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Canadian softwood lumber is pictured at the Port of Vancouver Lynnterm terminal in North Vancouver, British Columbia on February 13, 2015.

Ben Nelms/The Globe and Mail

A trade dispute between the United States and Canada over softwood lumber is escalating, raising the spectre of higher tariffs as officials play down the likelihood of reaching a deal before an October deadline.

President Barack Obama and Prime Minister Justin Trudeau directed their governments at a June meeting in Ottawa to push forward and reach accord on the issue, long a thorn in relations, while acknowledging "significant differences" remain. Officials began two days of talks in Washington on Wednesday, the fourth round of negotiations since the leaders met.

Optimism is fading. Canada's Ambassador to the United States, David MacNaughton, and the country's chief softwood lumber negotiator, Martin Moen, have each said this month the sides remain far apart. Trade Minister Chrystia Freeland signalled the same, saying Canada would rather go past the October deadline than settle for a bad deal.

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"We're not going to be bound by any particular deadline," Ms. Freeland said in an interview on Tuesday. "We're going to try and reach an agreement, and we're working hard now in the fall to do that."

If the deadline is missed, the United States is expected to begin a process to enact new tariffs, which would be a barrier to Canadian producers. Exports from Canada accounted for most of the increased lumber demand from U.S. builders this year through April, Bloomberg Intelligence estimates.

The previous softwood lumber deal – which included export quotas for Canadian producers – expired in October, triggering a one-year standstill that includes a tariff freeze. Monthly softwood exports to the united States are up 23 per cent on average, on a seasonally adjusted basis, since the pact expired, data compiled by Bloomberg show.

The value of softwood lumber exports to the United States is up 25 per cent to $3.6-billion in the first six months of 2016, compared with $2.9-billion in the same period last year, according to trade data compiled by Statistics Canada.

Without a new deal, there's a "high risk" U.S. producers will petition the Commerce Department to enact "high countervailing and anti-dumping duties on Canadian softwood," Mr. Moen told a parliamentary committee this month. Canadian legal challenges to U.S. tariffs have been successful but "have taken years to get results," he said.

Any new U.S. tariffs wouldn't take effect immediately and would therefore create something of a second deadline for trade negotiators, raising the prospect of a deal after the grace period ends but before the tariffs are expected to actually kick in some time during spring of 2017.

"There is an overtime period, but we're working hard now" to reach a deal, Ms. Freeland said. In another interview, she called it a "really tough issue" with no guarantees. "Can we guarantee a positive outcome? No, we can't. But I think it's important to say from the Canadian side, we're not looking for any deal, we're just looking for a good deal."

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The Trudeau cabinet was briefed by Mr. MacNaughton earlier this week about rising anti-trade sentiment in the United States.

The talks are "challenging," Mr. MacNaughton told journalists on Aug. 21. He reiterated Canada would rather miss the October deadline than cede to U.S. demands. "We're not there yet. We're still quite a ways away from getting there" and reaching an agreement, he said.

While goodwill between the two governments is essential to concluding a new softwood agreement, it's not enough because a majority of U.S. companies must approve any deal, Mr. Moen said, describing the prospect of an agreement by October as a "goal" for Canada.

"We do remain far apart on several key issues," Mr. Moen told the lawmakers. "There are considerable gaps that will need to be bridged in order for a new agreement to be concluded."

The 2006 softwood agreement expired on Oct. 12, 2015. Canada sought to extend the agreement but the United States declined.

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