairy farmers as the major issue preventing a breakthrough in NAFTA talks, which passed the latest in a series of U.S.-imposed deadlines on Friday with no resolution.

U.S. Agriculture Secretary Sonny Perdue demanded that Canada end its low-price milk-proteins policy to reach an agreement. Canada has encouraged overproduction and flooded export markets for milk proteins used in cheese and yogurt, hurting U.S. dairy farmers, Mr. Perdue said in an interview aired on Sunday on C-SPAN television.

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Republican Tom Reed, a member of the influential House ways and means committee, urged Ottawa on Sunday to allow U.S. farmers more access to its market to assuage U.S. President Donald Trump, who has consistently complained about this issue as talks have dragged on.

The President's assertions that Canada has enjoyed lucrative advantages over the United States have not let up, and last week at a rally he threatened the “ruination” of the Canadian economy by imposing steep tariffs on imported vehicles if the sides can't reach an agreement.

Larry Kudlow, Mr. Trump's chief economic adviser, said Canada’s insistence on maintaining protections is the major stumbling block. “Milk, dairy, drop the barriers, give our farmers a break and we can fix some other things,” Mr. Kudlow recently told Fox News.

Canada has imposed tariffs on imported dairy products of up to 298 per cent. About 5 per cent of Canada’s market for butter, cheese and other dairy products has been opened recently to imports through trade agreements with Europe and Asia. Another 5 per cent is allowed in tariff-free through trade with the United States and other countries. The supply management system has its detractors in Canada as well, especially among free-market conservatives.

Dairy cows are seen on a farm in Saint-Valerien-de-Milton, southeast of Montreal, Que., Aug. 30, 2018.

Christinne Muschi/Reuters

Foreign Affairs Minister Chrystia Freeland said that a trilateral deal remains possible, but not at any cost to the Canadian economy. She stressed the need for flexibility on both sides. “We’re serious when we say no deal is better than a bad deal,” Ms. Freeland said in an interview on Sunday with Global News. She declined to give specifics about any of the main issues at the table, saying all officials had pledged not to negotiate in public.

With regard to Mr. Kudlow's remarks, she stressed that he is not at the negotiating table.

Robert Lighthizer, the chief U.S. trade negotiator, is currently in Brussels for trade talks with the Europeans. The next round of NAFTA talks could come as early as Tuesday, although Ms. Freeland is expected to attend the Liberal caucus retreat in Saskatoon at some point next week as well.

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The renewed debate over dairy capped a tumultuous week for Prime Minister Justin Trudeau's Liberals in the trade talks. Auto-industry imports and Mr. Trump's opposition to an independent dispute-resolution process − Chapter 19 in NAFTA − also remain hurdles to a deal with the United States and Mexico.

Adding to tensions are revelations in a report by The Globe and Mail on Saturday that Mexico hashed out its extensive agreement with the United States after Canada had unilaterally brought a proposal to the United States that Mexico had not agreed to. It was not accepted.

In May, with a congressional deadline looming, Canada offered the Trump administration new auto-sector rules that would move jobs out of Mexico and provide more access to the protected Canadian dairy market for U.S. farmers. In exchange, Canadian negotiators asked that the United States take most of its other demands off the table.

Canada presented a NAFTA accord that included a rule that would require 40- to 45-per-cent of vehicles be produced in factories with hourly wages of at least US$16 per hour, The Globe reported.

The three sides had already set up a meeting about that issue. But Ottawa cancelled the meeting at the last minute, a source said, and instead proposed that the auto rules be written into NAFTA with no further negotiation.

Mr. Trump’s top advisers – including Mr. Kudlow, Treasury Secretary Steve Mnuchin and son-in-law Jared Kushner – were inclined to take the offer, said officials with knowledge of the talks. But Mr. Lighthizer rejected it.

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The tables turned in July, when Mr. Lighthizer invited the Mexican team to negotiate without the Canadians in the room, explaining that the United States and Mexico were just working out their differences on the auto issue. When U.S.-Mexico talks ended on Aug. 27, it was Canada’s turn to be surprised: Its partners to the south emerged with an extensive deal to overhaul nearly every aspect of NAFTA, including dispute-resolution language.

Adam Austen, spokesman for Ms. Freeland, declined to comment on the details of the Globe report. "Canada is now working constructively with the U.S. With good will and flexibility on all sides, we know that a resolution is possible," he said.

Conservative foreign affairs critic Erin O’Toole said Mexico did not double-cross Canada, but rather seized an opportunity to advance its own interests during negotiations.

“The Mexicans have been a lot more shrewd than we have,” Mr. O’Toole said in an interview. “When you have something that’s critical for your economy, you go for it.”

Mr. O’Toole said the Trudeau government dragged its feet for the first few months of the negotiations and should have addressed auto content rules from the outset instead of focusing on other issues. "I think there was a naivete on the part of our team, the Prime Minister and the minister,” he said.

With a report from Reuters

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